Glenn Landau - Vice President of Investor Relations John V. Faraci - Chairman, Chief Executive Officer and Chairman of Executive Committee Carol L. Roberts - Chief Financial Officer and Senior Vice President Timothy S. Nicholls - Senior Vice President of Printing & Communications Papers Mark Stephan Sutton - Senior Vice President of Industrial Packaging Thomas Gustave Kadien - Senior Vice President - Consumer Packaging and Ip Asia

Phil M. Gresh - JP Morgan Chase & Co, Research Division George L. Staphos - BofA Merrill Lynch, Research Division Gail S. Glazerman - UBS Investment Bank, Research Division Steven Chercover - D.A. Davidson & Co., Research Division Albert T. Kabili - Crédit Suisse AG, Research Division Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division Scott Gaffner - Barclays Capital, Research Division Paul C. Quinn - RBC Capital Markets, LLC, Research Division Mark A. Weintraub - The Buckingham Research Group Incorporated Chip A. Dillon - Vertical Research Partners Inc. Mark Wilde - Deutsche Bank AG, Research Division

Good morning. My name is Phillis, and I will be your conference operator today. At this time, I would like to welcome everyone to the International Paper Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Glenn Landau, Vice President of Investor Relations. Sir, you may begin your conference.

Thanks, Phillis, and good morning. And thank you for joining International Paper's Third Quarter Earnings Conference Call. Our key speakers this morning are John Faraci, Chairman and Chief Executive Officer; Carol Roberts, Senior Vice President and Chief Financial Officer; and Tim Nicholls, Senior Vice President, Printing Papers, the Americas. During this call, as always, we will make forward-looking statements that are subject to risks and uncertainties, which are outlined on Slide 2 of our presentation. We will also present certain non-U.S. GAAP financial information, a reconciliation of which will be found on our website. Our website also contains copies of the third quarter 2012 earnings press release and today's presentation slides. Lastly, given our expanded disclosure around the Ilim JV, Slide 4 provides context around the joint venture's financial information and statistical measures. With that, I will now turn the call over to John Faraci.

Thanks, Glenn, and good morning, everybody. As you all know, this morning, we announced our third quarter results. I characterize them as strong results despite a challenging macroeconomic backdrop. We increased our EBITDA sequentially by $100 million to over $975 million, while continuing to generate excellent cash flow from operations. And I'd note, this is after the divestment of 3 containerboard mills, which took about $45 million of EBITDA out of the quarter. In line with our commitments around capital allocation, we've reduced our balance sheet debt by $800 million in the quarter, partially funded by the proceeds from the building product from the 3 mills sales, containerboard mills. As well as increased our dividend by 14% to $1.20 a share, reiterating our confidence in our outlook for free cash flow into 2013. And as Tim will speak about after we wrap up earnings, we strengthened our global portfolio by announcing yesterday our strategic entry into the corrugated packaging market in Brazil. Within our North America Industrial Packaging business, during the quarter, we successfully implemented a $50 a ton containerboard price increase and importantly achieved our original merger benefit target of $300 million, 15 months ahead of schedule. So the headline there is more and faster. While maintenance outages were lower in the third quarter across, really, all of our businesses, seasonally softer demand in our corrugated box business because of our heavy concentration of ag business in the second quarter, coupled with overall slow growth in North America and in a lot of the markets we compete in around world, our packaging businesses were a little slower and we took a lot more downtime in Industrial Packaging that you'll see during the quarter. On the strategic front, Franklin continued its successful production ramp-up and qualification of fluff pulp, and the Sun joint venture started up the fourth coated paperboard machine in September. Let me just move to the next slide, which is the financial snapshot. Revenues were in line with the last quarter and up more than 6% versus the third quarter of last year. That's principally due to the Temple-Inland acquisition. EBITDA margin compression was primarily due to lower pulp prices. Pulp prices hit their bottom during the third quarter. And lower export price realizations really in all the places where we make paper and export, which is principally North America and Brazil, and they were offset partially by the Temple merger benefits. As I said earlier, really the story in the quarter is continued strong cash flow from operations, nearly $900 million. Let me turn it over to Carol now to kind of go through the details.

Thanks, John, and good morning, everyone. As John mentioned and as you can see on Slide 7, we continue to make significant progress on our balance sheet, reducing our debt of further $800 million in the quarter. And this brings our total debt paydown since the Temple-Inland acquisition to $1.5 billion, and that puts us on track to meet our debt-reduction target by the year end of 2013. Taking a closer look at the third quarter financial bridge on Page 8. As you see, we earned $0.75 per share from continuing operations and before special items, and that's versus the $0.46 we earned in the second quarter. The primary headwind we faced this past quarter besides the expected loss of operating profits associated with the divested mills was volume, which was down sequentially by $0.05. And as John noted, this was largely due to seasonally lower box sales noted by our heavy mix of agriculture in the second quarter, and as John said, also impacted by continued overall slow growth across North American packaging businesses. The operations and cost line, while positive, does include a couple of items worth noting. There's $0.04 of downside exposure due to an unfavorable but noncash LIFO inventory valuation adjustment and a further $0.02 of Temple-Inland purchase accounting true-ups. We were able to more than offset these items with good operations, incremental Temple-Inland synergies of $15 million and the Franklin start-up. And lastly, as you can see on the bridge, outages were lower in the quarter and our share of the Ilim JV earnings were favorably impacted by currency versus the negative adjustment we saw in the second quarter. In terms of downtime, we did have fewer scheduled outages, which meant increased market-related downtime to effectively match our supply to our customers' demand in the…

Thanks, Carol. So let me just summarize our fourth quarter outlook, precisely is really a more of the same type of demand environment, but it's going to be impacted by the normal expected seasonal slowdown in North America that we see every year after Thanksgiving, and then it's either more of a slowdown if the weather is bad or the usual slowdown if it's not. So with that, let me talk to sort of high-level about how we're seeing 2013. And at this point in time, we still expect and are going to be planning our next year for a more of the same global economy. I am quite positive and quite confident that our earnings runway will materialize in 2013, is quite positive. It's going to by led by the trajectory of the North American Industrial Packaging business with year-over-year earnings improvement due to pricing increase, Carol talked about, as well as continued synergy realizations. And we've also got other strategic and cost savings projects and initiatives in Brazil, Russia, China and North America that we've talked to you about. They're all going to turn from cost this year into contribution next year. We do expect higher fiber and energy costs in that new year, probably $100 million to $200 million, as well as a noncash pension expense, which is going to be sizable of $250 million to $300 million as a result of lower discount rates, start of return on assets and amortization of gains and losses. So net-net, as we look at 2013 and again, I'd say with the continuation of slow growth around the world, we think IP is very well positioned for significant improvement in EBITDA, free cash flow and return on capital as we get into 2013. Before I turn it over to Tim…

Okay. Thanks, John. I'm excited that I can talk to everyone about the strategic entry into corrugated packaging in Brazil that we announced yesterday. Yesterday, IP and Grupo Orsa formally agreed to form a corrugated packaging business, expanding IP's leading global platform to Brazil. IP will hold a 75% stake in the newly formed company, which will hold Grupo Orsa's current containerboard and box assets, and that share is valued at approximately $470 million. But before I discuss the Brazilian corrugated market and specifics around the deal in more detail, let me also update everyone on a change to our paper business, which is good news. We have an option, as you know, to build a second uncoated freesheet machine at the Tres Lagoas mill site. And that supply agreement that we have with Fibria and the option to build that second machine was set to expire in January of 2013. We've now agreed with Fibria to extend the timing on that. So the new agreement gives IP the option to start the second machine between 2016 and 2018, which we think better matches the incremental capacity that we're going to need to supply our customers' demand. And if you remember, to Investor Day, we were talking about meeting that capacity in the '15, '16 time frame. So this enables us to better time capital investment. Now let me turn to the packaging investment and talk about why we think this makes sense for International Paper. First of all, it's a market that we know well and it allows us to expand a core IP business into a growing market where we already have a meaningful presence with our paper business. It gives us the opportunity to earn good margins and an attractive return with industry margins in the corrugated…

Thanks, Tim. And with that, operator, please open the lines for questions.

[Operator Instructions] Your first question comes from the line of Phil Gresh with JPMorgan. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Two questions here. One is the margin targets you laid out there, the 25% to 30% EBITDA margins, is there any kind of capital required to get to those margins? And the second question on the transaction is this is obviously still a pretty fragmented industry down in Brazil. So should we be thinking of this as kind of a step one of a multistep process? Or is this -- are you kind of pleased with the transaction as it stands?

On the capital side, Phil, what I really like about this deal is it's really minimal capital. There's a lot of process improvements we think we can make. And there is some capital that will be required, but I'd say it's in line with just running the business day to day. So it will revolve around de-bottlenecking, usage improvements on chemicals and energy and fiber. So in my view, it's minimal capital. In terms of the market itself, it is fragmented, but it's probably, in terms of the operating model, a market that is closest to the U.S. in terms of how it looks. It's integrated producers producing containerboard and corrugated boxes. You really need board supply to be a player in the corrugated box market. And I think the opportunity here is to make this investment and improve what it is. And if there are other opportunities, they'll have to be financially viable and earn the right to be part of the business.

So I'd just add, this is not -- I don't think this is a consolidation strategy for the industry in Brazil. Think of it as we bought, the #2 or #3 player depending how you want to measure it. And we think there's good growth opportunities with this business as the Brazilian market grows. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Got it, okay. And then the second question is just on containerboard in North America. Obviously, some significant market related downtime there. And if we kind of add it up here, year-to-date, you're tracking ahead of last year on the amount of downtime that you've been taking. So is this a cost savings opportunity? Is there an opportunity to take capacity out here? Or are you still kind of holding out hope in the growth of that we might see in the next couple of years and you'd rather wait?

Good morning, Phil. This is Mark. I think what we -- the way we think about the current, let's say, last 2 or 3 quarters in downtime is really trying to optimize the system that we have post-Temple integration. And we're making some choices on channels, segments and customers. And in the process of doing that, we make the board we need for that particular customer demand. But we do have a pretty good system for taking any downtime, whether it's market-related downtime or how we plan our maintenance to really drive to the lowest marginal cost production that we can have in any given period of time. So I think we're managing it very well. It's a big system. Over 13 million tons. And the level of downtime that's market-related plus planned maintenance is still resulting in a pretty decent operating rate. We do believe the market is going to improve beyond what it's doing in 2012. And I think that will, obviously, follow as the U.S. economy hopefully picks up.

The volume that we had to purchase from the containerboard mills, it wasn't available for us to ship from our own mills.

Right. So that's the other sort of added dynamic for a period of time as we go forward is as we executed the divestiture of the 3 mills that we were required to sell, we do purchase a good portion of that board back into our system, especially the 2 mills on the West Coast. They're in proximity to our box business there. So that's another added dynamic of 900,000 tons or so that we effectively had in our system in a diminishing rate over time. So really just trying to manage the whole supply chain. And if you look at -- just look at the past few quarters, I think we've got the ability to manage and flex our capacity with all of those variables playing into it.

Your next question comes from the line of George Staphos.

Two questions. First off, on Orsa, can you discuss what the age of the mills is right now? My guess it's relatively a young fleet of machines given that you mentioned, I guess, to Phil's question there's not a lot of incremental investment that needed to be done? And can you mention what the level of vertical integration is? Perhaps you said, I had missed it, and I had a follow-on.

Yes. The vertical integration is around 80% plus or minus. I characterize the machines as being good assets. They run fairly well, but just as, for instance, they have more than 2x the amount of unplanned downtime across their system [ph] we would typically expect. So we see a huge reliability opportunity just in terms of how you run the -- how you maintain the machines, how you run the machines. And then there's also some opportunities around cost improvements from, as I mentioned, energy and chemical usage. So I think we like not only the mill assets but the box plant asset. It's actually a very -- in terms of housekeeping, it would rival what we look like in our Brazilian mills, which is probably company standard. So we think we've got a good fleet to work with.

Okay. Tim, to the extent that you will have less unplanned outages, do that suggest that perhaps the level of vertical integration will drop as you'll be producing paper at a greater rate or greater efficiency than it's currently being done? And if so, where do those tons go? Are they being largely sold domestically? Are they being put into the export market?

No, they're primarily sold domestically. And yes, it could drop a little bit, but I don't think it will be something that will be material for a long period of time.

Okay. My last question, I'll turn it over. Can you comment at all on how early trends are in terms of your key businesses, corrugated and printing papers? For what we've been seeing thus far in earnings season, trends seem like they've been perhaps sequentially getting better if you adjust for seasonality, that's across a broad array of packaging and paper markets, but what are you seeing?

[indiscernible] for North America, George?

That's largely North America because basically the companies that we track probably are more North America than international, but yes.

I'll just -- I'll start it on printing papers, and then hand it off to Mark. I mean, October looks pretty good so far in terms of order intake, backlogs and shipments. So if you look across all of the segments that we supply, we feel pretty good about October, and we'll see how the beginning of November shapes up.

Yes. On the corrugated packaging side, I would echo what Tim said. I mean, October is picking up sequentially over September. A couple of spots we see improvement on -- in our online retailing customers or Internet sales look better. We did see some pickup in our durables and building material-related segments, and that seems to have been kept at a sustained higher level. There are some offsets in some of the food segments we're in. Everybody knows what's going on in the meat and poultry industry relative to corn prices and their ability to bring their products to market. But I would say, October this year has got a couple more days than last year's October and I think we like what we see so far as the quarter starts.

Tom Kadien, do you want to comment on coated paperboard?

Sure, John. And George, in coated paperboard, the market I would say is still pretty soft. But sequentially, I think for a couple of quarters now we've seen, I think, 2% improvements in volumes quarter-over-quarter. So we're not where we'd like to be. I think we're off about 4% versus prior year. But sequentially, it's getting better.

Your next question comes from the line of Gail Glazerman with UBS.

Looking at containerboard, just I guess starting there, a couple of quick questions. Looking at the downtime that you've taken relative to industry inventories, there's a little bit of a disconnect. Can you give some perspective on kind of where you see your inventories relative to the industry? And also, I think you've kind of referenced this, but maybe a little bit more color, as you transitioned in the Temple business, how is that going in terms of kind of retaining customers relative perhaps to the experience with Weyerhaeuser?

Okay, Gail, good questions. On the inventory side, we do our best with our supply-chain systems to predict what we need to make in the quarter or coming months. I would say in the third quarter, we probably got a little tighter than we wanted to from a service platform standpoint, so we'll try to fix some of that as we go forward. But our inventories, we believe, are in good shape at an absolute level. The challenge, of course, is always having the right stuff in the right places. I think we can continue to improve that. But we do like the ability to run the business with a good, tight supply chain. But we need to make sure our service levels are where they need to be. On business retention, we've done a number of things this year. And I'd say largely, we're satisfied. We've been able to earn some business that both companies had before and retained some of that. In some cases, customers have diversified a little bit, but we've been able to replace some of that business. We have been in the process of closing about 9 plants and changing some shift structure with some of the others. And our goal is to retain about 95% of the revenue during those processes, and that's where we're at right now on that. So I'd say, by and large, given we're making some choices about channels and customers, we feel pretty good about it. And our overall objective is to sustain our EBITDA margins, and we've been able to do that given we've got these commercial dynamics while we integrate Temple.

Gail, we lost some business. Or Temple was in the process of losing some business in the fourth quarter last year. So as Mark said, we feel pretty good about how we've operated with customers since we closed. But there's -- but by the time we got Temple, they're in process of losing some business in the third and fourth quarters of last year.

Yes, that's a good point, John. Some of that actually materialized there in the summer, but they were notified at the end of last year that some changes will be made. We worked real hard to try to replace as much of that as we can.

Okay. And actually just sticking on that, you referenced expecting to be kind of 100% run rate on the price increase exiting the year. Can you give a little bit of color how you see that playing out in the fourth quarter relative to the first quarter next year?

Well, I think it's just a general statement that we're working real hard with our customers and we're making good progress with the box. And each -- every customer is an individual and you work with each customer. And we just -- we're making good progress. So I think in general, we'll be heading into the year, into 2013 in good shape on the pricing across our box business.

Okay. And just one last one, actually sticking on pricing. TIm, RISI has been reporting price weakness across a couple of uncoated freesheet grades. It seems maybe a bit more severe than what you're seeing, but can you just confirm that?

Well, I'd characterize pricing as stable, Gail. I mean, yes, there's pockets here and there, and everybody knows we're heading to a seasonally slower period of the year. But right now, if I had to characterize the business as a whole, I'd say it's stable.

Okay. And actually let me -- sorry, one last one. There was something referenced, I think, in the charges about European packaging restructuring, is that something that's been ongoing? Or is that something new and incremental?

Gail, this is Carol. That's something that's been ongoing. We've had our Spain. We built our new box plant in Spain. So we've closed a plant, and we're doing some things to realign that business and take cost out. So it's not a long-term project, but it was something that did hit us in the quarter.

Your next question comes from the line of Steve Chercover with D.A. Davidson. Steven Chercover - D.A. Davidson & Co., Research Division: Just couple of quick questions, first on Grupo Orsa. I assume that it's going to be fully consolidated on the balance -- or the income statement.

Yes, it will be fully consolidated in all of our financials. Steven Chercover - D.A. Davidson & Co., Research Division: And do you have the opportunities or any agreement with respect to the remaining 25%?

There's language in the shareholders agreement, but it's really kind of a standstill for the first 3 years. And then there's an opportunity past the third anniversary to either -- to own more either through a put or a call. Steven Chercover - D.A. Davidson & Co., Research Division: And you indicated that the Brazilian corrugated market or I guess the containerboard is structured somewhat like the U.S. How would you characterize the actual box plant? Did they suffer from overcapacity as well?

It's a typical type of converting business. So there's always latent capacity in converting facilities. But I think that if you look at industry margins, when you look at it over a period of time, industry has been between the low-20s and the high-20s in terms of margins. So there's roughly 500,000 tons of containerboard that gets exported out of Brazil to other parts of the world. And there is less than 1% of containerboard that gets imported in. So I think it's a pretty stable market. Steven Chercover - D.A. Davidson & Co., Research Division: Great. And just switching gears, it's encouraging I guess, not surprising that wood products, we've got a nice window of opportunity. Any sense on the timing?

Yes, that depends on how -- whether we sell the business in pieces, which is one option or sell it all in one shot, which is another option. We have -- the good news is we have bidders for both. So it could go faster if it's one sale. It could go a little slower if it's 3 sales. Either way, we expect to have it closed in the first quarter. And I think we're looking at the bidding process. We've got a healthy, very healthy process going on, so we like the hand we've got.

Your next question comes from the line of Albert Kabili. Albert T. Kabili - Crédit Suisse AG, Research Division: Yes, just a question, I guess, on Grupo Orsa. On the -- why structure it as a JV? Why not buy the whole business along those lines? And then secondly, I know capital needs aren't going to be meaningful. But to the degree they are, do you see that as self-funding at this point?

Yes, I do see it as self-funding, more than self-funding. And why 75-25? Well, you got a person who started the business and he doesn't want to leave it entirely. So we'll be -- we'll have a management team in place that runs the business on a day-to-day basis, but he's a local business man. He's built the business up from the ground and wants to continue to be a part of the business.

And I think in our discussions with -- he was a major shareowner, and this discussions have been going on for quite some time. We come to believe that we can be -- he'd make a good partner. So we're not -- his preference was to keep the stake, and we were okay with that.

I mean, he really -- he knows the local market. He knows the customers. They have a very good commercial organization. I think he'd take the power of their commercial organization and our manufacturing and process know-how, and it will be a pretty powerful combination. Albert T. Kabili - Crédit Suisse AG, Research Division: Okay, got it. That's helpful. And just along M&A and capital allocation. At this point, with this acquisition, with still integrating Temple-Inland, how do you see future M&A playing out versus the capital allocation priorities that you've laid out?

Yes, this is not an M&A agenda. This Orsa has been on the radar screen for quite some time in terms of discussions. So we like the hand we have. We've got a lot going on, as you said, around the world. And as I said, we're poised to deliver significant improvement in EBITDA, free cash flow and ROI next year with everything we've got. So the balance allocation of cash is going to continue, and I don't think there's a big M&A pipeline ahead. Albert T. Kabili - Crédit Suisse AG, Research Division: Okay. Okay, got it. And then final question for Caroline. I may have missed it, but on the initial read on pension expense next year, is that -- did you indicate that was $200 million higher? Or $200 million to $250 million is going to be the total expense for pension next year?

Al, you've heard it correctly that it's $250 million incremental pension expense, and you know where that's coming from. That is really just really driven by the discount rate. When you look at the interest cost calculation and then you look at the amortization of gains and losses, it's impacted by the discount rate. So unfortunately, it's an expense but fortunately, it's not cash. And if you go back and you look at the cash requirements, we -- looks like for '13, we've got a very small $40 million required cash contribution to the pension. Albert T. Kabili - Crédit Suisse AG, Research Division: Okay, all right. And that's with the help of the highway bill as well, I take it?

Yes.

Your next question comes from the line of Mark Connelly with CLSA. Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division: With just a couple of uncoated freesheet producers, it's striking how different people's view of the market is. I wonder if you could give us your perspective on some of the submarkets and how IP is performing relative to your view of the overall market? And also, if you could tell us how you're thinking about the substitution risk from some of the new stuff that we're seeing out there, whether that's going to affect you in specific places or whether it's just going to affect the fringe players?

Mark, it's Tim. A couple of things. One, it's not uniform across all uncoated freesheet segments of the market. You're absolutely right. Printing Papers is and has been a little bit weaker than some of the other segments. But we look at our footprint here in North America and the customers that we're supplying. And then the second major point is we're able, given our footprint globally, to look out to other regions and take advantage of our presence in Latin America, our presence in Europe. And so where there has been soft places in the U.S. market, we've been -- we've had an export opportunity, not at the same margin structure but on export opportunity to either backfill Brazil and Europe or supplement Brazil's capabilities in Latin America. Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division: Can you give us a sense of whether the roll market looks very different from you versus cut size at this point? Again, I'm just trying to get a sense because it seems like every producer we talk to has got a different view, and that seems awfully strange in this market.

Maybe strange a little bit, but I don't think so. You got to look at weighting of position in terms of where people are -- what part of the market different companies are supplying. I can only speak to ours. We don't have a huge roll offset exposure to the market. So we're big on cut size and we're big on converting papers. And then we have a big specialty business that's embedded within printing and communications papers. So I think it depends on business mix across companies. Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division: Is it fair to say that you're probably not very concerned about the substitution risk from some of these lower-end grades?

Well I think you're always -- you look at the market, you want to make sure you're competitive. But we look at the fact that we consider ourselves a long-term strategic supplier with good quality and a great service platform, and that's how we're going to compete. We're not going to look at every competitor as an equal.

Your next question comes from the line of Scott Gaffner with Barclays Capital.

The first question is really just around capital allocation and more specifically, around the debt reduction. You have that Slide 7 where you show currently at 3.5x net debt to EBITDA on an adjusted basis for the Moody's target. And John, I think you might have even alluded to this a little bit on the call, it's just the growth in EBITDA as we move into 2013 should -- as you have Temple-Inland for the full year, should move that number down slightly? How are you thinking about debt paydown versus actual just reduction in the leverage ratios going forward and maybe more cash for other capital allocation priorities?

Carol, why don't you talk about how we financed Temple, and then I'll come back and kind of share some thoughts on capital allocation going forward.

Sure. When we financed Temple, we did a bond offering in the fourth quarter of '11 and we did short-term debt this year, which we are paying back pretty aggressively. Our plan for next year is to continue to actually pay down debt. We've got targeted another $1 billion of debt repayment in '13, and we'll take the opportunity to pay down what debt is the most effective for us because we don't have a lot of maturities coming right at us. And with the cash flow generation that we have for next year, which will be strong, that will be a good plan, and we'll have opportunities to look at other options for cash.

We will pay down most of the bank debt by the end of next year.

Well, we'll actually pay down most of the bank debt by, yes, by the beginning of next year. And we also have the proceeds then of the building products coming in, along with strong cash flow from the business. So we should be in good shape.

So we remain committed to an EBITDA-to-debt target of 3 or less and we're making progress moving in that direction. We're going to be able to carry more balance sheet debt because of the increase EBITDA. And if you think about -- go back to Investor Day, we think our mid-cycle EBITDA target is just north of $5 billion. The -- we're not there yet, but we're moving in that direction. So I think we've -- it's playing out the way we financed it, and we like where we're at.

Okay. And just a follow-up on that, the pension gap you have listed here, $2.7 billion. You did note that the pension expense goes higher, $250 million to $300 million. How does that pension gap change as we move into 2013, if you're current assumptions around pension expense hold?

Well, of course, what we'll do at the end of the year, we will calculate the pension gap based upon asset returns through the end of the year and whatever the discount rate is at the end. So I wouldn't speculate on what that will be, but will do that calculation and we'll do that at year end.

At some point in our lifetime, interest rates will turn up. That 200 basis point increase in interest rates wipes out that pension gap. So we've been incorrectly thinking that interest rate at some point will move up. Last year, this year, next year, the answer is probably they're not going to, but we don't want an overfunded plan. So we'll put cash when it's needed. That's all part of our cash allocation plan. And our free cash flow is strong enough that we can be increasing the dividend while we're paying down debt, funding the pension plan while we're paying down debt and spending the appropriate amount of CapEx to keep the business competitive.

Great. Hopefully, the highway bill allows you to not overfund the pension a little bit and maybe have those interest rates come back in the next year, give you some time for that to correct itself. Just lastly, on the Temple-Inland synergies, you noted $15 million of Temple-Inland synergies in Industrial Packaging in the quarter. You noted that you're at a $300 million run rate. Are there synergies outside of the actual Industrial Packaging segment? I just would have thought you would have been higher than $15 million in the quarter based off of attaining the $300 million run rate at the end of -- end of 3Q?

Scott, this is Mark. I think there are synergies and obviously accrue, some of it is in the sourcing areas. And I don't have that number for the third quarter handy. But there are some synergies relative to the Temple acquisition that's not captured just in Industrial Packaging business, but it's -- the lion's share is in the packaging.

But think of it this way, the second quarter run rate was about $240 million, another $15 million in the quarter means -- at the third quarter run rate is about $300 million. So that the kind of annualized impact of what happened in the quarter is $60 million. We're not done.

Your next question comes from the line of Paul Quinn with RBC Capital Markets.

Just one, just following up on the Temple's building materials business and for sale. And lots of earnings reports this morning, so I may have missed it in your stuff. But if you could tell us the contribution from this business in Q3 and year-to-date?

Well, it's not reported as part of our business because it's a business held for sale. And its EBITDA numbers are quite -- are pretty good, and their quarter-over-quarter, they keep on improving.

Your next question comes from the line of Mark Weintraub with Buckingham Research.

You had kind of alluded to increasing the dividend. Obviously, you just did that. But is it fair for us to think if you can deliver on the ramp in earnings you're expecting that what we saw is going to be the first -- hopefully is going to be a series of significant dividend increases?

As I said, Mark, earlier, we're -- we told investors that we think 30% to 40% of free cash flow with the cycle is the appropriate dividend. We're going to be reviewing the dividend with the board on an annual basis. And absolutely, I think as we make progress and I think I've said it, we're quite confident in the earnings runway for next year, even in a kind of a confusing and sideways global environment that we can improve our EBITDA, our free cash flow and our return on capital. As that happens, we'll be looking to dividend in due course next year.

And obviously, getting the box price increases is an important part of that ramp in 2013 earnings-wise. If you look back historically, have there been times when you've been able to get better than full pass-through of a containerboard price increase? And I realize you're still in process, so I'm sure you can't answer this question yet. But what tend to be the characteristics in place that have enabled that to happen? And what -- how would that compare to the types of situation we see today?

Well, I think I don't have every past price increase on the top of my mind, but they probably have been some examples where the box price increase, depending on the segment it goes into and how the value chain is constructed, box versus sheets, that there have been higher pass-throughs. But I would say, if you think about this particular price environment as a normal price environment from a board through box standpoint, not anything out of the ordinary.

Okay, great. And then real quick, Carol, you had mentioned that true-up is going away. Did that also -- did that include the LIFO inventory adjustments going away in the fourth quarter?

No, Mark. The LIFO will be into the fourth quarter. What we had is we did have a catch-up of some purchase accounting, and I think that was around a couple of cents, so about $10 million that was catch-up for previous quarters. That does go away. But the LIFO will be -- we split that over the 2 remaining quarters of the year. So we'll see that again in the fourth quarter.

Okay, so I don't want to get too much in the weeds, but so in the first quarter, it goes away?

Yes, will just start over.

Your next question comes from the line of Chip Dillon with Vertical Research.

Forgive me if someone's asked this. But Pulp and Paper Week, as you know, is changing the way that they're going to report the board prices with their acquisition of Official Board Markets. And I just wanted to just check and see how that might affect your contracts given -- at least the ones that are indexed, given that they might go to a different way of looking at where prices are, and if your contracts anticipate something like this.

Chip, RISI did -- has been working on this for a while. I guess, since they've bought OBM and they're doing a process to get input from all the stakeholders. And we all participate and listen to that process. But we've done some changes over time or have been involved in changes with indexes. And I'm sure we'll figure something out that works for our customers and for us. It's hard to speculate on exactly what they're going to do because they haven't done it yet. But I think we believe we'll be fine with whatever we do to merge those, and it'll work for us and it'll work for our customers.

Got you. And then I guess as -- maybe as a related question, do you all have a thought about, just a high-level thought, obviously, about how closely you believe your prices should be tied to what RISI says or puts out there? Or do you -- And I guess that would take time to even implement if you even felt that was something you wanted to move away from?

We're comfortable with the structure that we have right now. A lot of our customers like to have index, and it's more for change than -- indexes at an absolute level in almost any industry are hard to tie down. But adding something that starts a discussion around change, I think works for a lot of our customers. And so we have a lot of contracts that have that. We have a lot of business that doesn't have it, and we are able to do fine with either kind of structure.

Your final question comes from the line of Mark Wilde with Deutsche Bank.

Mark, just a couple of clean-up things in the Containerboard business. One, if you look at the industry numbers for the third quarter in terms of operating rates and production, it looks like there was about 335,000 tons of total industry downtime in the third quarter. Again, just working off of the AF&PA data, and you guys you've taken out 319,000. So it would look like you've taken 95% of all the downtime in the industry in the third quarter, which seems kind of surprising to me. Am I missing something?

Well we took 319,000 tons of downtime, that part you got right. And we have a production plan that made what we needed to make to fill our orders. We do have a segment mix that's not the same as every other company, obviously. And seasonally, since our ag business is so big in the second quarter, we were down probably more than the industry itself in the third quarter, and we're just kind of learning the new seasonality and optimizing the segments we have. But as I said earlier, the plan that we operated under in the third quarter, when you look at the total mix of market and maintenance was, I think, incrementally 70,000 tons or so or 75,000 more than what we've been tracking the last few quarters in basically kind of flat market.

And Mark, I'd also suggest to take up 2 things. First of all, it's now a 13 million ton system, so what's a big downtime number is a smaller piece of the total capacity. And we've also got 900,000 tons that we're contractually obligated to buy back. Actually that ramps down over time.

Yes. And just -- I guess, John, what I'm trying to figure out is it would only mean like 15,000 tons of total downtime in the third quarter for the rest of the industry, which is about 65% or 70% of capacity. I know at least one of your competitors has kind of an ongoing issue in the middle town in Louisiana. I don't know what everybody else is doing. So it's just I'm trying to figure out if there's something that's not right in the industry data because it just seems so unlikely to me that you would be 95% of the industry downtime in the quarter?

All we can tell you is what we did. But I think -- importantly, look at our margins. Despite that downtime, our margins were better or slightly better than the competition.

I know. Listen, I got no problem with margin. I mean, I'm just trying to understand what you're telling us and then what the industry data is reporting. I'm trying to figure out if there's something screwy in the industry data? Do you have more -- is there more capacity out there than the industry is showing right now?

When you get the answer, let us know.

Okay. Well another question from Mark. And I just -- on that -- on this box price increase, just so we're all clear, you said you'd have it substantially in place at the end of the fourth quarter. We know that there's a number of customers out there that kind of reprice on the start of the quarter, start of the year. Is that a significant portion of your mix so that we would kind of think about your prices moving up through the fourth quarter and then at end of the meaningful stair step, does this repricing occurs for Jan 1?

We've got a number of different realization schedules as you can imagine. And I think as you just mentioned, depending on the segment, the customer, the individual agreement, I would say, based on normal realization schedule, we're working through and very satisfied with what we're -- the progress we're making with our customers. And we should be at a run rate as we leave the year with announced price increase largely in place. That's about all I can say in terms of detail.

Yes. Looking at our business, Mark, we see the full impact of -- for International Paper in 2013.

Yes, okay. I'm just making -- I'm just trying to think about sort of how much we might be pricing in for the fourth quarter as we kind of think about the trajectory through the quarter and try to figure out if there's this stair-step at the end. The one other question I have is just on Orsa, is there an opportunity, Tim, to perhaps move some equipment from other IP locations around the world down to Brazil to put into the JV?

Mark, it's Tim. There might be, but that's not the primary focus. I mean, we've got good assets in this business and it's just a matter of optimizing what we have at the moment.

Okay. And could you just -- I think both Klabin and Rogesa -- Rogesa just added capacity. Klabin is, I think, actually talking about a new mill down there. Can you just talk about a little bit about what you see on the supply side down in Brazil over the next few years?

I don't know anymore than what's been publicly stated by the other players down there. So it's -- what I read is that people are bringing on new capacity and shutting down old capacity.

This concludes today's Q&A session. I would now like to turn the call back over to Mr. Glenn Landau.

Thanks, Phillis. And thanks to everybody for joining our third quarter conference call. As always, we will be available post the call at the numbers listed on the first page of the Appendix. Have a great day.

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