International Paper Co (IP) 2015 Q1 法說會逐字稿

Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the International Paper first-quarter 2015 earnings conference call.

(Operator Instructions)

Thank you. I will now turn the conference over to Jay Royalty, Vice President, Investor Relations. Please go ahead.

Thanks, Jennifer. Good morning, everyone and thank you for joining International Paper's first-quarter 2015 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 the presentation. We will also present certain non-US GAAP financial information. A reconciliation of those figures to US GAAP financial measures are available on our website. Our website also contains copies of the first-quarter 2015 earnings press release and today's presentation slides. Lastly, relative to the Ilim JV, slide 4 provides context around 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. Thanks for your interest in International Paper and for taking time to join our quarterly call. I'm going to start on slide 5.

International Paper delivered a solid performance in the first quarter. Our team successfully managed the business to improve margins and improve earnings. This is enabling International Paper to continue to deliver strong results.

Extreme weather had some impact on our results in North America. Although, our operations overall performed well. We saw particularly strong results out of the Ilim joint venture in Russia. As margins expanded due to our strong export position.

Our research in EBITDA margin, absolute EBITDA and free cash flow, all improved year over year. Overall, we're pleased with how we operated and with our results in the first quarter. We feel like were off to a good start to 2015.

Continuing with our financial results on slide 6. EPS was $0.84 a share for the first quarter. And, this includes $0.04 of unfavorable Ilim FX impact. Our EBITDA margin was up 120 basis points versus the first quarter of last year. EBITDA grew by $32 million year over year. And, free cash flow improved to $319 million, up from $252 million in the first quarter of 2014.

If we dive a little deeper into margins, you can see on slide 7 that we're successfully managing our margins across our key businesses. Global dynamics are different in each of these regions and across the businesses. But, our teams are finding ways to drive improved performance in the face of these challenges. Despite the economic backdrop, we're finding ways to continue to win and improve results.

And, with that, I'll turn it over to Carol to cover the details in the quarter and the second-quarter outlook.

Thanks, Mark, and good morning, everyone. Looking at the sequential bridge to the $0.84, prices in mix were slightly unfavorable and volume was lower due to seasonality in Brazil and lower volume in industrial packaging. As Mark mentioned, operations were solid even with some winter weather impact in North America.

Input costs were favorable, particularly for energy and diesel. However, I would note that the diesel benefit was largely offset by higher distribution rates. And, we saw the favorable -- large favorable swing for Ilim. With most of this coming from a less severe ruble devaluation against the US dollar, compared to what occurred in the prior quarter. And, as Mark mentioned, on an absolute basis, the $0.84 for the first quarter does include a $0.04 unfavorable Ilim FX charge.

Moving to slide 9. In industrial packaging, beginning with price. Most of the impact we experienced in the quarter was on lower export prices, which, were largely a function of currency and the impacts of the strong US dollar.

Volume was lower. As shipments were impacted by weather, along with lower demand from several of our largest customers. Year over year, our shipments were up 1% on a same-day basis. And finally, operations and input costs were favorable sequentially, partially offset by higher planned maintenance outage expense in the quarter, as expected. And, as you saw on the margin slide that was previously shown by Mark. Overall, another strong quarter for our industrial packaging business.

Moving to consumer packaging on slide 10. Mix improved slightly and volume was favorable in North America. Input costs in North America were a tailwind as well, partially offset by higher distribution rates.

The first quarter is typically a higher-cost operating quarter in North America, due to seasonality. And, this was only made worse by the periods of extreme winter weather. And, if you think about that, it's just about how cold it was and some of the energy implications that it takes to run some of these big integrated mills.

Additionally, the business incurred some additional cost with the difficult startup at Augusta, following the annual outage there. But in total, a much stronger start to the year for consumer packaging in 2015.

In printing papers, we experienced some softness in North American pulp and paper pricing, along with a less favorable mix in Brazil, which, was due to seasonally lower domestic demand. The Brazil seasonality accounted for the majority of the lower volume as well, which was further amplified by the weak market conditions in the region.

Operations and other costs were negatively impacted by winter weather along with a one-time charge for the write-off of a project which we chose to abandon. Lower input costs for diesel and energy were offset by some commercial pressure and higher distribution rates.

And finally, there was some modest unfavorable FX impacts for the quarter as FX headwinds in Europe were greater than the net tailwinds we experienced in Brazil.

Turning to Ilim on slide 12. The JV turned in its second consecutive quarter of very strong performance on the back of expanding margins driven by its strong export position and now, is the lowest-cost softwood pulp producer on the globe.

Operational EBITDA for the quarter was $186 million, up 62% from Q1 2014. The JV did experience a modest negative non-cash FX related accounting charge of $47 million associated with the US dollar denominated net debt, which was $1.2 billion for the first quarter. The JV remains focused on cost management and post-project optimization to stay ahead of rising inflation and to offset the tough economic conditions in the country.

Ilim expects lower earnings in the second quarter before considering any FX impact from the accounting treatment on the debt due to a $10 million maintenance outage that's scheduled at the big [brocks] mills and higher inflation.

So, moving to the outlook for the second quarter. Volume will be up for our North American packaging business with one more day and seasonal strengthening particularly, in industrial packaging with the onset of the ag season. The industrial packaging volume is expected to increase by approximately 4% quarter over quarter. Consumer volume will increase as well due to the strengthening backlog.

Volume in Brazil papers will increase as we move past the seasonal weakness of the first quarter. Pricing is expected to be largely flat across the businesses. With the exception of Brazil, where paper prices are increasing in local currency. And, mix is expected to improve in North American paper and pulp.

Good operational performance across most of the businesses is expected to continue with some improvement in North American paper, North American industrial packaging, and North American consumer packaging, due to less weather impact and seasonally stronger demand.

In Brazil, we're beginning to see some signs of fiscal policy tightening. As the government begins to do things to egress the growing budget deficit. And, we're seeing line of sight that this may, and will probably, include lower export incentives, higher taxes, and potentially, tariffs on energy usage.

Input costs are expected to remain stable as most of the benefit is already in the first-quarter results. Distribution rates and wood costs are expected to remain, what we would consider as relatively high.

The second quarter is the heaviest maintenance outage quarter for the year and is increasing $65 million sequentially over first quarter. And as we've talked about, Ilim's expected to continue to perform well. And, for the purposes of this outlook, we've assumed flat FX from where we exited the quarter. So, a non-repeat of that modest negative. But, the JV does expect this to be offset by the items that I mentioned regarding the Brocks outage and higher inflation.

And so, with that, let me turn it back over to Mark.

Thanks, Carol. So, now I'd like to shift gears a little bit as we close out the comments and go to Q& A. Take a few minutes to talk about value creation and what we're doing in International Paper. I'm on slide 14.

This slide shows IP's ten-year journey to improve our return on invested capital results. With the last five years being in excess of our goal to consistently deliver results above our cost of capital. Now, obviously we want to improve that spread above our cost of capital. But, we're demonstrating that we can be at, or exceed, our cost of capital, which is a key measure for our value creation mindset at International Paper.

It's the yardstick; ROIC is that we measure investments by and make decisions in terms of what strategy we should deploy. Our primary intent is to increase the value of IP over time and we've been successfully doing that. And, we're excited about the path we're on.

This next slide highlights the main elements of IP's value creation and capital allocation strategy. As we've indicated, we're running our businesses consistently well and are generating strong free cash flow year in and year out, averaging $1.8 billion annually over the last several years. This has enabled us to strengthen our balance sheet, provide adequate CapEx to sustain this strong level of performance, reinvest in our core businesses, and return significant cash to shareholders.

We intend to continue this balanced use of cash approach to keep the Company on sound financial footing, to reward our shareholders, and to increase the value of International Paper. Our dividend policy and actions are clear and there's more room to grow. We've been opportunistic with our share buyback program, taking advantage of dips to buy shares at an average price below our intrinsic value. And, this has become an important tool and a good way to supplement return of cash to shareholders.

I'm pleased to report that in the first quarter, we completed the initial $1.5 billion share repurchase authorization. As of today's call, we have bought back roughly $120 million of shares since the first of the year on the new authorization.

Additionally, we continue to look for good ideas in which to invest, whether they're to strengthen and improve results within our existing businesses or selective M&A opportunities that are the right fit for IP and can be accretive to ROIC and our results.

I'd like now to turn your focus to a couple of great examples that we've recently announced and are acting on. The first, on slide 16, is an update on our strategic reinvestment at the Valiant Mill. As you're aware, we made the decision to restart the number three container board machine at Valiant last year. And, our team has been actively working toward that objective for the last several months. We're excited to report that the machine is up and running now, ahead of schedule and making salable product at this time.

This machine fills a large whole in our medium capacity with the roll off of the purchase obligations that were created with the mills that we divested as part of the Temple-Inland acquisition. Valiant is well-positioned to serve our needs to the South, where we have a large presence in the box market, as well as the West Coast markets. This additional capacity also enables us to cost-effectively handle the expected growth in specialty, craft liner board exports and our North American box markets.

It also gives us additional flexibility to meet the needs and maintain our low-cost position. While we continue to balance our system supply with our overall customer demand. And, it goes back to what we've talked about before, and that being our multi-channel strategy the we deploy in our industrial packaging business.

It's a very attractive deployment of capital; an existing facility with expected returns in excess of 25%. We expect this project to ramp up over the balance of 2015. And, it's a great addition to an already very good container board mill system.

Next project I'd like to talk about is the con -- is the project to convert our Riegelwood, North Carolina mill to a 100% pulp to meet the growing needs of our fluff pulp customers of the next several years. This project involves the removal of 350,000 tons of coated paperboard capacity at the Riegelwood Mill, much of which is dedicated to the production of coated bristles for the printing markets, under our Carolina brand.

We're selling the Carolina brand to MeadWestvaco and repositioning the coated paperboard business to focus more on the packaging grades of coated board. And, to free up the capacity to make the fluff pulp and softwood pulp at the Riegelwood Mill.

The conversion will provide additional pulp capacity of 400,000 tons at Riegelwood, and will bring our North American pulp system to 1.7 million tons. Importantly, 1.4 million of that is capable of making high-quality fluff pulp. This is the latest in a series of conversions to expand our fluff pulp business. By the way, a business we've been in since 1984 out of our Georgetown Mill.

The coated paperboard capacity that we make in the coated bristles area will be shut down by early 2016. And, the new pulp capacity will be online by mid-2016. Riegelwood will have the capacity, or the capability, excuse me, to flex this capacity as our market needs demand between market softwood pulp and fluff pulp.

This -- the decision to convert the mill was based on the opportunity to grow with the market and our customers in the attractive fluff pulp market. We have the best customers in the market and the best growing markets geographically throughout the world.

It also allows us to streamline our coated paperboard system. We intend to support our coated paperboard customers. And, the attractive growth segments, as I mentioned, in food service and consumer packaging grades out of our top rated mills in Texarkana, Texas and Augusta, Georgia. This investment of $135 million at Riegelwood has an expected return of greater than 20%.

So in closing, International Paper continues to perform well today. We like the positions we've built in the key markets where we've chosen to operate. And, the businesses -- in the businesses that are needle movers for IP. These strong positions, along with great execution by our teams on the ground, are enabling IP to manage margins and increase profitability, regardless of what the market throws at us.

We realize the world is a dynamic place and we're mindful of global demand, trade flows, and the implications of a strong US dollar. But, given our strong positions and our great customer base, we feel it's all manageable. We have a solid pipeline of high return capital opportunities, a couple of which I've just highlighted, that'll enable us to successfully deploy capital and increase value.

Our strong free cash flow generation enables us to fund these attractive opportunities, while continuing to return an attractive level of cash to our shareholders. All in, we remain excited about where we are, the path we're on, and what's out in front of us.

With that, I'd like to turn the call over to Jay and open it up for questions.

Operator, we're ready to take questions now.

(Operator Instructions)

Chip Dillon, Vertical Research.

Can you all hear me?

Good morning, Chip.

Good morning, how are you?

Can you all hear me?

We can barely hear you, Chip.

Okay, okay, is this better?

Much better.

Oh, sorry. Okay, thank you. My first question has to do with a couple -- well, I have a couple of questions.

One is the timing of the Riegelwood conversion. Obviously, the fluff pulp market is very attractive. Given its growth in international markets with rising living standards. And, I know Riegelwood is close to the port of Wilmington and it's an export product. But, the timing seems interesting to us because of the fact that other capacity is coming on.

And, there's another player that might need to participate temporarily as they deal with a conversion themselves. And, so we were curious about that and wondered, why now? And then, the second question just has to do with, could you remind us of your container board mill and box integration level in Europe proper? I guess, excluding Russia?

Chip, I'll ask Mike Amick, to -- who runs our consumer packaging business and North American papers and pulp to take the first one. And, Tim Nicholls will take the second question.

Hello, good morning, Chip. This is Mike Amick. As far as the timing of the Riegelwood conversion.

Without really referencing what others may or may not doing, we're just reacting to the need that we have within our system to meet the strategic business and the demands that we see growing across the world. So, this decision is very timely for us. And, we're excited about the opportunity and the value that this will create for our customers and for our shareowners going forward.

Okay, got you. And then, on the integration levels in Europe?

Yes, hello, Chip. It's Tim. Yes, they're pretty small because most of the business over there is focused on industrial and test liner. We do have a big fruit -- fresh fruit and vegetable segment. And, we do sell board out of North America. And, we're the main supplier for Kraft virgin.

But, on a total basis and this is a little bit of a round number, but I would say we're probably close to 15 to 20% of their total buy. But, a big portion of the virgin Kraft piece.

Got you, got you. And then, just real quickly, just to follow up back on the fluff conversion. Could you just remind us how much, or how different, it is selling fluff pulp to a typical consumer products company versus selling paper grade? Even into tissue and certainly into regular paper.

Is there, is -- do you find it's at least important to have some staying power to the market? Is -- do the contracts tend to be a little bit longer and the standards? Do people specify certain mills, et cetera?

Hello, Chip. This is Mike again. It is a technical sell. It is a product that requires a fair amount of engineering and qualification process. It's quite lengthy. So, it is a sell.

There's -- and, as I said, it's a qualification process. But -- and there are typically contracts, as well. But, that varies depending upon the customer and the situation.

Okay. Thank you.

Mark Weintraub, Buckingham Research.

Thank you. Two quick ones. First of all, as you noted, there have been lots of shifting dynamics. I believe at the end of the last quarter, you had laid out a goal or expectation of about a 5% improvement in EBITDA for this year. Is that something that you think is still doable?

Good morning, Mark. We do. As the year is one quarter down. Three quarters to go. It's a steep challenge as we laid out.

But, we do believe we need to shoot for 5% EBITDA growth. We have a -- some plans that put us within striking distance of that. And, we are hopeful and we've got a lot of time left in the year to do that. We've probably got about a 4% year over year in the first quarter.

But, the challenges get steeper. But, that's something we still have our eyes on.

Okay, great. And then, second, if I look at -- on, I think it was slide 22. You kind -- show your -- market downtime for your different businesses. And, container board, for the first time since, I think, second quarter 2013 perhaps, you didn't take any market downtime.

And yet, at the same time, you can see that the volumes in your industrial business, both versus the first quarter and versus the year ago, though, very slightly versus the year ago, there was a bit of a negative hit. So, there seems to be almost a little bit of a surprise. That, for the first time in a while, where you're actually seeing a little bit of the negative hit in on the volume side, you're actually not taking any market downtime in container board. Can you, maybe, talk us through, a little bit, the thought process there?

Yes, there's a -- as you can imagine, there's a number of things going on, Mark. This is Tim. First of all, we're buying less board on the outside, because we have a less requirement to do so. So, we're needing to make board for all of our channels to market.

Second of all, we're getting ready for what is going to be our largest outage quarter of the whole year. It's a big step up. First quarter was big. It's a big step up from the first quarter.

And then lastly, we ran better in the first quarter than we did in the fourth. But, we still didn't run particularly well. So, we were scrambling a bit to try to get the build in product in our pipeline that we're going to need as we go through the outage period.

So, at the end of the day, you're -- would you say your inventory situation is just where you want it to be in container board?

Not quite. We built 60,000 tons of inventory. We would've liked, probably, a little bit more.

If you think about it in terms of our system, that's less than two days of production. So -- and, we're going through a very heavy season. So, it's close to what we wanted. But, probably a little bit on the light side.

Okay. Thank you

George Staphos, Bank of America Merrill Lynch.

Thanks everyone, good morning. Appreciate all the details in the slides. I guess, I want to dive back into consumer and the box board markets. And, I missed this. I remember Riegelwood having two machines.

Could you relay or reiterate how much you're taking out of the Bristol market? And then, the related question. How do you see the folding box board markets now in terms of a supply demand balance? Specifically, in North America?

Hi George, this is Mike Amick. Your first question was around the printing piece of that. That business represents about 15% of our total capacity.

So, roughly in the neighborhood of, call it, 250,000 tons of capacity. Is what's being made at our Riegelwood facility. Directed at the printing papers market.

Okay. And, that --

Well, from a supply demand balance there, you're asking, really, on a worldwide basis. I mean, you're still seeing; we're still seeing, kind of a large supply position out there relative to demand. And, that's something that we understand and we look at and manage. But, that's still the case.

So, maybe rear -- backing up and segueing off of one of the earlier questions. How much of the conversion here was driven by the opportunities you see in fluff pulp? And, how much of it was a recognition of a potential supply demand imbalance in the future in the box board markets?

I know it's hard to, sort of, be precision-like in your comment here. But, we would be interested in your thoughts.

Well, this is one of these situations that come up, maybe, not too often. Where you've got a win -- a win-win. But, this was primarily a move driven by our fluff position. And, trying to improve our position in that business for the long term.

Okay. Two last ones and I'll turn it over. Bigger picture, you've done a great job of improving, as you've pointed out, the spread over your cost of capital mark over the last number of years. And, you intend to continue that.

How do you see the strategy shifting at IP, if at all, to manage and grow that spread? Do you see that being driven by things you do within your capital structure? To improve the spread? Or, do you see it being driven more by investment?

And, within investment, do you see it being driven more by acquisition opportunities? Or, more, the sorts of things like Valiant and Riegelwood? Thanks, and I'll turn it over.

Thank you, George, a great question. I think, for a company that has a scale that we have, and to be able to move the needle, you have to keep all of your strategic options available to you. So, it probably will be a little bit of all of the above that you just talked about.

But, what I think you will see is more opportunities with projects like Valiant that build upon a strong position in a business or a region. And, to improve that position. And, that's something that we have really not done a lot of lately. Because, we were doing some large M&A work and built the company we have today. So, I think some of this goes in cycles.

But, I think, back to my comments on ROIC being the measure that we're going to look at. We're going to work to create value against that backdrop, looking to maintain a solid spread above our cost of capital, and, what we do will need to pass that test.

Okay. Thanks. I'll turn it over.

Gail Glazerman, UBS

Hi, good morning.

Good morning, Gail.

Thanks. Carol, can you or Mark expand the project abandonment? Can you quantify how much the charge was? And, would that be the option for the paper machine down at Tres Lagoas?

Gail, I would prefer not to call out exactly what it is, because it would give some insight into some of the stuff we work on. But, it was pretty much an accounting thing. We go ahead and approve Code I funds for capital. And, once we make a decision that stays, we're not going to pursue something.

We just need to keep our books straight. So, it wasn't -- it was enough that I felt that we needed to call it out. But, that's about the detail that I'll be able to give you.

Okay. And, can you talk a little bit about what's been going on in the uncoated free sheet market? Are you seeing any response in the market to the threat of duties and any view on what might happen in June?

Gail, this is Mike Amick. As you're seeing, and as you're seeing reported in the industry -- industry numbers, there has been some pull back in reduction in imports coming into the US. And, as far as going forward, I mean it's -- from a timeline standpoint the ITC ruled on this.

It's now, in the hands of the Department of Commerce. And we'll see, expect to see, an answer or ruling from them on duties or potential duties sometime in June. Or, the summer.

Okay, but have you heard from customers that you might've lost last year with imports were coming in? Are you seeing that, or is it just with the demand supply and that's kind of offsetting it?

We haven't seen that, Gail.

Okay. And, can you give a little bit of color onwhat you're seeing in currently in terms of the demand in box market? Kind of, if you look into the second quarter? And, maybe, a little bit of color on export demand as well?

Hello, Gail. It's Tim. Yes, we're seeing a seasonal pickup in April. The first quarter economic activity was lighter than we would have hoped coming into the quarter. We had a little bit of a soft margin, as things settled out.

But, I think that we're seeing a normal seasonal pickup. And, second quarter is a big quarter for us. It's a lot of fresh fruit and vegetable and so I'd say April, so far, seasonally up.

And, export demand?

Export demand, actually, has been pretty good. You read all the headlines from the newspapers and you'd think that it would take a hit. But, we've seen the FX hit in Europe. But, from a demand standpoint it's been really consistent.

Thanks very much.

Alex Ovshey with Goldman Sachs.

Thank you. Good morning, everyone

Good morning, Alex.

Good morning, Mark. Looking at the first quarter box shipment number for IP versus the industry. Can you just talk about the drivers of the underperformance? Why IP's number came in lighter? And then, looking forward, is the expectation for the balance of the year that the volume number could potentially lag the industry?

Well, what we constantly do is make choices around customers. And, some of what hit us in the first quarter was choices around customer mix that we had made in the fourth quarter. And, those finally came fully through in the first quarter. Yes, over the next quarter or two, we could be, depending on what the market does, down a little bit or close.

But, what we're trying to do is manage a portfolio across all the segments that we serve and make sure we're picking the right pieces of business that make right sense for us for the long term. So, it's a, kind of, a constant evaluation that we go through and we were a little bit light in the quarter. But, I don't think that's a big concern.

Got it, Tim.

And then, thinking about your European container board business -- box business. You supply a lot of your craft liner board from the US, but you mentioned that the test liner is purchased locally. Is there a strategic benefit to potentially integrating that converting business in Europe with mill assets? Can you talk us through that scenario?

Sure Alex, this is Mark. We evaluate the test liner integration benefits and level on a continuous basis. We -- there was a time where we were 35% integrated. We had a mill in France that we closed. We have a good integration level in our business in Morocco. We have a couple of mills in Turkey.

We really look at it on a available paper, the type of segments we choose to participate in. Our business, as I've mentioned before, is largely built around the Mediterranean region and the fresh food areas. That's a heavy craft liner and semi-can medium market. That's the primary focus of that business.

And, we view the craft liner as an extension, with a boat in between of our North American box system. So, as we think about strategic development of that business, the need to make some of our own test liner, or more than we do today, will continuously be evaluated. But, there is ample supply in Europe for companies like -- that are configured like us. So, the availability of the paper is there.

It has to be the right economics and has to be the right quality with the weight and the different products we're making. And so, there could be a scenario where it makes sense to make more. But, right now we feel like our position is in a good spot. But, we evaluate it on a continuous basis. And, we've moved in and out, over time, with levels of own-make test liner.

Right off of Mark, if I can just ask one quick one on Ilim. I think you had talked about a normal EBITDA out of that business of about $600 million. With all the puts and takes, do we think we're on track to be able to achieve that number in 2015? And, what would be the cash dividend that would be associated with having an EBITDA number that's close to a normalized $600 million number?

Alex, it's Carol. I think that there's a good shot to hit that number. A lot will depend on how things turn out. We're performing well. We've got great cost position. So, a lot'll be -- depend on demand out of China for pulp and, kind of, where the currency goes and some other things.

Relative to the dividend, it's going to be very cash positive. So, a lot of that will depend of the Ilim board will make that decision. And, it'll be around that debt, debt covenants, and the ability to pay it. But, it won't be for a lack of cash. So, we feel very good about that business and I think we're going to have a very strong year.

Great. Thanks, Carol. Thanks, everyone.

Philip Ng, Jefferies.

Good morning. This is Alex Hutter on for Phil.

Thanks for taking my question. So, the strong dollars, I've just seen at a headwind for export container board prices. But, there's also been some container board price increases announced in Europe and Brazil. Can you talk about what you're seeing in terms of export prices. And, your outlook as prices begin to firm up?

Yes, hi, it's Tim. We, the -- most of the movement that we've seen has really been currency-related out of Europe. We haven't really seen any movement in other regions world. And, the price -- we've announced price increases on Europe shipments as there going out over -- we started earlier this year. But, that's only made up about half of the impact on currency.

So, I'd say it's Europe on currency. And yes, there's some pressure. There's been some spot prices here and there. But, nothing structural that we've seen so far in other parts of the world.

Great. Thanks, Tim, and then, just one follow up. I appreciate the color on April box trend seasonally. Is there any way you can give a comp on an apples-to-apples, year-over-year basis?

No, we'll see how the quarter plays out and talk to you at the end of the second quarter. I mean, it's -- like I said, it's usually our strongest quarter in terms of volume. And, we're seeing seasonal lift so far. So, we feel okay about it.

Great. Thanks very much. Good luck in the quarter.

Al Kabili, Macquarie.

Hi, thanks. Good morning.

A question for Tim, is just on the opportunity for further optimization in the container board business. Can you just update us where we're at there in North America? And, if there's any specific targeted improvement that you have for this year on that?

Well, we're constantly looking at -- I mean, every year we have a certain amount of initiatives baked in and it's across the board. We had extremely good performance in our converting operations in the first quarter, both on waste and on throughput. In the middle system, we're targeting a percent of cash costs every year.

We did not run as well as we wanted to in the first quarter. But, we ran a lot better than in the fourth quarter and we feel good about the rest of the year. So, it's going to be running the mills more reliably and running better from a input consumption standpoint. Supply chain continues to be a big opportunity for us. And, running the mills reliably actually helps that. Because, we -- there's freight logical statements from mills to converting facilities.

And, when we're up and down in mill facilities it makes it a little bit harder to keep supply chain in line. So, I think we've got a pretty good plan for this year in terms of improvement across converting mills and supply chains.

Okay. Thanks, I appreciate that. And then, also -- on just the -- I know the export had been the majority of the pricing sequentially in the business. But, from the medium, from the published medium price cuts, do you see any meaningful impact from that? Or, if you can call out what that impact is?

And, I would think there might be a sequential drag as you see the full impact of that in 2Q. Although, it may be light. Thanks.

Yes, I don't think it's going to be a huge shift for us. I just don't see the medium having a big impact on performance of the business.

Okay, and then, the final question is just on the West Coast; is going through another pretty severe drought this year. I know that impacted you last year. Any early read on what the impact might be this year?

It's hard to tell what happens through the course of the year. It hit us a little bit in the first quarter. Second quarter is when we naturally pick up around produce, fresh fruit, and vegetables. So, we'll have to see.

But, yes, it's still dry. What has helped is the port situation. Just, there were agricultural products that were sitting at ports spoiling, among other things. And, having that resolved and supply chains starting to correct themselves is going to be a help.

Okay. Thanks, Tim. I'll turn it over.

Mark Connelly, CLSA.

Thank you. Just one question. John Faraci used to talk about capital spending versus depreciation levels, geographically. That he was spending more capital in growth markets overseas and less in the US. As we think about the new spending and the new initiatives that you're making in the US, has that changed dramatically? And, where do you think that balance of CapEx to depreciation, domestically and overseas, is going to be over the next couple of years?

Good morning, Mark. It's a great question. I think some of the spending that you referenced really was about building some positions in some new markets. So, almost by design, you're going to spend early on greater than depreciation.

I think, our view is, spending as a percent of depreciation is an important metric. But, a more important one might be our capital spending as a percentage of our revenue. And, where we think we can generate these returns on invested capital in excess of our cost of capital. And, I think, again back to that as a more focused filter.

That's where you'll begin to see more capital in the strategic reinvestment category. Invested where we really believe we can create that sustained value. And, we'll be looking at capital as a percentage of our revenue, as also as a percentage of depreciation. And, looking at that together.

Okay. Thank you.

Scott Gaffner, Barclays

Thanks. Good morning.

Mark, when I look at the two projects, the Valiant restart and then I looked down at the Riegelwood conversion. The Valiant project, you have 25% plus IRR. Riegelwood is 20% plus.

The question is, really, going forward on these capital investments. Is there a belief within the Company that we should be looking at lower IRRs on future investments? Is that the quick correct way to read that?

Not sure I understand why you would conclude that. Are you thinking we maybe we did the highest ones first?

Correct. Exactly. So, now you're getting to the lower return on projects?

No, I don't -- that's not a good conclusion. What drives the timing on projects like this is, the return is obviously important. But, if there's an acceptable group of projects. Mike described the market demands of our customers. The timing of bringing product into the market.

You think about Valiant. Part of that timing was based on May first's buy and the roll off of our agreement. On the fluff project, we have the customer base we want and that customer base needs us to make fluff. So, that drove the timing more than it was the highest two returns we had. So, I think the kinds of projects you'll be seeing in the future will be in this range and better. Not worse.

Great. I appreciate you clearing that up. Just following up on export. Obviously, pricing's been a little bit pressure, just because of the FX component. But, when you look at shipping costs, have you noticed a significant offset there from lower shipping costs into the export regions that might benefit?

I'll take that for the whole Company, because we export a lot of things from the US. I don't think we've seen a significant offset in the export arena. There's puts and takes. But, nothing that's shown up materially as an offset to the pressures you described.

Okay. Thank you.

Dr. Mark Wilde, BMO Capital Markets.

Good morning.

Morning, Mark.

Mark, I wondered, first of all, if you could update us. I think you've been doing some kind of re-think around the whole international portfolio with the Company. It sounded like China had been the biggest question for you. And, I wondered if you'd be willing to talk about that?

Well, I can't talk about anything in detail. But, what you're referring to is what we talked about on a couple of calls and in a couple of conferences. And, that is, we constantly need to reevaluate our positions and our strategy. And, looking at places that we really believe on the long term International Paper can win. So, the international regions that we're in today are under evaluation.

And, as you can see from decisions we've made, even domestically, with the coated paperboard repositioning. Our positions in the US are under evaluation. All against the backdrop of, can we win long term and produce returns that are in excess of our cost of capital? Maybe not all at the same time, in any moment in time. But, that's the goal.

To get the Company's return on invested capital to be balanced at every any part of the Company in the long term contributing to that target. So, with that as backdrop, we have more work to do. I'm not prepared to talk about any conclusions, but rest assured, that work is being done.

Okay. That is fair. I wondered, just in looking at volumes quarter to quarter and year over year. A couple of them really jumped out at me.

One was the drop off in the Asian coated board volumes. And, the other was the weakness in the Brazilian uncoated paper volumes. Particularly with Brazil, I know that Brazil is weak. But, I also know with a weaker reals, that business should be much more competitive from an export standpoint.

Yes, I think on the Brazil piece. One of the issues for the IP number is was we had a tremendous first quarter in 2014. We got the lion's share of some incremental demand the came out of some government programs. And, we didn't have that this particular quarter. So, our comp was particularly difficult.

But, we are not losing our position in our Business, and our margins in the paper business in Brazil, were still very strong. It was really more of a timing and a comp issue, more than anything else, on the Brazil paper demand drop off. On the coated board in China, I think, part of what we're doing in our coated board business in China, we made those investments to make the high end of the market. And, we're continuing to upgrade our mix.

And, in some cases, based on the supply demand, and the economics and margin pressures it was the right economic decision for us to make less of the lower-end general folding carton grades. And, make more of the higher-end grades that go into more sophisticated packaging. And, just make less product to make a better result. So, that demand relative to the market, is self-inflicted and the right decision for us. Because, our strategy was to make the high-end grades.

Okay, now the last thing I wanted to do is to circle back on that three times leverage target that you have had, Mark. And, I'd just like some updated thoughts on how important getting down to that level is for you? And, what you'd be willing to go up to in the short term for a transaction?

I think it's no change in our view on that. We think that the three times leverage is the right place for International Paper over time. You've obviously seen us go above that. But, we did it and we got it back very quickly.

So, I think the strategy we would have on any investment that would require us to increase our leverage would be along those lines. Where, if we did it, we'd be -- we'd already have a plan to get it back. And, as we announced the transaction, we'd be announcing the plan on how we're going to get our leverage back. We think it's important for the long-term health of the Company and to be a long-term value creator, that being in that zone is important.

All right. That's helpful, thanks. Good look in the coming quarter.

Thanks, Mark.

Chris Manuel, Wells Fargo.

Good morning, a couple follow ups to some earlier questions. But, first, if I'm looking at, I think it's slide 33, here, correctly, or, I'm sorry. The slide here referred to a year-over-year price in your North American container board stuff being down a chunk. And, I'm presuming a lot of that's inflation -- or, I'm sorry, currency-driven.

Can you, maybe, talk about the appetite? Or, how you think about, particularly given your strategy as a -- using European operations as an export base for your North American mills, as to how you feel about needing to recover? Or, maintain certain price-cost relationship.

Additionally, you've got some other inflation stuff. You've mentioned logistics and freight that have been up a bit. How do you think about maintaining and recovering some elements there through your system?

Hi, it's Tim. First of all, we shift through multiple channels and we expect all of those channels to earn their keep. So, when we see margin pressure in an area, we're looking for ways to recover that. Or, shift from one channel to another. So, we did get hit on the container board side with currency.

And, we've had a number of increases that we've pushed through as we went through the first part of the year. We haven't recovered all of the currency impact. I'm not which -- sure which slide you were looking at? But, in -- if you're looking at the container business on page 31, most of what you see there is pretty small movements. And, most of that is mix.

We just experience variations. We sell to a lot of customers for a lot of different types of boxes. There's a pair -- a fairly broad distribution of price, given box construction. And, so most of what you see there is mix on price because of the boxes were selling. The margins, our margin structure from quarter to quarter was dead flat. So.

Okay. Second question was if I can follow up from an earlier one, as well. Have your customers approached you at all, particularly, West Coast customers; fruit and vegetable, produce, et cetera?

Regarding, the drought has been an issue, but, have they come at you and suggested that -- any sense that we may have 5, 10% lower needs, given shortages of water. Things of that nature. That's directionally some of the color we've heard regarding outlooks or thoughts regarding some of the crops. But, your color would be helpful.

Yes. No, we have not.

Okay. Thank you.

Steve Chercover, D.A. Davidson

Everyone, thank you. So, a lot of these things have been asked. But, starting with one. Obviously, currency it wa -- currency wasn't a problem on the bottom line. But, the revenues missed the consensus pretty substantially. So, I'm wondering if you can -- if that is the FX and you can quantify the impact?

Steve, the FX was the big factor. Translating those Brazilian sales and the euro sales into dollars was a big impact. And, that's the majority of it.

Great. Thanks, Carol. And then secondly, selling and admin are down both year over year and sequentially. And, xpedx is already discontinued op, so, is a good run rate to use in the low 400s now?

Can you say that again? You broke up on the first part of the question, Steve.

Pardon me. Selling and admin expenses are down year over year and sequentially. And, I believe that xpedx is already been discontinued. So, I'm just wondering if a good run rate is now in the low 400 range?

It probably is. But, think about the first quarter as probably a lower-cost quarter because we have an annual emerit increase that hits April 1. So, but, there could be a little bit of movement, but, it should be reasonable. The only other area there would be incentive comp can move around quarter to quarter and that's not insignificant.

Great, thanks. And, final question. It sounds like there is still some runway for Ilim after the brats work is done. So, can we see that thing approach, maybe, $50 million as a line item quarter in, quarter out?

I would hesitate to quote a number. I have to go back and do the math. But, one thing I would say is, because it is a pulp business, it is going to be a bit of a cyclical business. Is, you're going to have some peaks that are going to be really awesome. And, you don't know when those might be.

And so, it could be a very strong number, but I would have to go back and look at the math before I'd speculate on where the earnings would be. But, Jay would be a good one to follow up with on that.

Will do. Okay, thank you very much.

Anthony Pettinari, Citi.

Good morning. Mark, I was wondering if you could talk a little bit about the consumer packaging business? Following Riegelwood, you'll have two world-class SBS mills. But, you don't have the full converting capabilities of a few of your large publicly-traded competitors. So, as you look at this business long term, would you look to get bigger in converting? Or, would you maybe, look to continue to streamline the business?

Is it strategically important to be an SBS long term? Or, are you content to run it with the asset base you have now?

Hi, it's a good question, Anthony. The consumer packaging business, not only the US, but globally where we do it: we do some of that business in Europe, we do some in China, is an important business for us.

We are surgically targeted to certain segments with certain substrates. We don't have the full line of substrates. We don't have a full line of converting. And, that seems to be working for us.

In our recent history, we've tried some other methods to grow that business with other types of converting, with varying degrees of success or lack thereof. So, we're going to be very careful with how we look to grow that business. But, it is an important business for us. We really like the North American SBS base business and the converting that we do.

But again, back to my earlier comments. Anything we do in consumer packaging or any of the other businesses, we will have to be convinced that it drives the return on invested capital of the overall Company. And, even though we have a two-mill system, or emerging into a two-mill system in SBS for packaging grades, those are two enormous mills that have a significant capacity capability and product capability that are best-in-class in the world. So, I don't go by the number of mills.

I look at the number of customers we serve and the growth rates of those customers. And, where we think we can add value and be competitive. And, that will be the test we use on whether or not we grow and more converting. It's not a, we just need to do it to be like everybody else, or anything like that. It's about value creation.

Okay. That's helpful. And then, just turning to Brazil. You were, for instance, the top demand environment. Potentially, higher taxes and tariffs on energy usage.

Given all those challenges, is there a way to quantify the potential for EBITDA margin improvement at Orsa? Or, to quantify that runway? And then putting aside some of the bad external things, what are the actions you can take internally at Orsa to improve performance of that business?

That's a great question. I mean, the Brazil packaging business is in the same market, experiencing the same dynamics as our paper business. So, demand has been a challenge.

What we have done is we've improved internally how we're operating the mills that we have there. They're relatively small mills by our US scale, but they have the same kinds of challenges and problems.

So, we're deploying our capabilities of manufacturing excellence and other tools we use to improve those mills. And, we're seeing some results there; so, internal self-help improvement on how we operate.

And, on the box plants it's a number of things. It's improving our capability to serve customers through the supply chain improvements. And, also adding a little bit of automation to lower our fixed cost. And, we're making progress on all those fronts.

We're not losing position in our packaging business. We've got some really important customers that are having a tough go of it. So, as their business contracts a bit, we contract. So, we've got to figure out the commercial side and replace some of that business. But, I think when the economy in Brazil improves, when the government reforms take hold, the packaging business is going to be much better positioned to perform in a better environment than it was when we made the acquisition.

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

At this time, I'll turn it back to Mr. Royalty for closing remarks

Okay. Thanks.

Well, that will conclude today's call. Thanks, Mark and Carol and all.

And, thanks to -- again, to all of you for joining us this morning. As always, Michelle and I are available after the call. And, our phone numbers are on slide 19 of the presentation. Have a great day.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.