International Paper Company (IP) Q3 2013 Earnings Report, Transcript and Summary

Good morning. My name is Tamika, and I will be your conference operator today. At this time, I would like to welcome everyone to the International Paper Third Quarter 2013 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Jay Royalty, Vice President, Investor Relations, you may begin your conference.

Thanks, Tamika. Good morning, everyone, 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; and Carol Roberts, Senior Vice President and Chief Financial Officer. During this call, we will make forward-looking statements that are subject to risks and uncertainties, which are outlined on Slide 2 of our presentation. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures are available on our website. Our website also contains copies of the third quarter 2013 earnings press release in today's presentation slides. Lastly, given our expanded disclosure around our 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, Jay, and good morning, everybody. During the next 15 to 20 minutes, Carol and I will review our third quarter results and performance of individual businesses, then I'll speak to our outlook and will open it up to your questions. So for the quarter, International Paper delivered record operating earnings of $471 million or $1.05 a share. That was driven by continued margin expansion and very solid operations around the world in our manufacturing businesses. In spite of much higher wood costs due to the wettest weather we've had in the Southeast in over 100 years, we've got meaningful improvement in our North American Industrial Packaging business, and also a price improvement as well in our North American Coated Board business. We also got some price improvements in pulp, although it started a little bit later in the quarter than we expected, but it's going to flow through into our fourth quarter. And we announced price increases in our North American paper business and expect to see implementation beginning in the fourth quarter. We successfully executed $80 million of outages and saw a very significant progress in the ramp-up of the new capacity and capabilities in our Ilim joint venture in 2 of the facilities where we made major capital investments. And finally, in the quarter, we had late-breaking favorable development on the tax front, which resulted in a one-time benefit of $30 million, reducing our tax rate to 24%. But even without that tax -- that tax adjustment, the third quarter, from an operating earnings standpoint, was an all-time record for International Paper. Free cash flow continues to be generated at solid levels, and we see good momentum going into 2014. The run rate free cash flow for the last 2 quarters, which Carol will talk about, was $1.8 billion. All in, another milestone quarter for International Paper, taking a big step on our journey to becoming a stronger and more valuable company that creates value for our customers and our investors. So let me just quickly go to the financial highlights on the next slide. Sales were up 6%. Margins expanded by 160 basis points. EBITDA improvement of 12% or $100 million, both quarter-over-quarter and year-over-year. And as I said, an all-time record even without the tax benefit. So with that, let me turn over to Carol to take a closer look at the quarter, and then I'll come back and talk about the outlook.

Thanks, John, and good morning, everyone. As John said, IP delivered its strongest EPS quarter in nearly 2 decades, with the highest EBITDA and operating earnings in our history. The quarter benefited from strong price improvement, solid operational performance and good progress in the ramp-up of the Ilim projects. In the quarter, volume was slightly lower due to one less shipping day in North America, and we did have seasonally lower demand in our North American Industrial Packaging business. Maintenance outages were positive, as this was our lightest maintenance outage quarter for the year. Input costs were a headwind, particularly wood, due to the extremely wet weather in the Southeast U.S., which did significantly impact our Printing Papers business and it impacted also our Coated Board business. On the corporate side, we saw a one-time benefit of $13 million, due to the release of a tax reserve in the quarter, which as I said, helped interest. The tax benefit that John mentioned contributed $30 million or $0.08 to our results. And this tax benefit was associated with the recent U.S. court case decision that involved another taxpayer similar to us, and it provides for an increase in the tax basis for certain fixed assets. John mentioned it, the quarter-over-quarter improvement in the Ilim JV contributed very favorably to our results. The operations were better, and I'm going to talk about that, but we also did see a gain in the FX associated with the strengthening of the ruble against the U.S. dollar-denominated debt on the JV's balance sheet. So moving to input costs. We did experience a significant headwind relative to fiber cost increase, and that was mostly wood in our North American operations. On the second quarter call, we mentioned that we expected some headwind on wood cost, although not nearly to the degree to which it did unfold. We updated this outlook at the UBS conference in September. Fortunately, the weather situation has moderated since then. That said, it was still a big cost increase in the quarter and we do expect carryover into the fourth quarter as we enter what would be seasonally the normal higher-cost winter months, with somewhat relatively low inventory, than we are attempting to rebuild our inventories as we go. Now turning to the businesses. Let me first cover Industrial Packaging, which delivered record earnings, as well as the price increase in North American box came through roughly $30 per ton on average for the quarter. Within this record performance, our EMEA Packaging business did have weaker earnings due to a margin squeeze there experienced, as box prices, which they're increasing, are trailing behind on some Containerboard increases that have happened. And, all-in-all, we like the Containerboard increases and we'll take on the challenge of raising our box prices in Europe. As I mentioned previously, volume was lighter due to one less shipping day in the quarter, and it is seasonally slower demand for us. The second quarter is a very big quarter for us, with the agricultural mix, but still a very solid quarter. Operations were very good, and some of those operations were offset by some one-time costs. And as I said, we did see some input cost headwinds in North America as well in the form of increased wood and OCC costs. The next slide, Slide 10, really shows a great story. We saw benefits on pricing improvement and solid operations, and that created further EBITDA margin expansion in our North American Industrial Packaging business. And we continue to fare very well against our key public competitors. We should continue to see strong results in this area as we finalize the full realization of the announced price increase in the fourth quarter and drive our optimization improvements into 2014 and beyond. Moving to the pricing realization. And so relative to the conclusion of the American -- North American box price increased efforts, we continued to see very strong results in this area and we actually exceeded the plan we laid out earlier in the year. As I mentioned earlier, we saw box price increases rise on average of $30 per ton in the third quarter. And we exited the quarter at a run rate in the high $40 range. We expect roughly $5 per ton more in Q4. And so as we move through the quarter, we will fully recover more than the $50 Containerboard increase. So a very strong success in this area. Turning to the next slide. When you look at our North American Packaging business, we truly feel that we're uniquely positioned to continue to realize benefits and improvements. We've spoken to this opportunity before, and I want to emphasize it again, that we have an opportunity to optimize this large-scale business that we've built in a number of areas: operations, supply chain, our commercial efforts. And this can contribute additionally about $200 million of EBITDA to the bottom line. We're well positioned with low-cost assets that can continue to improve. We have untapped capacity at our Valliant, Oklahoma mill that could ramp-up quickly and very cost effectively and at the right time. We've got a great portfolio, an attractive portfolio of customers that we can continue to upgrade as we work our mix. We have a strategic mix of virgin and recycled mill capabilities that enable us to effectively serve a broad range of markets, both domestically and across the globe. And we embrace the strategy to manage our supply to our customers' demand, and that will allow us also to meet those -- that demand at the lowest delivered cost. And finally, we're also seeing the opportunity to leverage our global Industrial Packaging footprint as we expand our reach into markets around the globe. That's everything from best practice sharing to global and multinational customers and segments. And that represents just a few of the potential opportunities that we have in front of us. So moving from Industrial Packaging, let me talk about the Consumer Packaging business. As we look at our Consumer Packaging business, we saw some price improvements in our North American business, and we had a big step-up due to no outages in the third quarter. Our European business continues to perform well, and we continue to see good momentum in North America as backlogs remained strong and price increases continued to be implemented. Relative to our Foodservice business, turning to the next slide. There were some nice and important developments relating to this business in the quarter, as key customers and potential customers publicly announced intentions to move away from foam-based cups to paper cups. McDonald's announced their plan to convert to paper hot cups in all of their 14,000 plus locations in the U.S.. A McDonald's representative cited customers' changing preferences and increased recyclability as the driver for this change, and they expect a multiyear transition that will extend probably through 2016. In the case of Dunkin, they moved to paper in their Brookline Mass. stores in response to anti-foam legislation. And they stated, they're looking for a solution to replace foam that meets the goals for cost performance and recyclability. These 2 opportunities alone would result in 3 billion to 4 billion cups in increased demand, and that would translate to roughly 80,000 tons of paper cup stocks, which is great for us, as we're very well positioned to benefit from this development. Additionally, in this business, we have received word that we'll be expanding our position to become the primary supplier to the leading gourmet coffee retailers. So all-in-all, the food service business continues to be an exciting place and important part of our Consumer Packaging franchise. Moving on to Printed Papers. We had good quarter-over-quarter improvement, as we saw a seasonal uptick in volume in Brazil and Europe, and operations were very favorable in North America. We have a weakening price here throughout the quarter, but that's -- I wanted to just comment, that's largely driven by softness in the export market and a little bit of pricing that we saw in Europe. Additionally, in this business, we experienced lighter maintenance outages and a non-repeat of the bad debt issue that we saw in the second quarter. Input costs were higher in the form of wood, as I mentioned, and this was a big impact in our paper business. And we did see a negative impact from FX in Brazil and Europe. And finally, as you're probably aware, we did announce in the quarter a $60 per ton increase for offset and cut size paper that we expect to begin to implement in the fourth quarter. So moving to the next slide. I wanted to take a minute and give you an update on our plans for the Courtland mill wind down and the repositioning of our North American Papers business. As we announced and discussed in September, we made a difficult decision to permanently close the Courtland mill. And as I said, this was a very tough decision for IP and, really, for our very dedicated employees, but clearly the right decision for the business. So relative to the shutdown plan, we intend to permanently shut the first 2 machines by mid-November. This will result in our exit from the Coated Papers business and the elimination of capacity for exports and selected marginally profitable domestic business. The last 2 machines are scheduled to be shut down by mid-Q1 2014, and that will result in the elimination of the balance of the capacity at Courtland. Right now, we're in the process of running qualification trials at the 4 remaining mills, and we'll be transferring our most attractive business to these commodity and specialty mills to enable our best business to run at the lowest possible cost. We have more business than we have capacity. Therefore, it will be necessary to exit the least profitable grades. While the end state that we'll reach later next year will be favorable, we are going to be in a transition mode for the next couple of quarters. So in the fourth quarter this year, we expect cost and really, inefficiencies of running the mill in a half -- with 2 machines, that does create inefficiencies. And that impact of that transition through the operating earnings line could be as much as $40 million. In the end, we will be better positioned for long-term success in our North American business. We're going to have 2 excellent world-class, low-cost commodity mills; 2 very highly capable, well-equipped specialty mills to serve our most attractive segments and customers. Moving on to distribution. Xpedx delivered a solid quarter, as we expected, driven by revenue improvement. And this was despite one less shipping day. And also, importantly, continued improvements in our operational cost. We continue to work very diligently on the spin-off opportunity with Unisource. And I'd say we're making progress on reaching a mutually acceptable transaction. Turning to Ilim. We've talked about Ilim a little bit, and we did see significant progress on the ramp-up of the major capital projects at Koryazhma and Bratsk, along with some appreciation and move up in pulp prices. And this did result in an improvement in the operational EBITDA of $37 million over the second quarter. Additionally, the ruble strengthened against the U.S. dollar, which did result in a net favorable noncash FX gain on the JV's $1.4 billion of U.S.-denominated debt. Moving to the next slide. I wanted to update you where we are with the project ramp-up. As I mentioned, and as we said we would, we saw significant progress in the third quarter, as the project benefits are beginning to show up and the startup and ramp-up costs are continuing to come down. Ilim expects to make another big step forward in the fourth quarter, as operational efficiencies and equipment reliability continue to improve. Additionally, the team is working very hard on product qualification efforts as we speak. And as those products get qualified, we'll begin to sell those, and that will show up in the improved margins. So while Ilim expects to see further improvement in results in the fourth quarter, some of this improvement will be offset by increased cost that are just associated with the season -- wood cost issues that hit us this time of year and other seasonal costs. But the way that we would -- the way we see Ilim, and we're very excited about it, is we've done the hard work, we're not done, but making great progress, and 2014 looks to be a great opportunity as well as beyond. So turning to free cash flow and uses of cash. A lot happened during the quarter, all good. As you recall, we closed on the sale of the Temple-Inland Building Products business early in the quarter. Received $710 million in cash proceeds in July. On September 10, we announced a 17% increase in our regular dividend to $1.40 per share, payable in December of this year. Additionally, we announced an authorization to buy back up to $1.5 billion in shares. We've been active with this program since receiving that authorization. And up-to-date, and I guess through yesterday, we've repurchased more than 2.6 million shares at an average price of $45 per share for about $120 million. Additionally, we continued to pay down debt, and that reduced our debt balance by $457 million year-to-date, and we expect to pay down roughly $600 million for the full year. As you can see from the chart, and John mentioned this, we continued to track well on our path towards our stated goal of $2.2 billion in free cash flow. And if you take the last quarter, the last 2 quarters, we are at a run rate of $1.8 billion. We feel good about our ability to continue to grow the free cash flow as we move into '14, and we feel very good about our capital allocation plan. So moving to the fourth quarter outlook, before I turn it back to John. We see a relatively flat quarter-over-quarter change on volume. Seasonal increases in Brazil and European package are offset by the decline in North American papers due to the restructuring, and there are 2 less shipping days in North American packaging. Prices will continue to improve in North American Packaging, as discussed earlier, and we'll begin to see implementation of the announced price increases in North American Paper. And we should also see pricing improvement in our European and our Brazilian Packaging business. On operations, the largest impact item will be associated with the Courtland transition and the wind down as previously discussed. We do expect some mild but continued impact from higher wood costs that we saw in Q3. Net-net, on mill outages, they'll be $10 million higher for the fourth quarter. And we expect taxes and interest to return to normal levels after the benefits we saw in Q3. And while we expect additional improvement at the Ilim JV, seasonal costs and increasing wood supply issues will offset a good portion of these gains. And we're assuming no change in FX for the quarter, so no repeat of the gain in Q4. So with that, John, let me turn it back over to you for the wrap up.

Thanks, Carol. First of all, I'd like to emphasize that while this was a record operating earnings and EBITDA quarter, we've still got additional upsides from here. We continue to build momentum and generating free cash flow in our EBITDA results, and have line of sight to the $5 billion plus EBITDA goal we talked to investors about 1.5 years ago. In the fourth quarter, as Carol said, we expect to realize the full benefits of the OCC's price increases announced in April and further price increases in North American Coated Paperboard, North American Papers, and Europe and Brazil Box businesses. We're also going to see some volume improvement in Brazil and some improvement in both our European and Brazilian Packaging businesses. Carol talked about the Courtland headwinds, about $40 million. But we like how this business is going to look in 2014 with the 4 mill system. Boxes -- Box volume will be lighter in North America because they've got 2 less shipping days. And wood costs are going to continue to be a headwind, but I'd say the Southeast is finally drying out and inventories are getting rebuilt. And we have slightly higher maintenance outages in the fourth quarter and expect tax rate to return to normal level. So what makes International Paper different and attractive? This last slide here, I'm on Slide 23, we have strong leading positions in our primary North American markets and the best margins, with further upside potential. We've got a global footprint in our key businesses with attractive growth potential, and we have the talent to lead the business and execute against our plans. We've transformed the company and strengthened our position in our core platform businesses. We continue to manage the portfolio aggressively and have more upside through optimization, repositioning of our North American Papers business and strategic investments like Ilim that are ramping up with a lot of upside. We've improved our free cash flow generation and have plans to grow and sustain it, which leaves us in a good cash position and able to return better-than-cost of capital returns. At the same time, through a balanced use of cash, we returned some of that cash to our share owners, as evidenced by last month's actions to both increase our dividend and authorize a share buyback program. So with that, I'll stop right there and open it up to your questions.

[Operator Instructions] Your first question comes from the line of George Staphos of Bank of America.

I guess my first question is on -- if you could provide any outlook on early fourth quarter trends within Industrial Packaging? And John and Carol, I noticed on the slide in the appendix that you did see a little bit of a market-related downtime in industrial, if I saw that correctly. Could you comment at all where perhaps some softness arose in the quarter that you might not have anticipated? And I've got a couple of follow-ons.

You want to take that?

Sure, I will. The kind of the outlook, as we enter into the fourth quarter, in October, box demand is about where we thought it would be, still tracking kind of like the market tracks, just slightly positive. And for us, we were behind the industry numbers 300, 400 basis points early in the year. We've narrowed that to less than 100. In September, we were much less than 100 basis points behind. And that's what we're seeing going in the fourth quarter. So I think we don't anticipate any major changes in demand. On the other 2 channels to market for our Containerboard, the open market, domestic, of course, that reflects the U.S. Box business, and so that will track about the same. And the export market, we expect a normal fourth quarter seasonal demand pattern. With respect to your comment on the lack of order downtime, it was 70,000 tons. As you know, a very large system. And as we look at how the quarter unfolded in the third quarter, and we realized what orders we had and what basis weight and whether it's recycled and virgin, we made the paper we needed for the customer demand we had, as well as trying to position our inventories to the best way possible as we prepare for the beginning of next year and the maintenance outages we have. So with all those considerations, we come up with 70,000 tons of capacity we didn't need to employ.

Fair enough. And that's also a silver lining in terms of producing to market demand. I guess one other question I had, can you remind us what effect you think some of the increase in Asian Boxboard capacity might have on your business, if at all? And then the last question, I'll turn it over. Ultimately, how much market share do you think -- maybe it's a question for Tom Kadien, do you think you can get off the coffee cup market and paperboard?

Tom Kadien here. On the Asia Boxboard, we really haven't seen a lot of impact here in North America. Where we see the impact is in the global export markets, where pricing has come down. We are largely out of most of those difficult market segments, and it really hasn't had a big impact on us in North America at all. On the move from foam to paper, we're the largest cups stock producer in North America, out of 2 of our Bleached Board mills. And we've got push in about a 50% market share there. So if we've got our normal share, that would be 50%. We expect we'll do better than that. And we're also the largest supplier of paper cups and lids to the quick service restaurant and coffee segment. And we think we'll do better than our share there as well, as we have been over the last couple of years.

George, the only thing I'd add about Coated Board is we don't see -- we produce Coated Board in Poland and in Russia, and we don't see the Asian impact -- impacting those core markets for us. Most of it is staying somewhere in Asia. And if you just look at -- on our table, our Coated Board volume is up 48% year-over-year. Unfortunately, so are bunch of others. And that's -- that excess capacity situation has got to work through.

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

A couple of questions on Industrial Packaging, following up a bit more. Typically, would you expect that the fourth quarter seasonally to have a little bit more, a little bit less demand than you'd see in the third quarter? And can one extrapolate from that on what expectations one might have for market downtime in that business? And then second, I think Carol had mentioned that you were -- you've exited the quarter in the high 40s in terms of the box pricing. And then I think she said, you expected to get another $5 as 4Q progresses. So is it fair to assume about a $10 per ton price improvement, 4Q v 3Q in box prices? And then, lastly, is kind of a flat demand outlook for next year at this juncture in corrugated the most realistic, or are there reasons why it might be better or worse than that? And if you can help spell that out, that will be great.

Mark, before I let Mark set and answer all those questions, we're not going to forecast market downtime. We don't do that.

Right. Thank you, John. Question #1. Yes, Q4 typically, I think, would be seasonally a little lighter in demand. And that's a general statement about the market, but in particular, about International Paper's segment mix. And as Carol mentioned, there's a couple less shipping days, which is not really a seasonality issue, but just a reality. We're going to make the board we need to make for the business we have in all 3 channels: the box business, the open-market here in the U.S., and the open-market globally. The price question around exiting in the high 40s, we will recover, as John said, more than the $50 increase, which is compensating for some of the waste you have in the convergent operations. And so as we sit here today, we're up $101 from last third quarter. And I think your $10 quarter-over-quarter is probably not a bad number.

And then lastly, as we think about...

I Oh, I'm sorry, your third question. Growth for next year. I was writing them down, and I didn't write that one down. Growth for next year, flat. I think when you look at the people who are developing forecast for box and looking at the macro indicators, there's a lot of energy around a slightly positive demand environment next year, maybe in 1.5%. And I think it's really going to be dependent on the U.S. economy. Box demand is going to track, nondurable is going to be a bit behind GDP. So as the consumer comes back in the market, we'll see good box demand. And hopefully, it's better than flat.

Mark, when you look at box demand for the industry, relative to where we were prior to recession, we're still 5% or 6% below the 390 billion square feet that were shipped in 2007. Box demand is growing at GDP less a point, and that's where we kind of think it is. If we get 3% GDP growth, which we should get at some point in time. And we're going to get positive box demand, which is going to be a big tailwind.

And one more part to add to that is, we did care about global demand for boxes. So with global demand up 3% to 4%, we all know there's a part of that segment, global segment, that we get to participate in. Specifically for International Paper, exports are very strategic. For the industry, they're strategic. So if you think about that, that could add another 0.5 point to 7/10 of a point of growth in North America.

And I'd say, just to that point, if you looked at the page that shows our shipments year-to-date by volume, even though box market is up 0.5% in the U.S. our shipments outside the us or outside shipments in U.S. and exports are up 5% in the first 9 months of the year.

Your next question comes from the line of Philip Ng with Jefferies.

Sticking on Containerboard. can you kind of give us a sense how you're thinking about inventory at this point? And do you draw down any more inventory in Q4?

I think we like where our inventories are right now, from the standpoint of operating our large system at the lowest possible cost. We had to prepare for some of the outages we have coming up, maintenance outages at the beginning of next year. And I think inventories are in good shape from the quality of inventory and returns. And we will operate our system, really, to the demand for our business, and not anticipate the need to build any inventory.

Got you. And then in your slide deck, you guys kind of highlighted how there's some untapped low-cost capacity for containerboard. Could that represent an offering for you guys to take out some high-cost capacity down the road?

I think all that depends on the demand profile. But I think the point in all of that is we have opportunities for very low cost to make more containerboard if we have the demand for it. And as we prepare in the future for how we view our current offtake agreements with the mills we had to divest. So all of that will play into a decision we make on capacity. It's out there if we need it and it's low cost.

Got you. And just one last question for Carol. Glad to see you guys buy back some stock, current quarter and year-to-date. Could there be an opportunity for you guys to take a more aggressive stance this year? Or is that more of an opportunity going into '14?

Well, as we said, we've got authorized $1.5 billion share buyback that we said was a 2- to 3-year program. And so we'll continue to monitor our options, but we'll probably stick to that path of that $1.5billion, 2 to 3 years. So you kind of do the math on that.

Lot of flexibility, though, in terms of how we go ahead and complete that share buyback.

Your next question comes from the line of Philip Gresh of JPMorgan. Phil M. Gresh - JP Morgan Chase & Co, Research Division: A couple of questions. First one, again, on Industrial Packaging. If we think about the downtime that you took in the quarter. Coming into the quarter, you're talking about building some inventories. So is it fair to kind of assume that the downtime was maybe weighted towards the end of the quarter, when we saw a little bit of the softer demand?

I wouldn't -- Phil, this is Mark. I would say, it really evolves through the quarter as we look at the actual demand from all 3 channels that we send Containerboard through and the inventory that we need. And inventory is not inventory. There's recycle, there's virgin, there's heavyweight, lightweight. And knowing what our seasonal demand is going to be for the upcoming few months, all weighs into it to -- the science behind it is balancing that system and making the board at the lowest possible marginal cost. So it's not a wait and see what happens and slam it in at the end. It's an organized process to really make our product at the lowest marginal cost. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Fair enough. Okay. Second question is just on Courtland. Appreciate the color around the $40 million incremental in the quarter. As we think about how that progresses through 1Q and into 2014, Carol or John, any color as to whether that would step up against, sequentially, in 1Q? Or it's kind of -- do we kind of level off here? And then, at what point do we step back down, do you think?

Phil, it's Tim Nichols. We're going to update that as we go. I think the important point to make here is the process is well underway. We're trying to do it at the lowest possible cost. We'll have 2 machines down in the middle of November. When we announced, we said the other 2 would come down by the end of the first quarter. We now had moved that up to mid-quarter, and the goal is to keep pulling that forward as rapidly as we can. Part of what we're doing is we're working through qualifications in other facilities for various products and customers. So you can think of the first 2 machines, that capacity coming out fairly quickly. You can think about the machine time used on the other 2 machines as being to do 2 things. One, cover for those qualifications. And number two, to help us build some inventory around unique products, like our colors, uncoated free sheet, where we need to build a little bit of inventory to manage the transition. So those machines are not fully available for current customer demand. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Okay. And then last question for Carol, just on the free cash, or with respect to working capital, et cetera. You talked about kind of the past 2 quarters, your run rate that you're talking, kind of $1.8 billion in free cash. The other first quarter was a little lower than that. I assume the fourth quarter can be higher as you draw some of the working capital down for this. Is that $1.8 billion number kind of a fair number to think about this year? And kind of assuming that you do you still have some kind of working capital headwinds this year that maybe you don't have next year, how should we think about that?

Well, Phil, you make a great point. I think $1.8 billion is a good number. And if the working capital headwinds, because we're raising prices and expanding margins, I think we'll take those headwinds all day long. So it's hard to speculate on what next year might bring. And yes, this year, the headwind, the sales are up and -- because pricing is up. So that has been be a headwind that will level out. But I think $1.8 billion is kind of a good normalized level for where we're operating today, and we think it should go up from there. Phil M. Gresh - JP Morgan Chase & Co, Research Division: And do you have a status of specifically what working capital headwind you might end up with this year, in that $1.8 billion number?

No, I wouldn't speculate on where the working capital will go in the fourth quarter. There's so many moving parts to that. And there's also a piece of working capital that's at corporate, that -- accruals and other things that aren't directly tied to ops. So I think we'll see where the fourth quarter comes out, but it should be helpful.

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

Not to belabor the point of Industrial Packaging. But industry inventories rose fairly sharply in June through August. And I'm just wondering, do you have any sense if that was intentional, or did you see the market get more competitive at all? Or anything that changes your view on the market. And also, maybe if you could address some of the capacities expansion news that's come out over the last month or so?

Okay, Gail, and this is Mark. On inventory, and I can only speak for International Paper on the inventory front. And for us, it was just running our business for, as I said, balancing the near-term needs and making sure we have the lowest possible supply chain cost as we go into what we know is going to be a maintenance outage season. And quite honestly, we weren't as prepared in this past first quarter and second quarter as we would have liked to have been, and we spent some money. We don't want to do that again. So for us, it was about really having our system be the most efficient, from a service platform and the cost standpoint. From the rest of the industry, I think every company, obviously, has its own issues with how they view inventory. On capacity, we are seeing, as everyone has recognized, some new capacity coming in the market. We haven't seen any, I would say, direct impact. But I think the -- the thing that will unfold over time is some of this product will probably find a home in certain segments, and then the secondary impact would be that we may see some additional suppliers showing up in some of the export markets. But so far, I think the new capacity coming on, it's not all the same type of product, and it's not all completely applicable to every segment we compete in. So we're monitoring that like we would in any other business issue.

Okay. And at Pulp and Paper Week over the weekend, reduced the premium on West Coast median. Do you see that as anything significant, as a distributable to maybe some of the excess supply in the East? Is there any comment you can make there?

No comment on that right now.

Okay. You talked about, Tom, I guess, the U.S. Coated Board market and how there's not been an impact on Asia. I guess, last quarter you talked about China, maybe, bottoming out. Is that still your view, or is it still getting incrementally worse?

I would say, it's kind of moving along on the bottom. It hasn't gotten materially worse. Pricing is about where it was. We're starting to see some of the high-cost capacity come out and be shut down, at least temporarily. So I would say that's offering a bit of an offset to some of the new capacity that's come online. But I would call it kind of bouncing along the bottom. And demand is actually getting a little bit better over there in Asia right now. So we're seeing that, as well as we're seeing some mixed improvement for ourselves.

Okay. One last question. I guess there was a reference on the slide in terms of pension, about $1.5 billion on 100 basis points. Is that meant to just be a sense of what the sensitivity is? And if so, could you just give a sense of, based on what you're seeing today, what your pension deficit would look like entering 2014?

Yes, Gail, that's illustrated. So 100 basis points equates to about that. And interest rates over the last few days have come down a little bit, so going the other direction. And if you look at that total accounting, funding, we do that at the end of the year, and it's a combination of how did our assets performed versus what's the liability math tell us. But directionally, it should be moving in the right direction for us. So it should be better at the end of this year than it was at the end of last year, unless something changes dramatically between now and year end.

Okay. But you can't put a number to that?

No, I couldn't. Because I'd have to be trying to predict what asset is going to do between now and the end of the year, and where are interest rates between now and the end of the year. And that would be -- if I could do that, I'd probably be doing something else.

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

If you could just talk a little bit about the Brazilian Containerboard and India operations. I noticed -- I guess, India had a little bit of a step-back from the second quarter in terms of its performance. And then also, the Brazil -- the Brazilian acquisition, I know it's early days, but that really hasn't contributed either. So sort of what kind of ramp do you think we could expect for those as we go into '14? And do you expect each of them -- certainly, Brazil should be profitable, but do you think India will also turn the corner?

Yes, it's Tim Nicholls. I'll talk about Brazil, and then turn it over to Tom for India. In Brazil, we've been squeezed this year. OCC has gone up dramatically, not precedent setting because we've seen this kind of cycles before. But we step into the operation right as OCC was taking off, and we saw our margin squeeze. So we've seen the worst of it. I expect margins to improve quite dramatically as we go into the fourth quarter. And I think the business has done a nice good job recovering price to cover the OCC increase. So we're still going to like the business a lot. We have no change in view on what we think the margin potential is. We -- even in a slower economic year, we still feel good about the growth this year going into next year. So it's unfortunate that we have margin compression, but I think we're on the road to recovery.

Chip, regarding India. The quarter that you see on, what is it, Page 33, that's all about an annual outage at Rajahmundry. We would have to get into the recovery boiler and do a lot of work. We were down for almost 25 days in the quarter. And we had a -- frankly, we had a pretty good September. 20,000 of the 40,000 tons that we sold in the quarter were sold in September. And we're set up for a good fourth quarter. The issue that we have been fighting, and the industry has been fighting over there, wood cost had run up as some competitors have added a pulping capacity. So pricing has been chasing wood cost increases for the better part of the year. And we're finally, at this point, I would say, catching up. So we had a pretty good September, and we expect a much better fourth quarter.

Tom, you might talk about the optimization of pulp [indiscernible] as well.

Yes. We're running at about 500 tons a day in the Rajahmundry pulp mill. We have capacity to do more than that. And we're, frankly, waiting on consents from the government to allow us to do that. So we've got some upside on cost, as well as productivity that we're just waiting on. We hope that to come through by the end of the year.

Got you. And then...

[That's all we can make. So we're going to like it as we figure out how to make more.

Got you. And then one last quick one for Carol. Just as a follow-up on the pension issue. If we -- let's just say, who knows what happens between now and year end. But let's say that interest rates were 100 basis points higher, it was the corporate rate. I'm just trying to read this correctly, and the stock market stays up for the year. I don't think we would be remised to first of all, expect that shortfall to fall below $3 billion. I can't imagine that wouldn't happen. And then if that did happen, and I know it's different from accounting versus what the government requires. But if we did see, at least from an accounting standpoint, that net number come down, could we see your plan contribution number that you've been talking about for the next few years maybe come down as we look at 2015 or '16?

Yes, Chip. Those are good questions. You're right. The math on your first part is if the 100 basis points stays in the market, it stays around where it is, there's going to be a significant reduction in the unfunded liability. And what you said is very accurate. So you're right also, relative to accounting versus funding. There are 2 different completely different sets of math. And from the funding, the 2014 funding and the '15, because there's a smoothing element to that, those are pretty well, I would say, locked in. The thing that could change that would be policy in D.C.. Law changes could change that, and that happened a couple of years ago. It could happen again, but not saying that or speculating. But the first 2 years, '14, '15 are locked in. Where a higher interest rate would help us, is -- you're also correct that it would start to feather in to what we would have to put into plan in the '16 to '17 timeframe. And it would reduce any money that we might have to put in there. So net-net, higher interest rates would be great. It would help us on the accounting and ultimately, it would support us on the funding as well.

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

Start off on the Courtland side. I wondered, either Tim Nicholls or Carol, can you give us some sense of just the EBITDA impact of that closure as we look forward, what's the hit look like from just not running that tonnage?

It's Tim, Mark. The way I would say it is this. We operate a system, and we have a mix of customers that we use the system to support. We had grown exports, we had grown some marginally profitable tons to fill up machine time over the past couple of years. And as we looked at the system that we had, we said, we can run a smaller system and do it better. So we're not going to forecast what earnings are going to be, but you can be assured that we look at the economics of we were going to run a system, and we have, in the 4 mills, a low-cost commodity set of assets. And even with [indiscernible] and Georgetown for they products they produce. We have a very low-cost system for specialty and value-added. So it's a combination of getting the right amount of capacity for the business that we want for the long-term, and not -- and from a capital allocation standpoint, keep investing in a system that sized larger than we need.

Okay. And just one other question on Courtland, Tim. This is the third mill you've taken out of the white paper business now, having shutdown and then restarted part of Franklin and having converted Pensacola. I just wonder whether all of this affects you're thinking about investing in a new paper, another new paper machine down in Brazil?

Well, it's a great question, Mark. And the way we think about these options is based on the dynamics of the business. We view the uncoated freesheet markets around the world as very much regional markets. They have regional supply demand dynamics and margin dynamics. And so part of the complication around -- and we see this in Brazil, as we've told everyone. We're trying to grow into the region as fast as possible. Supply chains are long, you tie up cash and inventory, you have FX exposures. And depending on where you're planning to supply, you have different environmental certifications and forestry certifications that are required. So it's very hard to supply from one region of the world to the other for the long term. So it will be made on a case-by-case basis, region-by-region.

Okay. Then just a couple of Industrial Packaging questions. Mark Sutton, was there any impact in the third quarter from some of those West Coast contracts starting to roll off?

Mark, you're speaking of the offtake agreement?

Yes, exactly.

So just to remind you, the offtake agreement is going for 3 years and there's a decreasing step down. So it's going to, over time, have an effect, but we don't expect any sharp effect. We've got to manage that as part of our supply chain, and it's a -- in the first year, and even in the second year, it's a pretty big part of our supply chain. So I would say, it has a sort of effect to the plan. And we've organized that step-down so that it works for us and our customers and our supply chain.

Okay. Then, another question I have was just, with some of these new capacity, the machine conversion, some of these, the discussion of new lightweight recycled mills, I just wonder whether there's anything you could do with that idled 400,000 ton machine at Valliant to look at making lightweight recycled on that machine? And what would it take for you to restart or retool that machine?

I think, we -- Carol mentioned it in her comments, that's one of the options we have for some very low-cost capacity that is available for us, if we need it. And we look at the whole system, Mark. And based on that and our demand of our customers, we'll decide what type of products we actually need to make. Because as you know, every Containerboard mill is not the same. And so we haven't -- we're not prepared to talk about an estimate or anything, what it would take, capital-wise, to change the great output of that machine. But rest assured, all of that is in our consideration. But the main thing is, we'll bring capacity on if need it for the demand of our customers and for improving and getting at this optimization that Carol talked about in this new Industrial Packaging system.

All right. Then the last one is just, in the Industrial Packaging down in Brazil, you did a 7% margin this quarter. I think Klabin is up in the kind of low- to mid-30s, but they own forests so that presumably helps them, I think, kind of mid-West A Coast businesses, kind of somewhere between. What is a reasonable target, do you think, for kind of an EBITDA margin at Orsa?

So it's like what we said when we acquired the business. We think it could be solidly the mid-20s. So our view on margin opportunity has not changed, Mark.

Mark, I'd add just a comment out of capacity. I mean, our objective in all our businesses is to make what our customers require with a minimum amount of assets. So the fewer machines, fewer facilities, and so, we'll run our system as hard as we can. We're going to make the right products and only start up more capacity if we absolutely need it.

Your final question comes from the line of Anthony Pettinari of Citi.

Just a couple of questions on Industrial Packaging. Carol outlined the $200 million optimization opportunity. And I was wondering if there was any sense of the timing to realize that opportunity, or if you're counting on any real improvement in the Containerboard markets over the last couple of years to realize that? And then switching to EMEA. You referenced the margin squeeze with box prices lagging Containerboard increases. Is this a sort of a normal lag, or are you seeing increased competitive pressure in boxes? Or how should we think about that going into 4Q?

Anthony, this is Mark. On the optimization, I think the optimization that we're talking about, that $200 million, really isn't about the market dynamic. It was about internal initiatives. Our mill system, optimizing the 16 mills and getting a lower average cost across those mills and including, in the supply chain. And the other part was on the commercial side and really just looking at the new box system and making sure we're making the right products in the right box plants and that we upgrade the segments and the customers within those segments. And that's -- we're already underway on some of that, and that's an ongoing process that I think we'll take. I think we originally said, post synergy period of the 24 months, we're not waiting to get started on that. But I would say, that's over the next couple of years. And if you could repeat the second question?

It was the EMEA box margin...

I can talk to that, Mark. What's happening is, you've got to remember, Europe is just coming out of a huge recession, so there's a lot of pressure on market demand. So it's more difficult with demand being negative year-over-year, certainly, in the Industrial segments, to get box prices up, as board prices are coming up. I think absent that, if we had a more normal economic environment, you'd see a quicker flow through.

What those -- to add also to that, John is exactly right. It does ebb and flow there. So if you look at the margins as an independent converter in Europe, there's -- kind of go up and down a little bit. But we feel pretty confident that as board goes up, ultimately, box prices will go up as well. And we're just in the trough part of that. We hit the trough part of that in the third quarter.

So let me wrap up and say, it was a very good quarter for International Paper. We performed to record levels. We've got more to come in 2014. We're going to generate a lot of cash. We're going to use it in a balanced way that creates value for our shareholders. That's the story, and we'll be talking more about it as we revisit with you in -- for the fourth quarter in January. Thanks.

Thanks, John, and thanks, all of you for taking the time to join us this morning, as always. Michele and I will be available after the call. We look forward to speaking with you, and our phone numbers are on Page 24 of the appendix. So have a great day.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation. You may now disconnect.