Download - INTERNATIONAL PAPER CO (IP) Earnings Report: Q3 2015 ... · Thanks, Jay, and good morning, everyone. Thank you for joining us this morning to review our third-quarter results and

CompanyName:InternationalPaperCoCompanyTicker:IPSector:ConsumerGoodsIndustry:ConsumerNon-Durables

EventDescription:Q32015EarningsCallMarketCapasofEventDate:18.16BPriceasofEventDate:43.93

©2014TheStreet,Inc.Al l R ightsReserved Page1of21

INTERNATIONALPAPERCO(IP)EarningsReport:Q32015ConferenceCallTranscriptThefollowingINTERNATIONALPAPERCOconferencecalltookplaceonOctober28,2015,09:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

JayRoyalty;InternationalPaperCompany;VPofIRMarkSutton;InternationalPaperCompany;Chairman&CEOCarolRoberts;CFO;InternationalPaperCompanySVP&CFOMikeAmick;InternationalPaperCompany;SVPofNorthAmericanPapers,Pulp&ConsumerPackagingTimNicholls;InternationalPaperCompany;SVPofIndustrialPackaging

OtherPart icipants

ChrisManuel;WellsFargo;AnalystMarkWeintraub;BuckinghamResearchGroup;AnalystAlexOvshey;GoldmanSachs;AnalystChipDillon;VerticalResearchPartners;AnalystGailGlazerman;UBS;AnalystAdamJosephson;KeyBanc;AnalystPhilipNg;Jefferies;AnalystGeorgeStaphos;BofAMerrillLynch;AnalystDebbieJones;DeutscheBank;AnalystMarkWilde;BMOCapitalManagement;AnalystAnthonyPettinari;Citigroup;AnalystSteveChercover;DADavidson&Company;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

Goodmorning.MynameisPatrickandI'llbeyourconferenceoperatortoday.Atthistime,IwouldliketowelcomeeveryonetotheInternationalPaperthird-quarter2015earningsconferencecall.

(OperatorInstructions)

Thankyou.IwouldnowliketoturnthecallovertoJayRoyaltyVicePresident,InvestorRelations.Jay,thefloorisyours.

JayRoyalty(VPofIR):

Thanks,Patrick,andgoodmorning,everyone,andthankyouforjoiningInternationalPaper'sthird-quarter2015earningsconferencecall.OurkeyspeakersthismorningareMarkSutton,ChairmanandChiefExecutiveOfficer,andCarolRoberts,SeniorVicePresidentandChiefFinancialOfficer.

Duringthiscall,wewillmakeforward-lookingstatementsthataresubjecttorisksanduncertainties,whichareoutlinedonslide2ofthepresentation.Willalsopresentnon-USGAAPfinancialinformation.A




reconciliationofthosefigurestoUSGAAPfinancialmeasuresareavailableonourwebsite.

Ourwebsitealsocontainscopiesofthethird-quarter2015earningspressreleaseandtoday'spresentationslides.Lastly,relativetotheIlimJV,slide4providescontextaroundthejointventure'sfinancialinformationandstatisticalmeasures.Withthat,I'llturnthecallovertoMarkSutton.

MarkSutton (Chairman&CEO):

Thanks,Jay,andgoodmorning,everyone.Thankyouforjoiningusthismorningtoreviewourthird-quarterresultsandouroutlookforthefourthquarter.I'mgoingtostartonslide5.

InternationalPaperdeliveredanotherquarterofstrongresultswithearningspershareof$0.97inthethirdquarter.EarningsweredrivenbyoutstandingresultsinourNorthAmericanIndustrialPackagingbusiness,withEBITDAmarginsof25.2%.SolidperformancecontinuesattheIlimjointventure,resultinginrecordoperationalEBITDAinthequarter.Additionally,IPreceiveda$35milliondividendfromIliminthethirdquarter,andfinally,ourreturnoninvestedcapitalcontinuestobestrong,withyear-to-dateresultsabout10%.

Oncapitalallocation,weincreasedourdividendby10%to$1.76pershareeffectivewiththefourth-quarterpayout.Alongwiththat,werevisitedandimprovedourdividendpayoutguidelines.Also,wecompletedtherestructuringandareextendingthe2006timbermonetization.Carolwillsharemoreontheseimportantitemslaterinthecall.

Andfinally,werecentlymadeasignificantstrategicdecisionthatimpactshowwewillservetheimportantAsianmarketmovingforward.RelativetoclosingthedealtosellourstakeintheSunjointventure,wehavereceivedtherequiredgovernmentapprovalsandweexpecttofullyclosethedealinthefourthquarter.

Movingtoslide6,andcontinuingwithourfinancialresults,revenuewasdownyear-over-yearinthequarter,asithasbeenallyear.Primarily,thisisduetotheimpactofFXtranslation.Wealsotookalargenon-cashaccountingchargeof$0.15duringthequarterduetothedeclineinthevalueoftheRussianrubleversusthedollar,andthatisprimarilyonIlim'sUS-denominatednetdebt.Moreimportantly,ormostimportantly,Ishouldsay,wehadastrongEBITDAquarterat$1.1billion,andwithmarginsabove19%,strongfreecashflowof$512million,andareturnoninvestedcapitalofover10%.

Soagoodquarter,andwiththat,I'llturnitovertoCarolandaskhertocoverthedetailsonthequarter,alsoouroutlookfortherestoftheyear,andsomecommentsoncapitalallocation.I'llreturnattheendtowrapupthecallbeforewegointoQ&A.Carol?

CarolRoberts (InternationalPaperCompanySVP&CFO):

Thanks,Mark.Goodmorning,everyone.

Takingalookatthebridgefromthesecondtothirdquarter,youcanseethatourperformanceoverallwasfairlyconsistentquarter-over-quarter.Thelargestchangesinvolvedanon-cashchargeassociatedwiththeIlimJV'sUSdollar-denominatednetdebt,andthatwasduetothesignificantdeclineinthevalueoftherubleduringthequarter.

Thismorethanoffsetthebenefitoflowerplannedmaintenanceoutageexpense.Pricingwasimpactedbylowercontainerboardexportpricingandunfavorablepricemixoncoatedpaperboardandpapers.Overall,acrossthebusinesses,volumewasgenerallyflat.

Wehadsolidoperationsinthequarter,andasexpected,inputcostswerehigherintheareasofenergy,OCC,andrailexpense.TheOthercategoryincludesafavorableFXgainfromBrazil,andasmentioned




earlier,theIlimJVperformedverywell,withstrongoperationsthatpositivelycontributed$0.04pershare.

Turningtothesegmentsonslide8,IndustrialPackagingcontinueditsstringofstrongquarterlyresults,delivering$553millionofEBIT.Lowerplannedmaintenanceoutageexpensewasthebiggestdriverofincreasedearningsinthequarter.Exportcontainerboardpricescontinuetobeundersomepressure,andwebelievethisisprimarilyduetothestrongdollar.

VolumewasimpactedbylowercontainerboardexporttonsandseasonalsoftnessinEurope.AbsoluteboxvolumeinourNorthAmericanboxbusinesswasflat.Operationalperformancewassolidandinputcostswerehigher,asImentioned,asweexpect.

Turningtoslide9,IPcontinuestoenjoyindustry-leadingmarginperformance,asMarkmentioned,drivenbytheexcellentexecutionofourNorthAmericanIndustrialPackagingteam.Thisincludestheircommercialefforts.Asyoucansee,onthetoprightportionofthisslide,we'vemadesignificantprogressinclosingthegapstoindustryboxshipmentsoverthelasttwoquarters.

Thisisduetonewbusinesswinswe'resecuring,growthwithourexistingcustomerswhoarewinningintheirrespectivesegments,andoursignificantpresenceinsegmentswhicharegrowingfasterthantheindustryaverage.Asyoucansee,atthebottomoftheslide,we'reseeingpositivegrowthtrendsinonlineretailanddistribution,agriculturalproducts,andbeverage.

Proteinisasegmentthat'simportanttousandthathasrecentlystruggled,butitisshowingsignsofresumedgrowth.Processedfoodsisalargesegmentthatcontinuestobechallenged,asconsumerpreferencesareshifting.Butoverall,weareencouragedbyourresultsandthetrendsweareseeingaswemoveintothefourthquarter.

TurningtotheConsumerPackaging,earningswerehigherduetolowerplannedmaintenanceoutageexpenseandimprovedoperation.WhilevolumewasupslightlyinbothNorthAmericaandEurope,itwasweakerthanweexpectedforthistimeofyear.WedidexperiencesofterbacklogsinNorthAmerica,whichweviewasaresultofcustomerdestockingacrosstheindustry.Wealsoexperiencedsomepricepressureonplatestock,alongwithalessfavorablemixinNorthAmerica.

Turningtoslide11,itwasaverygoodquarterforourPrintingPapersbusiness,withearningsup$78million.Wehadseasonallystrongervolume,lowerplannedoutageexpense,andstrongeroperations,andthesewerethekeydrivers.ThiswaspartiallyoffsetbylowerpricemixinNorthAmericanpaper,abitlessfavorablepulpmix,andanincreaseinRussianexports.

Lookingatslide12,I'dliketotakeaminutetohighlightabusinessthatreallyshowsthestrengthofourkeycompetitiveposition,andthat'sourBrazilianpaperbusiness.Asweallknow,Brazilfacesahostofchallengesrightnowasit'sinthemidstofaverydeeprecession.WhatgetslostrelativetoIPisthefactthat,despitethecurrentsituation,ourpapersbusinesscontinuestoperformverywellandcontinuestogeneratestrongEBITDAmargin,above30%.

Despitetheweakdomesticeconomy,we'veimplementedoneroundandareworkingonasecondroundofdomesticpriceincreases,whicharehelpingtooffsetweakdomesticdemand,aswellasincreasedinflation.Additionally,ourexportpositionisstrongerthaneverduetoourstrengthenedcompetitivepositionandthebenefitofthecurrencydevaluationtoourcostposition.Weexpecttobuildonthemomentumwesawinthethirdquarteraswemovethroughthefourthquarter,asvolumeseasonallystrengthensandweimplementthesecondroundofdomesticpriceincreases.

TurningtoIlim,theJVdeliveredrecordoperationalEBITDA,asMarkmentioned,inthethirdquarter,andthiswasallaroundstrongoperationsandincreasedvolume.ProductionattheBratskmillwasatarecordlevelinthethirdquarter,exceededthecapitalprojecttargetsthatwehadset.Asnotedearlier,theJV




didtakealargenon-cashchargeinthequarterforthedeclineinthevalueoftheruble,primarilyrelatedtotheJV'sUS-denominateddebt.

AsMarkmentioned,wedidreceiveadividendpaymentfromtheJVinthequarterof$35million.Lookingahead,theJVisexpectingseasonallyhighervolumestobeoffsetbyloweraveragepulppricesandhigherinputcostsforthefourthquarter.

Movingtothefourth-quarteroutlook,volumeinNorthAmericawillbelowerduetoprimarilythreelessshippingdaysintheNorthAmericanboxbusinessandseasonallylowerspecialtysales.ThiswillimpactNorthAmericanIndustrialPackagingresultsbyabout$35million.

VolumewillalsobeimpactedbyfewershippingdaysinNorthAmericanConsumerPackaging.Weexpectseasonallystrongervolume,asImentioned,intheBrazilpaperbusiness.Weexpectpricingtoberelativelystableforthebusinesses,however,wedoseealessfavorableseasonalmixacrossourNorthAmericanpaper,pulp,andpackagingbusinesses.

Operationalcostwillbeaheadwindinthequarterrelativetothethirdquarter.PartofthisstemsfromthefloodingthatwesawinSouthCarolinaearlierthismonth,whichimpactedbothourEastoverandGeorgetownmills.Additionally,withthelowerdemandexpectedinNorthAmericaduetofewershippingdays,combinedwithstartingtomoveintothewintermonthsacrosstheUS,operationalcostwillbehigher,aswillenergyexpenses.

WeexpecttheimpactoftheNorthAmericanpaperandpulpbusinesstoberoughly$25million,andthatdoesincludetheimpactsfromthefloodandtheoperationalimpactthathad.WeexpectsimilarseasonalityissuestoimpacttheNorthAmericanpackagingbusinessbyroughly$20million.

Relativetoinputcosts,weexpectenergyexpensesfortheNorthAmericanbusinessestobeabout$10millionhigherinthefourthquarter.Maintenanceoutageexpensewillincludeincreasecollectivelyby$45millionasshownontheside.Asalways,weprovideanoutletforIlimassumingstableFXcomingoutofthequarter,sothefourth-quarteroutlookassumesanon-repeatofthe$0.15chargeweincurredin3Q.

Shiftinggears,beforeIturnitbackovertoMark,I'dliketoprovideanupdateoncapitalallocationandhowwethinkaboutthisimportantarea.Thishasbeenaconsistentmessageandwe'vecontinuedtorefineourthinkingandourapproachrelativetodrivingthegreatestvalueforIPandforourshareholders.Tostart,ofcourse,cashfromoperationsenabledIPtofundalloftheseimportantelements,soourfocuscontinuestobeonmaximizingcashgeneration.

Lookingatthetopleftportionoftheslide,oneofthemostimportantaspectsofourcapitalallocationphilosophyistosystematicallyreturnasignificantportionofourcashtoshareholders.AsMarkmentioned,we'verevisitedthetroughtestforourdividend,andbasedonahigherlevelofconfidencearoundthesustainabilityofourcashflow,wehaveincreasingtargetpayoutfromthepreviouslynoted30%to40%,nowto40%to50%ofourfreecashflow.

Opportunisticsharebuybacks,aswebeendoingsinceweinstitutedthefirstauthorizationroughlytwoyearsago,remainsaveryimportantpartofthiselementofourstrategy.Thoughtfulandeffectivecapitalspendingisanothercriticalelement.We'regeneratingstrongresultsandarecommittedtorunningasociallyresponsibleCompany.

Tomaintainthatlevelofexcellencerequiresabaseloadofmaintenanceandrevelatoryspending.Beyondthat,welookathigh-returncostreductionprojectsthathelptooffsetinflationarycostsandthenenableIPtomaintainandincreaseourcompetitiveness.

Next,weintendtomaintainastrongandhealthybalancesheetandthatincludesaninvestment-grade




creditrating.Webelievethisisimportanttomaintainthefinancialstrengthandflexibilityneededboththroughthegoodtimesandthenotsogoodtimes.

Finally,wecontinuetolookforwaystoincreasethevalueofIPthroughreinvestment.Thisisallaboutopportunitiesthathavehealthyspreadsaboveourcostofcapital,andimportantly,improveIP'sstrategicposition.

GiventhatcashfromoperationsfundstheimportantelementsofourcapitalallocationstrategythatIjustspokeabout,slide16showsourcashfromoperationsannuallysince2008.Wehavebeengeneratingsignificantcash,andcombinedwithourthoughtfulapproachtoCapEx,thishasallowedustomaximizefreecashflow.

Turningtoanupdateonourcapitalallocationactivityinthequarter,let'stalkaboutanumberoftheseitems.Asmentioned,werecentlyincreasedourdividendby10%,effectivewiththefourth-quarterpayout,to$1.76pershareannually.Thismarksourfourthconsecutiveannualdouble-digitincreasesincethefallof2012.

AsImentioned,westrengthenedourpolicytomovethetargetpayoutrangeupto40%to50%freecashflow.Sharebuybackremainsanimportantpartofourcapitalallocationstrategy.Webought151millionofsharesinthethirdquarter,whichhasbroughtouryear-to-datetotalto423million,andourtotalsinceSeptemberof2013toalmost1.9billion.

Movingontothenextitem,aswehavepreviouslydisclosed,weneededtotakeactionthisyearregardingtheloanagreementsassociatedwithIP'ssaleofthetimberlandsbackin2006.OurobjectivewastoreduceIP'sriskandpreservefinancialflexibility,whilemaintainingthedeferralof$1.4billionintaxes.Wetookaseriesofsuccessfulactionsduringthethirdquartertoachievethoseobjectives.

It'simportanttofirstremindeveryoneonthecontextaroundthisandthenwalkyouthroughinabitmoredetailthanImightnormallydo,thedetailsofwhatweaccomplishedinthethirdquarterandwhatweplantodointhefourthquarter.Asyouknow,wesoldsomeofourtimberlandsin2006for$4.85billioninaninstallmentsale,whichresultedinadeferralof$1.4billionintaxesontheproceedsfromthatsale.

The2006structurewasupforextensionrenewallaterthisyearandinto2016,sowethoroughlyevaluatednotonlyanextensionofthestructure,butalsorestructuringoptionsthatwouldreduceIP'sexposuretobankrisk,whilecontinuingtomaintainthe$1.4billiontaxdeferral.Ultimately,wemovedforwardinthethirdquarterwiththerestructuring,whichprovidesIPwithbenefitsandflexibilitygoingforward.

Third-quarterrestructuringwillbefollowedinthefourthquarterwithafive-yearextensionofthenewstructure.Theoriginalstructurewasfullrecourse,meaningthatwepledgednotonlythetimbernotesbutalso$4.85billioninIPdebtobligationsascollateralforthebankloan.Alothaschangedsinceweputtheoriginalstructureinplace,makingthistypeofstructurenolongerthemostprudentforInternationalPaper.

Sowemadethedecisiontomovetoalimitedrecoursestructure.Thefirststepinthisprocesswastobuyoutourthird-partyequityinvestorfor$198million.Thatinvestorwasnecessaryintheoriginalstructure,butwasnolongerneededinthenewstructure.Additionally,movingtothenewstructureallowedustoeliminate$150millionofdebtfromourbalancesheet.

Themostsignificantrequirementinthemovefromfulltolimitedrecoursewastoadequatelycollateralizethe$4.85billionofbankloans.Toaccomplishthat,wemadea$630millionpaymentagainstthoseloans,whichcomesbacktoIPwhenwereceivethecashfromthetimbernotes.Asaresultofmovingtolimitedrecourse,theassetsandliabilitiesassociatedwiththestructurehavecomeontoourbalancesheetinthe




thirdquarter,whichissimilartothetreatmentwehavewiththeTemple-Inlandtimbermonetization.

Inthefourthquarter,wewillworktoputpermanentfinancinginplaceforthefive-yearextension,andfollowingthefive-yearextension,themonetizationstructurecanbeextendeduptoanadditional15years.Sotosummarize,atremendousamountofworkwasaccomplishedinthequarter.

Wesetthestageforcompletionofthefive-yearextensionofthetimbermonetization,whichreallyallowsustokeeptheoptionuptoanadditional15years.ThenewstructureeliminatesIP'sexposuretosignificantriskanditmaintainsthe$1.4billiontaxdeferral.

Goingbackuptothesideandmovingontocapitalspending,wehavesetthe2016planat$1.4billion,whichwillincludespendingrelatedtotheprojectsweannouncedlastquarterfortheNorthAmericanIndustrialPackagingsystem,aswellastheRiegelwoodfluffpulpconversionproject.

Finally,asyouknow,onOctober8,weannouncedourdecisiontosellorstakeintheSunJVtoourpartnerfor$23million.Importantly,thedealalsoincludestheremovalofroughly$400millionofJVdebtoffofIP'sconsolidatedbalancesheet.AsMarkmentionedearlier,we'vemadealotofprogresstowardsthecloseandexpecttofinalizeeverythingshortly.

Sowiththat,letmeturnitbackovertoyou,Mark.


Thanks,Carol,fortakingusthroughallthosedetailsandtheveryimportantelementsofcapitalallocation.

Ifeelgoodaboutourcapitalallocationstrategyandtheworkweaccomplishedinthirdquarter.Itwasabusierthannormalquarteronthatfront.TheseweretherightmovesforIPandI'mreallyconfidentaboutourpathahead.

WhatIwouldliketodo,though,onslide18ofputalittlemorecontextaroundourstrategicdecisionrelativetoAsia,andwhatweseeasacontinuedimportantmarketforIP.You'veheardmesaythisbefore.We'vebelookingatChinaforawhile,weserveitmanydifferentways,andwereachedaconclusionthatservingAsianinallthosewaysthatwehaveinthepastisreallynolongerthebeststrategytomaximizevalueforIP.

Sowedecidedtoexittheon-the-groundmanufacturingwedoinChinaforcoatedpaperboard,aswellasourIndustrialPackagingboxbusiness.That'sbothinChinaandSoutheastAsia,theboxbusinesses.We'llcontinuetoservecustomers,though,inthisreallyimportantregioninavarietyofways.

Inwaysthatareworkingverywelltoday,includingexportsfromourIlimjointventureforsoftwoodpulpandselectsexportsfromtheUSofgloballycompetitiveproductslikeourcraftlinerboardandourfluffpulp.SoChinaandAsiaremainimportanttous.We'rewillingtoreevaluatehowweservethemarketsaswegothroughtime,andthat'swhatwedidinthiscase.ThisisasignificantdecisionfortheCompanyandonethatmakesIPevenstrongerandmorevaluable.

OnthelastslidebeforewegotoQ&A,onslide19,inclosing,I'dliketoturntotheinvestmentpiecesfortheInternationalPaper.We'vebuiltaportfoliowithstrongcompetitivepositionsinkeyselectmarkets,whereInternationalPaperhasarighttowin.Ifweexecutewell,wehavearighttowin.IlikeourportfolioandwillcontinuetolookforopportunitiestorefineitandimprovetheCompanyaswemoveforward.

Ourstrategyisenablingustoachieveanincreasedreturnoninvestedcapitalaboveourcostofcapitalandwe'vebeendoingthisforthelastfiveyears.Sowe'rereallyconvincedthatwecansustainably




continuetogeneratethesetypeofreturnsandcontinuetoimprovetheCompany.

Wearealsogenerating,andCarolmentionedthis,it'sreallycriticalthatwefocusonthecashflowelementofourCompanysothatwecanfindourcapitalallocationstrategy.Again,weareprovingthatwecangeneratestrongsustainablefreecashflowyearinandyearoutacrosstheCompany.

Finally,wearefocusedonthoughtfulcapitalallocation,whichyoujusthadadetailedviewofonCarol'slastslide,that'sbasedontheprinciplesofcreatingvalue,rewardingourshareholders,andmakingInternationalPaperabetterCompanythatyoucancountonforthelongterm.

Withthat,I'dliketoturnitbackovertotheoperatorandwewillopenupthefloorforQ&A.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

ChrisManual,WellsFargo.

ChrisManuel(Analyst-WellsFargo):

Goodmorning,gentlemen.Thanksforthecolorandallthecomponentshere.Justtakingastepback,Mark,overthelast,say,12monthsorso,you'vedoneanumberofactions,mostlydeletesorcleaningupelementsoftheportfolio.Asyousittoday,doyoufeelthatyou'relargelydonewithwhatyouwanttodowiththeportfolio?Aretherecomponentsinthebusinessthatlookparticularlyattractivetothatyoufeelyou'dwanttobeaddingorlooking,sowithrespecttohowyou'rethinkingaboutacquisitionsortheportfoliowasawholeasitsitstoday?


That'sagreatquestionandsomeofwhatyoudonaturallyovertimeiswhatwe'vebeentalkingaboutinthelastyear,whichisrefiningtheportfolio,recognizingthatsometimeseverythingwearetryingtodoisn'tworkingthewaywethoughtitwouldbe.ThatwillbeacontinuedelementofhowwelookattheCompany.

ButIwouldremindyou,though,thatwe'venotjusttakensomethingsout,we'vealsoreinvestedinaprettybigway,andit'spayingdividendsintoourIndustrialPackagingbusiness.Itdoesn'tgetthesamepressasanacquisition,butmakingthatbusinessevenstrongerthroughimprovingouroperationsontheboxside,aswellasthemillside,hashadaprettygoodeffectandwehavegotmoretodothere.

Imentionedinmycomments,Iliketheportfolio,butbynomeansdoesthatmeantherewon'tbeanymorechanges.ThechangeswillcomeagainstourfilterofcanwemaketheCompanystrongerandcreatemorevalueandgeneratemorecashthatwecanthenfundourcapitalallocationstrategythrough.

SoonM&A,I'vesaidthisbefore,M&Aisobviouslyapartofyourstrategyinanycompany,butagain,againstourfilterofcreatingvalueanddoingthingsthatincreasethereturnoninvestedcapitalwithagoodspreadaboveourcostofcapitalwouldbetofirstplacetostart.Obviously,theindustriallogicofwhatwedoinganddowellhastofitaswell.


Andasafollow-up,ifIcould,asIlookat--you'vegotaslideherewhereyouhighlightdowntimethatyou'vetakenacrossmostofyourmillsandsuch.WhenwethinkaboutdowntimeinNorthAmerica,withsignificantamountof--there'sbeensomechunksofnewcapacitycomeonstream,there'sbeeneven




morechunksofcapacitythathavecomeout.

Howdoyouthinkaboutthemarketasitsitstoday?Isitrelativelybalancedtoyou?Doyoufeelit?AsIlook,overthepastthreeyears,you'vetakendowntimeinallbutoneofthequarters.Dofeelthatyou'reaboutdoneneedingtotakedowntime,orperhaps,doyouevaluatemaybetakingalittlecapacityoutyourself?


Chris,that'sagreatquestion.Thisisastatementacrossallofourbusinesses.Weruntheoperationsbasedonourorderbookandourcapacity,givenoutagesandallofthosethings,doesn'tperfectlymatchourdemand.Demandseasonalityandcapacityseasonalityaresomewhatoutofphaseinourbusiness.

We'velimitedthatovertime.Thecontainerboardbusinesshasgottenreallygoodatitbecausewehavesomanymills.Butwe'regoingtomaketheproducts,andallthosebusinessesthatwehaveordersforandthatweneed,that'swhatyieldstheamountofdowntimewetake.Whatwe'velearnedtodo,though,istakethatdowntimeonamarginalcostbasisanddoitprettyefficiently.

Wearenolongerpracticingpapermakingfromyesterday,wheretheonlywayyoumakemoneyisifyouruneverythingwideopentoitsengineeringlimit.We'venowimprovedoursystemenoughwherewecanrunourbusinessandourmanufacturingfacilitiestothemarketdemandwehaveandbeprofitabledoingit.Wecontinuetoworktogetbetteratthatbecausethat'sarealimportantelementofhavingtheCompanythatwetrytocreateflexibilityandtheabilitytomatchtheorderswehaveanyquarter,anymonth,oranyyear.


Thankyou.

Operator :

MarkWeintraub,BuckinghamResearch.

MarkWeintraub(Analyst-BuckinghamResearchGroup):

Thankyou.Maybefollowingupalittlebitonthat,yougave,intermsoftheoutlook,yougaveguidanceindicationsontheimpactsfromvolume,impacting,youtalked$35millionpervolumes,andyoutalkedabouttheoperationsinpaperandpackaginginputcosts,mill,maintenance,etcetera.

Summedupsomethinglike$135million,$140million,whichwouldsuggestinthelow$0.20.Firstofall,wouldthatbeaboutrightintermsoftheimpactsfromthoseelementsandwould--otherthantheIlimcomingtheotherway,wouldtherebeanythingelsesignificant?Andrelatedtothat,doesthatcapturetheexpectationsoftheseasonaltypeofdowntimethatyoumighttake,whichyouwerejustreferringtoandifyoucouldhelpusoutthere?


Yes,Mark.It'sCarol.Forsurewhatwewereattemptingtodowastohighlightthatseasonalitybecausethat'salotofwhatyou'reseeingthere.It'saboutthedays,it'saboutthattimeofyear,it'sabouttheorderpatternsthatwesee,andsincethethirdquarterisastrongquartertraditionally,thefourthquartertendstobeseasonallyweakerquarter,andthat's--youcapturedit.


Okay.Thenjustonequickfollow-up.Ontheuncoatedfreesheetbusiness,nowwe'veseenthe




countervailingdutiesinplaceforalittlewhile,whatifanyimplicationshasthatbeenhavingfortheNorthAmericanmarketandthen,inyourcase,towhatyoudoinBrazil?

MikeAmick(SVPofNorthAmericanPapers,Pulp&ConsumerPackaging):

Hey,Mark.ThisisMikeAmick.Justrealquicklyonthat.It'sstillrealratherfluidintermsofthemarket,asweseechangesinthedynamicsthatarehappeningwithregardtoimports.Astheytakeeffect,theyarestillpreliminary,thefinaldutieswillcomein,inFebruary.

Asyousawfromthestats,someofthesearestillestimates.Wesawadecreaseyear-over-yearinthethirdquarterbyroughly80,000tons.Theoverallmarketrightnow,wethinkis,year-to-date,isroughlydownabout1%to1.5%sothisisgoingtostillbesomewhatofamovingandfluidoverthecourseofthenextseveralquarters.

WithrespecttoBrazil,andthevolumethere,weweren'tmovingalotofproductintothismarketfromBrazil.Itwaswhatwascomingintowarehouses,say,inMiamiwasgoingoutintootherpartsoftheotherpartsofLatinAmerica.SofromaBrazilstandpoint,intheUS,thatwasreallynotareallybigimpact.


Okay.Great.Soisitfairtosay--becausethat1%,1.5%,that'scertainlybetterthanwhatwehadbeenseeing,sowasthedoestheneteffectatthispointseemtobefavorable,atleastnear-term,onthemarket?


Yes,Mark.That'safairstatement.Certainlywherewe'vebeenseeingthe3%to4%decline,thishasbeenanimprovementthatwe'veseen,andasfarasInternationalPapergoes,we'vedonealittlebitbetterthanthat.


Great.Thankyou.

Operator :

AlexOvshey.

AlexOvshey(Analyst-GoldmanSachs):

Thankyou.Goodmorning,everyone.Coupleofquestions.Maybegoingbacktojust[inventoryversus]supplyanddemandintheUS.Canyoutalkabouthowyou'reseeingdemandthusfarinthequarter,howyou'rethinkingaboutyourinventorypositionrelativetowhereyouneededtobeandjustwhatyou'reseeinginexportmarkets?

T imNicholls (SVPofIndustrialPackaging):

Yes,goodmorning.It'sTimNicholls.Actually,demandstartinginthefourthquarterisreasonablygood.Remember,weareupagainstaprettytoughcompsgivenhowwellthemarketperformedlastyearinAugust,September,butthencontinuingtothefourthquarter.Soanypositivegrowth,anypositivegrowth,thisyearinthefourthquarterhastobeviewedasabigplus.InOctober,wearetrendingpositivesorightnowweareupabout1%,butwe'reencouragedsofar.

Intermsofinventory,wegrewourinventoriesfromsecondquartertothirdquarter(inaudible)andtheyareroughlywherewewantedthem.Wedidthatfortworeasons.One,wetalkedaboutbefore,supply




chainefficiencies,andthereturnoncarryingalittlebitmoreinventory,morethanpaysforitself.Butalsoaswecameoutofthesecondquarter,wewerejustcomingoutofheavyoutageandsowehaddepletedinventories,builtthembackinthethirdtogetreadyforfourth-quarteroutageseason,sowe'reinagoodplaceintermsofourinventories.


Excellent.ThankyouTim.Justlastoneforme,thinkingaboutcapitalallocation.Acoupleofthingsthatyousaid.Onewastheinvestment-gradebalancesheet,andtwowasthedeal,mostimportantly,hastodrivereturnoninvestedcapitalabovethecostofcapital.

Soontheinvestmentgrade,what'stheupperlimitaroundleverage,asyouseeit?Andthereturnaboveinvestedcapital,doesthatmeaninthefirstyear,ordoyoufeelaslongasyoucangettothenumberbyyeartwo,three,orfour,you'dstilltobewillingtolookatanacquisitionthattransformative.


Alex,I'lltakethesecondpart,andI'llaskCaroltocommentonourdebtmetrics.Ontheinvestment,significantinvestments,weneedtoseelineofsighttoanROICthat'satthecostofcapitalprettyquicklyinthosefirst,likeyousaid,firsttwoorthreeyears.Thenweneedtobelievewehaveactionableplantogetittoaspreadofmaybe200basispointsaboveourcost.

Itdoesn'tneedtobeforevertask.You'veseenusdothatonourbigacquisitions,WeyerhaeuserandTemple,forexample.We'renotgoingtobeperfectbutthat'sreallywhatwe'relookingatandthat'safilterthatweareallalignedonandsoweseeitprettyquickly.


Alex,regardingtheinvestmentgrade,inourspace,3timesdebt-to-EBITDAforusfeelscomfortable.OneofthestrengthsofInternationalPaperthatyouhavetoaftermemberisbecauseourbusinessesaresowellpositionedinthemarketsintheircostposition,ourcashflowgeneration,prettymuchthroughoutmostconditions,remainsverystrong.

Sowefeelcomfortablekeepingthattypeofleverage,andasdothewaitingagenciesandthereputationwehavewiththeratingagencies,whichwedowhatwesaywe'regoingtodoandthathasbeenworkingwellforus.


Excellent.Thankyou,MarkandCarol.

Operator :

ChipDillon.

ChipDillon (Analyst-VerticalResearchPartners):

Yes.Thanksandgoodmorning.Justaquickquestionaboutthechangeinthetimbertransactionfrom10yearsago.It'sonthebalancesheetasacurrentitem.That'sbecauseyou'regoingthroughthistransitionandIdon'tthinkitwastherebefore.Willthatberemovedfromthebalancesheetsinceit'snon-recourseandwillwecontinuetoseetheoffsettingentriesontheassetandliabilitysideaslong-termgoingforward?





Yesit'sinthecurrentbecausewe'reintheprocessofputtingthepermanentfinancinginplaceinthefourthquarter,sowe'llputthepermanentfinancinginplaceinthefourthquarter,anditwillmoveoutofpermandthenitwillbetreatedjustliketheTemple-Inlandtimbermonetizationis,butyou'llseeitonthebalancesheet.


Okay.Gotyou.Thensecondquestionisonthecapitalspending.ItseemslikeafterthelastcallinlateJuly,earlyAugust,thatCapExfornextyearwaslookingtobeabovethedepreciationrate,maybe$1.6billion,becauseofthe$300millioninIndustrialPackagingandhowthatwasanovertaboveandbeyondinvestmentthatyouwereusingwithfreecashflow,giventhereturns.

Nowitlookslikeyou'reguidingdowntheCapExfornextyearfromwhatwewould'vethought.Iknowyoudidn'thaveanofficialnumberthelastcall.Iwaswonderingwhatitemsorhowyouwereabletomakethosechangesandwhatthethoughtwasbehindthatdecline?


I'mgoingtotakeashotatthisandthenI'llobviouslyletMarkcomment,butwhathappenedinJulyiswejustwerenotinourprocessyettodeclarewhatour2016planwas,butwefeltitimportanttocommunicatetoyou,toourinvestorsourplansaroundthebusiness.

AndsowhatwetalkedaboutinJulywastheprojects,andagreedthatwe--leftitopensotherecouldbeachangeinthe2016capital,butobviouslywedoourplanningworkasweenterthistimeofyear,gettingreadyfor2016,andwejustfeelcomfortablethatwecangettheworkdonethatweneedtogetdoneontheprojectsandintheCompanywiththe$1.4billion,soIdon'tthinkit'sanymorecomplicatedthanthat,Chip.


AnddoesthatincludedanymoreBoilerMACTordidthatdropoff?


Itincludeswhat's[inspare]sothatincludesourregulatoryrequiredspending.


Gotyou.Lastquickquestionison--youtalkedabouthowChinaandhowobviously,it'sanimportantmarket,butcertainlyservingtheminthefluffmarketfromthestatesandinthesoftwoodpulpmarketandvirginlinerboardfromRussia,certainlyforalotofreasonsmakesense,giventhefibersituation.Couldyoumakethesameargument,orwouldyou,aboutIndiaoraretheredifferencesaboutIndiathanwhatyouseeinChina?


Chip,youcouldmakearguments.Obviously,therearedifferenteconomicbarriersatanymomentintime,whetheritstariffs,supplychainmaturity,andallofthosethingsthatwouldallowyoutomakemoneyservingamarketwithanimportantproducts.Thefundamentalelementiswhatyoujustsaidandthatisifyouhavegloballycompetitiveproductsfromaqualitystandpoint,whichwehave,andagloballycompetitivecostposition,andinourbusinessitstartinfiber,thenifyoucanaccessamarketthatappreciatesyourproducts,youshouldbeabletomakethatwork.

Youcanseeexamplesofthatintheforestproductsindustryallovertheworld.Sothat'ssomethingwealwayslookat,anditgoesbacktoourmulti-channelstrategyinourcontainerboardbusiness.Weare




containerboardprovidersfortheworldmarkets,notjusttheUSmarket,andwe'vebeendoingthatforalongtimebecauseheproductisgoodandourcostpositionisgoodandourserviceplatformistrustedbythecustomer,soit'sdefinitelyapossibility.


Thankyou.

Operator :

GailGlazerman.

GailGlazerman (Analyst-UBS):

Hi,goodmorning.


Goodmorning,Gail.


GoingbacktothecapitalprograminIndustrialPackaging,isthereanyfurtherguidanceintermsofhowthat'sgoingtorolloutoverthenextyearortwo,intermsofboththespendingandtheincrementalcapacitythatmaycomewithit?Isthatinthesametimelinethatyouwould'vethoughtlastquarterorhasthatbeenrefined?


Hi,Gail.It'sTim.Yes,it'sinline.Thechangestohowwewerethinkingis,asyou'llremember,wetalkedaboutthisbeingthespendingthatwewouldbeginin2016anditwouldrollinto2017,andnochangetoanything,thespendingorthetimeline


JustreminderGail,onwhenTimcoveredthoseprojectslastquarter,hetalkedaboutthedriversofthoseprojectsimprovingtheIndustrialPackagingcontainerboardmanufacturingsystem.There'salotofelements


Okay.Andbacklastfall,whenyouannouncedtheplanstorestartValliant,youtalkedaboutalsoswingingnewboardoutofmediumandmoreintofacingpaper.I'mjustwondering,youcanyougiveanupdateonwhereyoustandonthat?Haveyouaccomplisheditoristhatyettocome?


Wehaven'taccomplisheditfully.Wecontinuetogrowourgypsumproductthere,andsoweareencouragedbythegrowththatwesee,andthecontractualobligationsthatwehavegoingforward.Soit'sinprocessandwewillcontinuetoworkonit.We'retryingtodoallofthisonaverymethodicalwayandeliminateorminimizedisruptions.


Okay.Thankyou.




Operator :

AdamJosephson,KeyBanc.

AdamJosephson (Analyst-KeyBanc):

Thanks.Goodmorning,everyone.OneforTim.Tim,youtalkedabouttheOctoberpick-upinUSboxdemandthatyou'reseeingup,upabout1%.Giventhatindustryboxdemandgrowthhasslowedthroughoutthecourseoftheyear,andgiventheobviouspocketsofweaknessevidentintheUSeconomy,areyousurprisedthatyourshipmentsareup1%inOctoberanddoyouexpectthattypeofgrowthtocontinue?


Wellit'shardtopredictthefutureintermsofwhatwillhappen.AsIsaid,fourthquarterisatoughcomp.Wehadsomeexposuresearlierintheyear,thatjustbasedonoursegmentmix,intermsofprocessedfoodsandhowtheyhaveunderperformedforaperiodoftimenow.Anotheronethatunderperformedinthefirstpartoftheyear--well,really,rightthroughthethirdquarter--hasbeenprotein.

Avianfluinpoultryandtherewasabanoncertaincountriesallowingimportedpoultryproducts.Thosebanshavebeenlifted.Weareactuallynowseeingabitofrecovery.Wehopethatwillcontinuethroughthefourthquarter.Soyes,there's--theeconomyandyourreadaboutmanufacturing,whatwasmaybehurtingusalittlebitearlierintheyearpotentiallyisnowhelpingus.

Butonebrightspot,wesawourbeveragesalespickupinthethirdquarter,whichwasalittlebitofareversalofatrend,andsothatisahelpfulandhopefulsign.Theotherthing,wehaveafairlylargeexposuretoe-commerceandindicationsofaristhatitlookslikeithasthepotentialforareallybigseasoninthefourthquarter.


Thanks,Tim.OneforMark.Mark,yourEBITDAisdownabout4%to5%year-to-date,andIfullyappreciatethatemergingmarketshavebeenworsethanmanyfolksexpected.Doyouhavereasontothinknextyearwillbenotablydifferentthanthisyearintermsofyear-over-yearchangesinEBITDA,andifso,canyougiveanysenseastowhy?Thanksverymuch.


Thanks,Adam.WeobviouslyintendedtoimproveourEBITDAthisyearforthereasonsyoumentioned.We'vehadsomeimprovement,butwe'vegivenitbackbecauseofsomeoftheheadwinds.We'reevaluatingouroutlookfornextyear,butwefeelgoodaboutthelevelofperformancethatwehaveasaCompany.

Webelievewecansustainthatlevelofperformance.Theglobaleconomyisgoingtoreallyprovideanopportunitytoimproveorstaythesameandwearestillevaluatingthatrightnow,butwefeelgoodaboutthelevelthatweareat,andourgoalisobviouslycontinuetogrowtoearningsoftheCompany.


Thanksalot,Mark.


Thanks,Adam.




Operator :

PhilNg,Jefferies.

PhilipNg (Analyst-Jefferies):

Hey,goodmorning,guys.CanyouprovidesomecolorontheweaknessyoucalledoutinNorthAmericanconsumer?Isthepricingslippageprettymuchisolatedtotheplatestockbusiness,andhasthedowntimeyou'vetakenduringthequarterprettymuchtightenedupthemarketatthispoint?


Goodmorning,Phil.ThisisMikeAmick.Whatwe'veseeninthethirdquarter,asCarolmentionedinhercomments,wedothinkthatthereissomesluggishdemandoutthere.Mostofthatisreallywethinkwrappedarounddestockingthroughthesupplychain.We'veseenatourconverters,afairamountof,3%to4%pulldowninstocks,thatcoupledwithsomealreadyelevatedinventoriesacrosstheindustry,wethinkisexplainingalotofthat.

Ourvolume,we'vehadacoupleofspecificaccountsaroundourbacklogs,aswellassomemeasureddecisionsthatwouldtakeasfarbackas1.5yearsagotostartfocusingandpullingbackonsomeofourexportbusiness.Andwe'regoingto,asMarksaid,we'regoingtocontinuewith,inthisbusiness,asinallbusinesses,tomanagedtoourorderbook.Sofourthquarteris,inthisbusiness,isgoingtobe,alittleseasonallychallenged,aswenote.

Iwillsayonourfoodserviceside,andthecupstockbusiness,we'remanagingthroughthatportionofourbusiness.Itisverystrong.We'veseensome--havingagreatyearwithourshipmentsupabout6%year-to-dateandwe'vegotstrongorderbooksinthatbusiness.We'vejustcompletedthe[kitten]footprintexpansion,thosenewmachines,andcupconvertingmachinesarebeingdeployednowandwe'reactuallyoperatingthatnewequipment,sowe'reexcitedaboutthatportionofourbusiness.


Okaythat'shelpful.Andswitchinggearsbacktocontainerboard,there'sbeenalotofquestionsonthecallaboutsupply/demand,moreshort-termnature.Butmedium-tolonger-term,Mark,you'vealwayscharacterizedthemarketasbeenbalanced.Butbasedonsomeofthecapacitythat'scomingonandoneofyourbigcompetitorsidlingupafairamountofcapacityinthefourthquarter,atleast,what'syourviewonsupply/demandgoingforward?

Andjustwantedtogetsomethoughtsontheexportmarket.You'veseensome[leakage]thereonpricing.Doesseemlikealotofalotofyourcompetitorsarepullingbackinthatmarket.Doyouhaveasensethatpricesaregoingtostartstabilizinghereortherestillsomedownsiderisk?Thanks.


Hi.It'sTim.Justonthecapacityquestion,I'mnotgoingtocommentonwhatcompetitorsdowiththeircapacity.Wehave,uptothispoint,withcapacityadditions,beenabletomanageourwaythroughthewholeprocesswithourcustomersandwe'reofferingadifferentvaluepropositionthanalotofcapacitythat'sstartedupoverthepasttwoyears.

Wehavegoodgeographiccoverage,wehavewideproductmix,andweahavetremendouscapabilityacrossourwholesystemthatallowsustoselltocustomers,providingqualityserviceandproductrange.Onexports,it'sbeenalittlebitsofterhereinlatesummer,asweendedthethirdquarter,notmuch.Thesurprisingthingis,withthestrengthofthedollar,virginkraftlinerboardexports,themarketsweselltohaveheldupreasonablywellthroughtheyear.




Wesaidit'salittlebitofaquestionmark,butitsaystousthere'saneedfortheproductthattheyarebuyingasopposedtojustgeneraleconomicconditionsforallpackagingintheregion.Sothere'salittlebitofsoftnessaroundprice,notmuch,andhopefullyitwillstabilizethroughthefourthquarter,butthemarketshaveheldupreasonablywellthisyear.


Tim,aremill[nets]prettymuchatapointwherethedecisionhastobemadewhetherornotyourhigh-costcapacitymakessensetorunandsupportthatexportmarket?I'mjusttryingabettersenseifthere's--we'reatapointwhereexportpricesstabilizeshere?Thanks


Westilllikeourmarginsonexports.


Okay,thanks.


Phil,anotherpartofyourquestionwasaroundpricingandisthatisolatedtotheplatestock.Itprimarilyis.We'reseeingsomesoftnessonthefoldingside,butmostofthatisisolatedtotheplatestockbusiness.

Operator :

GeorgeStaphos,BankofAmerica.

GeorgeStaphos (Analyst-BofAMerrillLynch):

Hi,everyone.Goodmorning.Thanksforallthedetailsandtakingmyquestions.Carol,Iwantedtocomebacktothetimbertransaction.IjustwanttomakesurethatIhadagoodholisticon.You'regoingtobemakingapaymentofroughly$600million.Hasthatalreadyoccurredorwillthatbeoccurringinthefourthquarter?

Wherewillweseeit?I'massumingwe'regoingtoseeinthebalancesheetanddebt.Andformakingapayment,youdeferthetax,whichis--youdeferpaymentonthetaxof$1.4billionforasmuchasfiveyears,andperhapsasmuchas15years.WouldthatbefairandwhatelsehaveIleftoutormischaracterized?


Takethefirstquestion.Yes,thecashwentintothestructurethisquarter--orlastquarter.Thendownintheliabilityside,you'llseetheothersideoftheequation,thenon-recoursefinancialliabilityofit.Sothat'swhatyou'llseeonthebalancesheet,soyou'llsee$4.85billionupinassetsandthenyou'llseethe$4.2billiondownintheliabilityline,andthedeltaisthecashthatwe'veputintothedealessentially.That'sthesimplewaytothinkaboutit


Okay.Andinturn,you'lldeferthetaxesforatleastanotherfiveyears,perhapsasmuchas15?Isthatcorrect?


Yes,andifyougobacktothestructure,thestructurewasfor30yearstotal,sowedidthefirst10,andthe




waytheoriginaldealwithstructured,itwas10withfourfive-yearextensions,whichgotyoutothetotalof30.Sothisfirstoneisforthefirstfiveandthenthatgivesustheoptionattheendofthisfiveforthreemorefiveyearsoranother15years


Okay.Thankyouthat'sclear.AsImentionedearlier,Iappreciatethedetail,particularslide9andslide15onthecapitalallocation.Myotherquestion,just--alotofthemhavealreadybeenasked--asyoulookatsupply/demand,again,inpaperboard,broadly,andrealizingthatyou'regoingtorunyoursystemasalways,todemand,someofyourcompetitors,oneofyourlargeronesinSouthAmericahastalkedaboutrampinguptheirownboxboardproduction.

TheninEurope,oneofyourlargerglobalpeers,ifyouwill,hastalkedaboutbringingononeoftheirlargeconversionprojectsalittlebitearlierthanexpected.Noneofthisisnewnews,buthasthatchangedatallyouroutlookintermsofbeingabletosupplythemarket,oryou'reseeingabitmorecompetitioninthesemarketsasaresult?Thanks,guys.


George,that'sagreatquestion.Thepaperboardmarketdoeshaveaglobalelementtoitdependingonthetypeofproduct.We'vebeenmanagingtheseshiftsandchangesinthedifferentgeographiesandthetypeofproductused.WemakeSDSintheUS,butwemakefoldingboxboardinEurope.

Weobviouslytakeallofthatintoourthoughtprocessaroundhowwe'regoingtomake,whatweregoingtomake,andwhereweregoingtomakeit.AsMikementioned,aportionofourvaluepropositionisthatweprovideproductsreallyonthehigh-endofthepaperboardproductspectrumtoreally,reallygood,andthenonthecupside,weareoneofthosereally,reallygoodconvertersthatprovidethefinalproduct.

SoIwouldn'tsayingofthoseannouncementsorchangesorintentionsthatyoumentionedcreateanimmediatereactionintoIP'splans,butweconsiderthem.Butourpositioninthismarket,wefeelprettygoodabout,intermsofthecustomerswehave,theconvertingwedoourselves,andthecompetitivenessthatwehavebothonacostofproductside,sowe'llkeepwatchingthemarketthatweplayin,butthat'showwelookatit.


Mark,theVarkhausprojectalso,thathasn'tchangedyouroutlookatthisjuncture?Thatwaspartofmyobliquereferencetherebefore?Again.Thanks.Goodluckinthequarter.


Thanks,George.

Operator :

DebbieJones.

DebbieJones (Analyst-DeutscheBank):

Hi,goodmorning.IwantedtoaskaboutBrazil,yourguidanceonsideboard.It'salwaysinterestingwhenyouseeBrazillistedasstableinpackagingacrosstheboard.Ijustwantedtogetyourthoughtson,one,doyouthinkthere'sopportunityforpricingtobeabenefit,justgiventhatyou'veseensomeannouncementsoutthereforthefourthquarter?Andthentwo,justoperationally,shouldwebelookingformoreimprovements,eithercomingintothefourthquarterorinto2016,becauseyou'vementionedin




thepastthatyou'dliketotakeoutsomecostinthatoperation?


Debbie,that'sagoodquestion.TheBrazilpackagingbusiness.Carolhighlightedthepaperbusinessandthebusinessmodelinpaperisdifferent.Weexportaboutone-halfofwhatwemake,sowehaveadifferentprofitmodel.TheboxbusinessisallBrazileconomyandthenegative2.5%GDPisanegative2.5%boxdemand.

Thatisthechallenge.Thedemandissoft,inflationisup,andwe'vestruggledtorecoverthatwithpricing.We'restartingtoseesomepricemovement,butthefirsttimeyoutrytoreallygetsomethinginisthehardest,inaninflationenvironmentthathasademanddeclined.Soourviewonthatbusinessrightnowiswerealigningourmanufacturingassetsandtakingoutthecostwetalkedabout.

Andwe'rerepositioningourselvesforthebestplacewecanparticipatecommercially,sothere'sbeensomecustomerturnover,weweredoingsomethingsweprobablyweren'tthebestsuitedtodo.Wearereplacingsomeofthatbusinesswithbusinesswe'remorecompetitiveon.It'sgoingtobeaworkinprocess.BegreatwhenwegetBrazilbacktoaplus2%or3%versusaminus2.5%becauseitwilldefinitelyhelpwiththebusinessperformance.

DebbieJones (Analyst-DeutscheBank):

Okay,thanks.IfIcouldjustaskafollow-uponpensionexpenses.Areyouabletocommentatall--I'mjustlookingat2016--basedonhowyourassetshaveperformedandrates,ifweshouldseeanincrementalpensionexpensein2016?


Debbie,wedon'tanticipatearequiredpensioncontributionin2016.

Operator :

Dr.MarkWilde.

MarkWilde (Analyst-BMOCapitalManagement):

Goodmorning,Mark.Goodmorning,Carol.Ihaveaquestionandafollow-on.Thequestionreallyis,ontheEBITDAtargetsthatyou'vesetoutinthepastatinvestordays,bothintermsofthelevelandingrowthrate,doweneedtorethinkthose,andifso,howareyouthinkingaboutthem?


Thosetargets,we'vetalkedalotabout.TheCompanyisquiteabitdifferentthanitwaswhenwesetthetargetbackin2012,sotheintentistomaximizetheEBITDApotentialoftheCompanywehave.Obviously,growingEBITDAisapartofcreatingvalueoverthelong-term.

Sothatwillstayinourtargetsandgoals.Wearen'tpreparedtothrowanothertargetoutthereatthismomentintime,butrestassured,partofwhatwetalkedaboutdoingwascreatingvalueovertime.IthadanEBITDAnumber,ithadamarginnumber,andithadareturnnumber.We'rehittingonsomeofthosebutwe'veobviouslybeenshortontheEBITDAline


Okay.ThenMark,ifIcould,justafollow-on.YourcommentsonChinaandwhatyouwerehintingat,intermsofpotentiallyIndia,aboutbeingafiberexporterratherthanbeingamanufacturerinthecountry,




overtime,exportingpulpandcontainerboardhasbeenoneofthemostvolatilesegmentsofthebusiness.Canyoujusthelpusweighthatelementofyourstrategywiththevolatilitythathistoricallyhascomewithit?


TheservingofmarketsthathaveagrowthprofilebutmaynothavearawmaterialornaturalresourceadvantageisnevergoingtobetheprimarybusinessofInternationalPaper.It'sprobablynottheprimarybusinessofmostforestproductscompanies,butitisaverygoodwaytousefullyyourassets,turnthoseassetsatthehighestlevel,andgeneratetremendouscash.

Thevolatilityissomethingyoucanmanagewhenthebaseofyourbusinessis,asisinthecasetomostforestproducts,youmakeitanduseitinthesameregion.Sothisisn'tashiftofbeingaglobalexporteroranything,thisisjustsaying,wehavethebestchancetoservethesemarketswiththelowest-cost,highest-qualityproducts,andtheyneedtheproducts.Sothere'sawinforourCompanyandthere'sawinforthelocalproducerswhomayjustwanttheresourcetodotheconversionthemselves.That'showwelookatit.


Okaythat'sreallyhelpful.Thanks,Mark,andgoodluckinthefourthquarter.


Thankyou,Mark.

Operator :

AnthonyPettinari,Citi.

AnthonyPett inari(Analyst-Citigroup):

Goodmorning.JustcirclingbacktoNorthAmericancontainerboard,youhaveaslidethatshowsyouclosingthevolumegapwiththeindustry,butitseemsliketheerosionandboxpricesorpricemixthatyousawin3Qsteppedupabitfrom2Q.IwaswonderingifyoucouldjustgivesomecoloronthecompetitivemarketconditionsareseeinginNorthAmericanboxmarketsandmaybereconciletheexpectationforflatpricingin4Qwithwhatseemslikemaybeatougherboxmarket,ifthat'saccurate?


Hey,Anthony,it'sTim.Theboxmarketisalwayscompetitive,buthavingsaidthat,thepricemix,therewasmoremixinthenumberthantherewasprice.Given,wehavehugeswingsfrommonth-to-monthandquarter-to-quartersometimesbasedonseasonality,andsothemarketfeelprettystabletous.

AnthonyPett inari(Analyst-Citigroup):

Okay.That'shelpful.AndthenjustcirclingbacktoChinaandpotentiallyservingChinafromRussia,I'mguessingaddingkraftlinercapacityatIlimwillbeprettyattractive,givenwheretherubelis.Butontheotherhand,obviouslytheriskofdoingbusinessinRussiaseemprettyelevatedrightnow.Mark,IwaswonderingifyoucouldcontrastthosetwothingsintermsoffutureinvestmentsinIlim,especiallyonkraftlinersideversusthegeopoliticalrisksinRussia?


Anthony,that'sagreatquestion.Onthefirstpart,we'renotpotentiallysupplyingChinafromIlim.Itisa




bigpartofwhat'shappeningtodayandhasbeenhappeningverysuccessfully.Ofcourse,it'sbacktowhatIsaidearlier.There'sarawmaterialrenewablenaturalresourceadvantageandahigh-quality,low-costmanufacturingoperationthat'slocatedadjacenttoaneedingandgrowingmarket.

WedomakesomecontainerboardinIlimtoday,andit'sobviouslyoneofthebestplacesintheworld,giventhesoftwoodprofile,tomakekraftliner.Ilimisapubliclytradedcompany.Wehavea50%positioninit.Theyhaveastrategicplan.Theyareworkingthat.Rightnow,ourfocusatIlimistooperatethefirstphaseofwhatwe'vedonewiththemarketpulpoperationsatBratskandtheimprovementswemadeintheWesternRussianoperationthatservetheRussianmarketandwe'redoingquitewellonthat.

Onthegeopoliticalthing,Iwastherelastweek.Ourviewonsomeofthesethingsisaverylong-termview,andpoliticalissuescomeandgoandwehaveverygoodpartners.Wehaveaverygoodaccesstothepeopleweneedtoandthegovernmentandwefeellikeourbusinessissustainableoverthelong-term.We'reobviouslymindfuloftheissuesthataregoingoninandwehopetoworkthroughthoseandhopefullythebusinessenvironmenttranscendsthepoliticalenvironment,whichithasinmanycasesinmanypartsoftheworldovertime

Operator :

SteveChercover,D.A.Davidson.

SteveChercover (Analyst-DADavidson&Company):

Goodmorning.Thepressureison.Thefirstquestion,I'venoticedoverthelastfiveyears,yourdistributionexpensesasapercentofsaleshavegonefrom5.2%in2010to6.4%lastyear.Isthereanythingyoucandotostopthissteadyprogression?


Yes,I'mactuallyglad,Steve,youpointedthatout.It'ssomethingwe'vebeentalkingabout.Itwasabigreasonforoursupplychaininvestmentswemade,bothonthepeoplesideandonthetechnologysideoverthelastseveralyears.We'vemitigatedwhatwould'vebeenaworsesituation.

Wealsochangedthewaywethinkaboutthefullsupplychain,includingourinventorypositionincertainbusinesses.Butwe'vegottousewhatwecallinourCompany,[ME]asasetoftoolsthatreallyarefocusedonleanmanufacturingtechniques,takewasteandvariabilityout,andchallengewhatwe'redoingandhowwedeliverourproduct.

BecauseIrememberwhenIstartedworkinginthisindustry,itwasthe[roundingerror]andtoday,thecosttogetourproductstomarketsafelyandreliablyisatalevelthatitbecomesastrategicissuetomanage.Sowe'vegotalotofreallygoodpeopleonit,we'veinvestedincapability,andsowearemakingadifference.That6%,inmanycases,would'vebeencompletelyoutofcontrol,hadwenotintervened,butit'ssomethingweworkoneveryday.


Yes,thanks.$1.5billionisnotchumpchange.


Notatall.


CoupleforCarol,Isuppose.Thesharepurchaseactivityinthequarter,asIseeit,seemtobeprettymuch




limitedtotheprogramandnotmuchmore,soI'mwonderingwhethertheexitfromtheSunjointventureprecludedyoufrombeingmoreaggressive?


Steve,aswesaid,oursharebuybackprogramwillcontinuetobeopportunisticanditwillbeacombinationofhowwe'reseeingthevalue,aswellasthecashavailableatthatpointintime.Sothere'snolessfocusonorimportanceonthat.Aswegoforward,we'lljustcontinuetowatchouractionsonthat.


Okay,andfinalone.Whatpromptedtheincreaseinthedividendpayoutratio?Clearlywe'rehappy.Doesitreflectmaybealittlebitlessofanambitiousacquisitionstrategy?


Steve,ourdividendpayoutpolicyreallyisbasedonourconfidenceofsustainablecashflowgeneration.Wedothatwithatroughtestswherewelookatconditionsthatare--thatreasonablycouldgowrongandarewecomfortableat40%to50%ofourcashflowanddoesitstandthetestofourinternaltroughtesting?

Weadjustedourtroughconditionbasedonnewinformationaboutourbusinessesandhowtheyarerunningandwhatthecompetitivepositionsare.Thatledustofeelingwecouldgofrom30%to40%to40%to50%.It'sreallyaboutthatmorethanitisaboutwhatitsaysaboutotherusesofcashortheotherelementsthatCarolcoveredinourcapitalallocations.

WefeelrealgoodaboutthecashgenerationpotentialoftheCompanyandthatweshouldreturnasignificantportionofthatthroughadividendtoourshareholders.Wethinkwecandothatatthe40%to50%rate.


Terrific.Okay.Happyholidaystoeveryone.Wewillspeaktoyouin2016.

JayRoyalty(VPofIR):

Allright.Thanksallfortakingthetimetojoinusthismorning.AsalwaysMicheleandIwillbeavailableafterthecallforanyadditionalquestionsyouhave.Ourphonenumbersareonslide20ofthepresentation.Haveagreatday

Operator :

Thankyou.Thisdoesconcludetoday'sconferencecall.

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