Good morning. Thank you for standing by. At this time, we would like to welcome everyone to the First Quarter 2019 International Paper Company Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be question-and-answer session. [Operator Instructions]. It is now my pleasure to turn the call over to Guillermo Gutierrez, Vice President, Investor Relations. Sir, the floor is yours.

Thank you, Holly. Good morning everyone and thank you for joining us International Papers First Quarter 2019 Earnings Call. Our speakers this morning are Mark Sutton, Chairman and Chief Executive Officer; and Tim Nicholls, Senior Vice President and Chief Financial Officer. There is important information at the beginning of our presentation on slide two including certain legal disclaimers. For example, during this call we will make forward-looking statements that are subject to risks and uncertainties. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures is available on our website. Our website also contains copies of our first quarter 2019 earnings press release and today's presentation slides. Relative to the Ilim joint venture and Graphic Packaging investments, slide two also provides context around the financial information and statistical measures presented on those entities. I will now turn the call over to Mark Sutton.

Thank you, Guillermo, and good morning everyone. We will begin our discussion on Slide 3. International Paper delivered solid earnings and strong free cash flow in the first quarter. We performed well against a more challenging demand backdrop especially in our export markets operational performance was strong. We manage costs well and leverage the strength and flexibility of our system in a high downtime quarter. Overall, input costs were favorable in the quarter with lower recovered fiber cost largely offsetting higher wood costs that were caused by the heavy rainfalls in the southern United States. Taking a look at demand in North America box shipments slowed in the first quarter as customers drew down inventories and we experienced other near-term demand headwinds. However, we continue to see a favorable macro backdrop supportive of continued corrugated box growth. Inventory destocking among containerboard and absorbent pulp export customers is playing out as we expected and as we discussed last quarter. We anticipate our shipments to recover as the year progresses. In the first quarter, we generated $440 million of free cash flow and we returned nearly $400 million to shareholders through dividends and share repurchases. Continuing with our first quarter results on Slide 4, EBITDA was $896 million, that's a 4% improvement year-over-year which reflects solid operational performance across our three businesses. Our equity earnings were $114 million including $101 million from our Ilim joint venture and $13 million from our investment in graphic packaging. Free cash flow increased by almost $270 million year-over-year driven by higher cash from operations as well as lower planned capital spending in 2019. Although, it's not part of our first quarter free cash flow, I do want to note that in early April we received a $237 million cash dividend from Ilim. I'll now turn it over to Tim who will cover the performance across our business sectors and our second quarter outlook. Tim?

Thank you, Mark. Good morning everyone. I'm on Slide 5 which shows or quarter-over-quarter operating earnings per share bridge. Price and mix were stable in the first quarter with higher average prices in our North American box business offset by lower export prices and containerboard and cellulose fibers as well as a weaker mix in Latin American papers. Volume decrease driven primarily by lower seasonal demand and North American packaging and Brazil papers as well as lower export containerboard and pulp shipments as export destocking continued in the first quarter as we've had expected. Operations and costs were impacted by economic downtime in the quarter. No performance, however, was strong. We managed cost well and optimize our system in a heavy downtime quarter. Planned maintenance outage expense was $143 million in the quarter reflecting an increase of $100 million versus the fourth quarter. Input costs were favorable with lower recovered fiber largely offsetting higher wood. Energy costs were also lower and distribution costs moderated in the first quarter. Lastly, equity earnings were favorable quarter-over-quarter. Ilim equity earnings benefited from stronger operations as well as a $21 million non-cash foreign currency gain in the quarter. So now let me turn to the segments starting with industrial packaging on Slide 6. The business delivered $421 million in earnings. Price and mix were favorable due primarily to margin and mix in our North American box business which was partly offset by weaker export pricing. With regard to volume the first quarter is our seasonally slowest quarter in the U.S. and Europe. In addition, in the U.S. we experienced weaker box shipments which we believe is short term in nature. It is mainly driven by customer inventory drawdown and other regional dynamics such as flooding in the Midwest and a late harvest on the…

Thanks, Tim. You know as I sit here and think about the start to our year what really stands out to me is that we delivered another quarter of solid performance and strong free cash flow. Once again International Paper demonstrated the strength of our businesses and our ability to deliver solid financial results under varying market conditions. Looking ahead, we see a favorable economic backdrop for our products as we navigate through any near-term conditions. We built a resilient company that allows us to succeed and create value for our shareholders by investing in our people our customers and our operations. And we're doing what we said we would do, growing free cash flow maintaining a strong balance sheet and returning cash to shareholders. And with that we're ready to take your questions.

[Operator Instructions] Our first question will come from the line of Debbie Jones, Deutsche Bank.

Hi. Good morning.

Good morning, Debbie.

My first question is on a domestic box and you called out weather and customer destocking with that the majority of the shortfall versus your expectations. And then I was hoping you could comment on the confidence you have that you do start seeing the improvements in April whether it's kind of broader macro or some underlying things around certain segments that encourage?

It's a great question and probably the $64,000 question. Look on April we saw some things that were sort of one off like the delayed harvest in California we know they're out of drought we know the crops are there the harvest is coming in and it's going to start later. So we feel good about that and in our supply chain visibility to customers we have seen the destocking rate begin to slow down. So we feel pretty confident about that. Longer term, when you look out for the rest of the year, Debbie, we look at a number of macroeconomic indicators that we feed into a model that gives us a sense of a range of box demand and those macroeconomic models that we use and those indicators are still by external agencies being forecast to be relatively firm. So we feel good about solid conditions going forward and really a better second half as we look at the general economic indicators that correlate the most with box demand.

Okay, thanks. And my follow up question just on the full year guidance. Can you just talk about what drove the reduction? I think some of it must have been the $10 cut and PPW on containerboard. And then Jim comment also if you actually saw that in the market and then how to kind of correlate that with no change to the free cash flow guidance?

Yeah, we have -- Debbie, it's Tim. We thought we had headroom in free cash flow we call that out on last quarter's call. And so we feel really good about the $2 billion being solid at this point. And in terms of the guidance -- you're right it is acknowledging that there was a $10 published down but also just acknowledging that there was some additional weakness in export markets than what we were thinking about 3 months ago.

Okay. Thanks. I'll turn it over.

Our next question will come from the line of Gabe Hajde, Wells Fargo Securities.

Good morning, everybody. Thanks for taking the question. I guess first one might start with Ilim. Seems like operations and shipments and everything there seems pretty strong. Can you comment at all about sort of the trajectory or outlook for the full year in that business? And then what you're thinking about or what the organization is thinking about in terms of expanding capacity there's been some reports out there that suggests they're looking to make an investment over the next couple of years.

Gabe, I don't think we heard the first part. Where you talking about Ilim?

Yes. Ilim.

Yeah. Thanks Gabe. Ilim -- the thing about Ilim is that we've got the best cost and operational position in the world to serve the largest growing market for softwood fibers that are targeted to our tissue towel and packaging. And that coupled with absorbent business we have in the US gives us a really strong position but specifically for Ilim they're continuing to see growth. They see the same thing that everybody sees in the fibers market in China. China's economy has slowed down a little bit. There has been some pricing pressure but Ilim is continuing to grow. You can see the EBITDA performance and the performance on the IP side of the shareholder arrangement with the dividends and equity earnings. Ilim also has the ability to adjust their cost structure like we do in North America through a sophisticated approach to how to variable as much of what looks like fixed cost is possible and they're continuing to make progress on that. So I think the future is really bright for Ilim. As far as future development, there are some projects that have been publicly talked about that's normal in that part of the world to start talking about possible investments to get everybody lined up all the constituents, cities, governments, banks all of that type of thing. But to this point there's nothing formally approved about the next phase of pulp production. We have been doing some things for the packaging business in Russia and in Eastern Europe around containerboard and some box but there is there is a bright future for Ilim as the primary softwood fiber source for the Asian markets.

Okay. Thank you. And then switching gears I guess the cellulose fibers business, there was discussion on the prior quarter call about a commercial decision sounded like maybe some destocking. Also, can you update us on how that's progressing through I guess the first half here. And then visibility into that and getting a little bit better maybe on the volume front and the back half.

I think that's exactly our view. We had two main causes for our volume shortfall if you will on the absorbent side and that is the customer decision, we talked about last quarter that you referenced. And also, if you recall, we were talking about some uncertainty about Chinese demand. It was in the Chinese New Year period whether there was going to be a snap back in demand post Chinese New Year or a gradual return. We see more of the gradual return outside of China we have really good demand in the other regional markets in parts of Europe and Latin America the rest of Asia. And so we think that when everybody looks at what's happening in China and you see certain things starting to turn some economic stimulus starting to be injected we feel pretty good about the ability to be on the volume recovery plan we had that we described a quarter ago as we go through the year. I hate to keep saying in second half but in this case China's such an important market as they start to come out of the relative slowdown they had last fourth quarter and the beginning of this year we'll see the benefits of that in our Cellulose Fibers business.

Thank you, Mark. Good luck.

Thank you.

Our next question will come from the line of Chip Dillon, Vertical Research.

Hi. Good morning everyone. Thank you. First question is, you mentioned the -- Tim did the Ilim dividends total $900 million. I seem to recall your investment in Ilim has been all in less than that. I think when he did the investment about 10-12 years ago. Could you just update us on that please?

Yeah, all in roughly $685 million, Chip. So yeah, we've now recovered more than what we have in the investment.

Okay. That's great. Thank you. And then a second question. Could you just update us on the timing of the conversion that you planned at the Riverdale mill? I know the last comment was a little bit. There was a bit of a range of dates. I think first half or first quarter or first half I think were the terms where does that stand now. And you know are you because of the -- you know incremental looseness in the market not to mention the strength in white paper. You know considering maybe pushing that to the second half or to some other period.

Chip, that's a very good question and you know we did talk about it I think last quarter. Just a quick reminder on the Riverdale conversion it's bleached white top high-performance liner something that we currently don't make that exact product in our current mill portfolio. So that project is about giving IP capability in the box markets for the high print segments. And so what we talked about was a little bit of a range right now what we're what we're planning on is first quarter of 2020. And it's because of the product that we're going to make at Riverdale. It's not more of the same type of containerboard we're already making. We don't know. Obviously, no one knows exactly what supply demand and what our order book is going to look like. But we're quite confident that when we bring that product on if we have to adjust our output in other ways in other ways in our system that we've got the capacity to do that based on our order book and if you remember when we brought value on that was also a different product it was lightweight medium that we had sold basically after the Temple acquisition and we were bringing some of it back in house. We brought that on in a period where we didn't need 100% of our capacity to meet our box demand. And we just adjusted the output of our system. So I'm quite confident that we can slot this capacity in because it's a different product than we're making and it's a product we need.

Understood. And last question. I know when we met with Tim when he became CFO last fall. Tim, you mentioned in New York you wanted to make buyback something that's something that has a certain cadence to it and certainly we've seen that in the last several quarters. And I guess Mark as we look ahead one sort of interesting track record a point that we could see IP achieve is if they raise the dividend again this year whether it's just a half penny a quarter or something. I think that would be the 10th year in a row. I go I've looked back as far as the 1930s I can't quite get back to 1898 but I don't think there were ever more than two years in a row where the company raised the dividend until this streak began nine years ago. And when I look around the marketplace and see certain stocks that have a track record you see certainly premium valuations. Is that something that you know is important to you as you think about you know capital allocation going forward having an annual increase of some sort.

You know you mentioned the string here of annual increases, so that sort of speaks for itself. But what I would say is we recognized the role increasingly we recognize the role we play in different types of investors portfolio. So as a materials company we have investors that need and want short and medium term returns and you can do that with share buybacks and dividends. We have other investors that are willing to use us as part of their long-term return strategy and obviously in capital intensive industries. That's an element of our business. So I'm committed to balanced capital allocation and we're trying to show through our actions that we mean it. And so the dividend and the dividend improving overtime governed by Chip our target and guideline of 40% to 50% of free cash flow. So the reason we talk about free cash flow and the reason I'm excited about our ability to continue to generate $2 billion and continue to grow it is it allows us to meet the expectations of the type of investor that puts international paper in their portfolio.

Understood. Thank you.

Our next question will come from the line of Mark Connelly, Stephens Incorporated.

Thank you. Two things, do you think that the white paper market has fully adjusted now to where it's going to be between roll and cut size. I'm trying to think about your own re-optimization given the opportunities that have come up. And with the higher prices that we're seeing, how are you thinking about imports not just in the stop gap period here but sort of over the next couple of years?

Mark on the mix between the role various printing grades and cut size. You know we have a strategy and cut size it's a little bit different than some of the market and still believing that there's value in a branded continuum of products and we think that does play into our results so that's obviously an important part of it. It's difficult to predict the role side and the role printing side. Just general offset paper has had fits and starts with its decline rate. But I think right now we see some stability in the split between the printing paper roll side and the cut size side. Obviously, if you look at our asset base and what we have in North America in particular left focused on that business. They are great mills but there's only a few of them and they lean more toward the cut size sort of branded market. So I think you can see just by basis of what we have and what's happening in the market that's where we lean more. As far as imports, we obviously look at data around markets and best destinations and we factor all of that into the strategic part of our pricing kind of decisions. And we'll continue to do that.

Okay. And just one quick question. You mentioned pulp export destocking. Do you have a view on where we are in that process and has it had a significant impact on your mix near term? That might be changing as we finish it up.

So I think we are past the midpoint of destocking. If you look at inventory days on softwood pulp it is still high. They're higher than balance but they're not rising. And so I think the questions are going to be a combination of demand and other fiber choices how fast we can get back to an industry that's more balanced on inventory. Temporarily, that usually means for us if we took a hit in absorbent as I described because of some of our commercial decisions sometimes we feel that with non-absorbent softwood pulp. But it's not a material change in our mix. We're still working toward an 80% plus mix of absorbent to non-absorbent softwood fiber and we're still solidly in the mid to high 70s. So it's a few percentage points it's temporary and we'll be back on the track toward getting into the 80s based on some of the comments Tim made about the products we have some of the patents and the customer base is pretty rich as far as diversity of needs and parts of the world.

Very helpful, Mark. Thank you.

And our next question will come from the line of Steve Chercover, Davidson.

Thanks, and good morning everyone. First one, hopefully it's easy. You used to provide us with your U.S. industrial packaging EBITDA margins. And I'm wondering if you had that handy for old time sake?

Yes. Something that Guillermo can follow up. I don't have it right in front of me, Steve.

Okay. I'll do that. So getting a bit more needy. Obviously, you're running containerboard systems demand. How do you characterize your own inventory situation at present? And how long do you think it would take for the broader industry to get back into balance?

Yes. I think we're kind of where we would like to be in terms of inventory levels as we look at the demand that we had in the first quarter and what happened with the transportation network and we try to reference that in my comments earlier. But a big portion of the downtime that we took, which is just adjusting to the speed of the transportation network and how it's working now versus how it worked over the past few quarters. So I think we ended in the quarter roughly in line with where we think we need to be and probably we manage it week to week and month-to-month.

Okay. And similar question on cellulous fibers. You took your first economic downturn in several years. So was that a function of the commercial decision you made or and also was the downtime anticipated in incorporated into your commentary at the end of January?

So I think it's the two things that I talked about. The dislocation related to the commercial decision we made and the lack of timely replacement of that volume through the latter part of the fourth quarter into the first quarter, so the commercial decision. Plus we didn't see exactly the slowdown in China coming for these -- some of these types of products and that created a little bit additional to that. So in order to balance our overall profitability, customer service and costs, we decided to adjust the output of our system. And again, when you think about our system, that's the cellulose fibers comment but some of these mills were in the same fiber basket as our containerboard mills and even our printing paper mill. So we managed the inputs to those facilities enterprise-wide and we managed the output from those facilities, i.e., transportation enterprise-wide and then we look at the customer commitments we have. And we believe that the results you see the first quarter and the variable cost management is a combination of all of those decisions we made, which, in this case, resulted in some economic downtime in the cellulose fibers business, partly related to the two issues I talked about, partly to optimize our overall cost position in less than full operating environment.

Yes, but I mean, I think you actually exceeded our expectations going from the bridge that Tim gives us for each of the segments. I guess you are managing that downtime in a very efficient fashion.

Well, we worked very hard at it. It's a very analytical process with some automated tools. I've described it before. It's been a while since I've had to describe it, thankfully. But we've gotten better at it. And the team's really worked well across businesses to really optimize quickly the variabilization of a lot of our cost that sometimes can be sticky when you don't have a robust sales and operation planning process and the ability for your manufacturing and supply chain teams to have faith that they can make this change in an input based on the output of that mill and not get caught without something. And we're just continuing to get better at that and we challenge ourselves to operate like last year when everything was wide open and also operate top-notch when things aren't wide open.

Thank you. Congratulations.

And our next question will come from the line of Mark Weintraub, Seaport Global Securities.

Thank you. I was hoping to get a bit more color to understand the improved fixed cost absorption you're expecting to see in industrial packaging. And I'm sure part of it -- a lot of it relates to likely less economic downtime. And so I wanted to kind of, if we could parse through some of that. Tim, I think you talked about the transportation network and can you give us a sense as to how much downtime might have been related to that because presumably that is now done and we don't have to worry about it on a go-forward basis, is that fair?

Yes, Mark, it was roughly one-third of the total economic downtime that we took.

Okay. Great. And then would it also be fair to assume that a significant portion was also related to destocking in the export market? And if you maybe could give us color on the pulp business, where do you think we are in the destocking with export, and I realize there are moving factors with underlying demand, maybe changing a little bit but maybe more color on how much your exports were down in the first quarter and if it's reasonable, if you can give us a sense is for the full year, how much you would think your exports might be down?

Yes. I won't go into quantifying that since it varies region by region. What we see right now, and I called out some of this, Europe is still in the process and it's a combination of a weaker winter season, but we think a stronger spring season as we go into the new agricultural season in Europe. Latin America feels better, but there's still some inventory destocking that has to take place in Southeast Asia. So we see it moderating and flattening out in the second quarter and then recovering in the third and the fourth quarter is a general comment across all of our containerboard exports.

The only thing I would add, Mark, is that Tim made a comment about Turkey, and that's an issue because some of the retaliatory tariffs. And I don't know -- no one knows if that's how much of a seasonal issue. It will get solid at some point. But we are a major supplier into that market for their kraftliner needs. We have box plants there, and it's a challenge right now. So that demand dislocation or the ability to ship there is looks like it's going to persist for a while until some of these other global trade issues get worked out on steel and aluminum and other things. So we'll just have to factor that into our output plans.

Yes. For sure. I mean, that is one of our largest export markets as a country.

All very helpful. And lastly, announcement by Clebin, I think it's last week. Any thoughts obviously, it would be the first large-scale eucalyptus base containerboard project. You're down in Brazil, you know the containerboard markets better than anybody. Any thoughts you would share with us?

You know the Clebin I think information that came out is not new. It's been talked about for a while as part of this large fiber project they have. We don't make containerboard out of that fiber. We make printing papers out of that fiber, so we don't have any real-life information to share about whether how good is going to be or anything like that. But we'll learn what happens as they tried to bring that into the market it's a really short fiber, but boxes are engineered systems and sometimes you can use different products in different places in the box construction. We do that all the time with fiber makes, our Madrid mill have a laboratory for that different types of fibers and different layers. So we'll see. But to us it was just confirming what was already out there, just the numbers announcement had to be more specific.

Thank you.

Our next question will come from the line of Adam Josephson, KeyBanc.

Mark and Tim, good morning. And thanks for taking my questions. Tim, one on the guidance, your second quarter guidance implies I think first half EBITDA will be flattish and then second half will be up about 100 just based on the full year. Can you just -- and I don't think maintenance will be any different year-on-year, 1H versus 2H. So can you just help me with some of the moving parts there, why you think they are your comparison will be much better in the second half than the first half? Is it better U.S. box volume? Is it something else? I'm just trying to understand that a bit better.

Yes. I think growth -- well, compared to what we think we're going to see in the first half, I think box volume will be better. I think we also are anticipating some of the destocking that we talked about in export containerboard, moderating in the second quarter and then beginning to grow again in the third and fourth quarter. On the pulp side, again, volume-related, we'll see a pickup in volume and a better mix of as we go through the third and fourth quarter that we've experienced in the first 2 quarters of the year. So some of the those things are what we're expecting to play out and with pretty good confidence that unless there's a dramatic shift in terms of the economic forecast we see and crop harvest and things like that, we think those are reasonable expectations.

Thanks for that. And just on demand for either of you, just a two-part question. Can you give us your April box demand just in the first couple of weeks of the month if I missed that? And somewhat relatedly, just on the e-commerce. In late 2016 and throughout 2017, there was a surge in box demand and there was a great deal of discussion around the e-commerce benefit. And as demand has slowed in the last year or so, there's been discussion about a potential adverse impact from e-commerce as Amazon and others are looking to reduce their packaging. Can you just share your thoughts as to what you think the e-commerce impact has been in recent months and what you expect in the months to come along those lines?

So on e-commerce, we see it continuing to grow. There's a lot of things that get bigger over time. Growth rates tend to go down but we're still seeing, not only from our largest e-commerce customer, but we have a lot of others that are growing rapidly, too. So we're still very bullish on the e-commerce and where it goes in 2019. I mentioned without getting into specific numbers, I mentioned demand in April as seeing continuation for March into April, it's moderated a little bit as we've gotten further into the month, but I think we're expecting a similar type of destocking pattern against again, a very tough comp in March and a tough comp in April.

And sorry, what was the March number, Tim?

We didn't publish the March number.

Okay. Thank you.

Talking about why we're seeing across the industry in terms of box demand and ours was down. I'm not going to characterize what the number was for a specific month, but we did see weakness as we saw the weather-related events and the destocking that we think the plays across our customer base.

Thanks very much.

Our next question will come from the line of Dr. Mark Wilde, BMO.

Good morning, Mark. Good morning, Tim.

Good morning.

Good morning.

I wondered, first of all, just in light of the downtime in containerboard in the first quarter, can you give us just a rule of thumb in terms of how you think about the cost of downtime in your containerboard system right now?

A rule of thumb for how we think about. Well, the rule of thumb is a percentage, and it's relatively split of our cost is true fixed cost in the short term. So we try to keep that at all times at an optimal level. And the rest of our cost, we view as variable innovative, even if it's not purely variable cost and we have, as I mentioned, on input -- of all inputs, wood, chemicals and everything else and an output of all transportation and supply chain to the customer, we have a supply chain operating model, SAP-based, lots of data visibility and our goal is to minimize all of that variable cost. And every time we have to go through a period of this type of operation, we've gotten a little bit better at variabilizing more of the cost. And our people and those systems continue to learn how to manage and it's about coordination, it's about not looking at it by containerboard or cellulose fibers or Printing Papers. It's about looking the fiber converters we have, making all three of those products, taking in wood, pushing out transportation and logistics cost and warehousing costs and using chemicals and other things and optimizing that for International Paper. And that's how we look at it. So that's our rule of thumb, not a specific number, but getting back to the smallest level it can be so that we have the best possible outcome when we're not running at sort of nameplate capacity. I would add though, Mark, running like we ran in 2018 with virtually maintenance outages and nothing else, it's not actually the optimal way to run our company or to supply our customers as a service platform they need. We'll do it when the market indicates we need to do it. But something like I talked about before, 3% to 3.5% of our productive time for maintenance, planned maintenance and about the same amount for flexibility in the supply chain marginal cost optimization, the ability not to buy expensive wood when we don't have to, that's where we make the highest level of profitability and have the highest margins. And that's not the first quarter, that's more than we would like to see, but that's why we work on that variabilization of our cost structure constantly.

Okay. That's really helpful, Mark. For my follow up, I wondered if we could just talk briefly about Ilim. I'm mainly focused on this talk about potential containerboard project over there as well as what's your thinking right now in terms of your ownership position at Ilim. We've talked about this over the last few years about whether you want to take that position up and potentially be able to consolidate Ilim.

So on the ownership position, it's 50-50 right now. We think that's the right answer for this point in time. We have good partners. It's working well. We have a strong shareholder agreement. We have our senior executives make up half of the board. So it's a very collaborative effort. And we think the 50-50, all in considering what's going on globally and everything is the right model for us right now. So we don't see a change in that in the near term. As far as the potential on containerboard, there's a market, 170 million people in Russia, the market is a good corrugated market, we participated in it in a small way. There's a little more we could do. And then there's some pockets of kraftliner demand that is theoretically anyway best served with Russian containerboard if you can get the supply chain figured out. There's part of China's fiber needs for brown virgin fiber that can feed in, that's also the best place to do that from is there. So we look at those unique markets to that cost structure and that asset base and really that fiber source is really what drives any interest in containerboard that goes outside of Russia.

Okay. That’s helpful.

Our next question will come from the line of Anthony Pettinari, Citi.

Good morning. Tim, just following up on Turkey. Is it possible to roughly quantify the size of your business there? And from an earnings perspective, is it accurate to say that this will hit both North American industrial packaging on the export side as well as the European industrial business?

Yes. Probably, to a lesser degree in terms of the business on the ground in Turkey and I would expect most of the detrimental impact to be in our export containerboard business. Turkey, in year's past -- it's ranged, but it's been anywhere from 100,000 tons to 200,000 tons. And it depends on the economic ambitions in Turkey and a number of other factors. So it's a big market for us. And given, as Mark said, the tariff structures that have been put on for one, but then secondly, just the underperformance of the economy there, it'll -- we'll work to overcome it. But it's a challenge in the near term.

Got it. And then may be more broadly on Europe, you ramped Madrid, you made these recent box plant acquisitions, but obviously the market has had some issues from a demand perfective. How are you currently think about the timeline for achieving profitability in European packaging, understanding it's not the biggest part of your business, but...

Well, our expectations on our European packaging business is we had, in the past, a very profitable business, above cost of capital returns. There's a couple of industry changes and a couple of IP changes that led to our profitability deteriorating and we have addressed most of those. So we fully expect that business to be profitable throughout as we exit this year and from then on. And we expect it to be a cost of capital returns. A big, big strategic gap for us. And it wasn't true 10 years ago, but it's true now, it's had basically zero in region integration on these cycled liners and we have that now and where we have that now you draw a circle around the middle and the Spanish box plant system, it's a very good business today. There's just other issues that we've got to finish fixing through our capability of the boxes we can make and the full integration of that mill. And I consider us technically integrated on most of our kraftliner from our U.S. mill systems. There's just a supply chain step called a shipping channel between the production and the usage. But to me, it's an integrated output for 30% to 40% of our fiber needs there.

Okay. That’s very helpful. I’ll turn it over.

Our next question will come from the line of George Staphos, Bank of America.

Hi, everyone. Good morning. Thanks for the details and congratulations on the operating performance. A couple of questions. First, in terms of pulp markets, its recognizing that your business is obviously, much more oriented to fluff and different than other business that we would see in the fibers market. There's been this standoff between buyers and sellers, particularly in Asia going back to the fourth quarter that in turn has led to inventories at the producer level rising, and we've talked about this on this call that you're now working those down. And buyers inventories being worked down. Where would you say your customer's inventories are, both in terms of the consolidated cellulose fibers business and also Ilim as we stand here today? Are customer's inventories relative normal at this juncture, Mark? And relatedly on pulp, you mentioned there were some downtick in demand that caught your operations a little bit by surprise. From my understanding, tissue has remained relatively stable in China from the day that's grown 5%. So what ticked down that led to the downtime? And then I had a follow-up on containerboard.

Along the overall inventory question, I wasn't clear to me whether you were talking about hardwood or softwood inventory. I think hardwood inventories are where the standoff is. I think primarily the bleach eucalyptus pulp coming from Latin America is a big input to China. That's what's been publicized that I've seen that there is a "standoff" between the producers and the users. On the softwood, we don't make that. But on the softwood side, again, as we said, 75% to 80% of our mix in the North American business is absorbent pulp. And that has a number of demand drivers. One of them is obviously, the economic health of the population in the GDP per capita and how many people can move into those types of products like disposable baby diapers. And if that changes because the economy changes that are with you just have a slower adoption rate and that's what we've seen. In other markets, we've seen the ability of a poor economic environment to actually have people stop the frequency at which they use some of those products, which then shows up in a lower growth rate. The rest of the softwood goes to the number of different users who would see softwood in, some towel and some packaging and we're not a major player for North America in that. That's really the Ilim story. And I don't have a number for Ilim's customer inventories, we just look at what everybody looks at which is the industry inventory numbers and they're north of I think 40 days and that's a high number for that particular product line. I think the perfect world balance for customers and suppliers is in the 28 to 30-day range. So I mean kind of new assumption on demand and assumption on production and you can figure out how soon it gets back to a more what if it would be historically normal.

Okay. But I mean, Mark I know you don't make hardwood per se, Mark, but using analogy for cellulose. Your fluff business and from what you can see your customers inventories on that side are relatively still high, but working lower, would that be fair? And Ilim, you wouldn't have a view on that. Would that be a fair recognizing it's tough to get at inventory data in China for the other customer side.

I didn't understand analogy you’re making so yes, I think the way you stated, high not as high as that analogy, at the high end working off and high basically, because of the dislocations in demand that I described, primarily in China. And a little bit in the Middle East. But that they thought they were going to sell more finished product then they did, there's more fluff pulp in the system but not at the levels that your analogy on hardwood craft. And on Ilim I think Ilim looks more like the general softwood market, but I don't have on customer inventory levels handy.

Totally fair. Appreciate the thought. I want to come back to you're saying earlier about maintaining 3% to 3.5% flexibility in the system. The way perhaps you needed to run in prior years because of all of demand for containerboard led to not necessarily how you like to optimize the system on a going-forward basis. To maintain that flexibility, I could think of a couple of ways that, that might change how you prosecute your commercial strategy over time. Do you think -- what would you be able to relate us in terms of how that changes how you run the business commercial in containerboard differently than maybe years in the past? Thanks, and good luck on the quarter.

Thanks, George. That's a fairly involved question, But I would just say at a high-level overtime, not in the quarter, not even in a particular year, just if you want optimize a business like this, then we believe somewhere in the range of what I talked about is what's necessary to keep your operation safe and reliable and then to keep your supply chain and your customers happy which leads to better value propositions, better margins, just better position for the customers if you have a great product and you have great service. And so that comes out to roughly about 6% I talked about. For the second 3%, it's about continuing to invest in our system. Some of these boring projects that we talked about something like head boxes and all, what it does it makes three mills able to make the same basis rate range and the same quality, which allows us to optimize the way we run. Everything doesn't have to be running wide open at the same time. And the other way to do it is challenging our teams through Six Sigma and best-in-class lean manufacturing techniques to improve productivity. And so that we can do more with what we have that then build a cost structure that is not requiring 100% nameplate output to make at least return. You have it as a reserve capacity like a public utility does and you don't use it and you don't put input cost, you don't put people against it when you don't need it. And I would say there's a human element to this, too. When you run like we ran last year, you wear everything out. You wear the equipment out and you wear the people out. And that's not a small issue in our company because we want to run a safe company where people are engaged and they're not completely running a sprint all the time. There's an element of running a nice race over time and so reliability, best practices in manufacturing and doing those kinds of things, building system flexibility and duplicity so we can make some decisions around the 16 containerboard mills we have, all leads to being able to have that flexibility time in terms of machine hours without it being a big cost. And I believe when we look at periods where we've had, that's where we produced the best margins, the best -- you don't know it but we know it, the best customer satisfaction and allowed us to grow our position because we can meet every need the customer had.

It gives you a more predictable system and probably an ability to have a more predictable customer base with longer-term contracts. But we'll turn that over at this juncture. Thanks again for taking the time.

Thank you, George.

Our next question will come from the line of Scott Gaffner, Barclays.

Good morning. Tim. Good morning, Mark.

Good morning.

Tim, I just wanted to go back to the export market for a minute. You said the inventory destocking was as expected but then when you were talking about the guidance you talk about some additional weakness. So 2 things. One, are you seeing a little bit weaker in market demand in the export market in addition to the destocking? And then two, when you look at the visibility to the export markets, I mean, how do you get comfort around your visibility? Is most of your sales there direct to customers? Or you're going through distribution? Just any color you can give us will be great.

Question. Most of it is direct. So we do talk to our customers and we get their view. I think the part that we didn't fully anticipate in terms of underlying demand with some of the seasonal crop weaknesses that I mentioned earlier. Europe is more of the issue as I laid out in some of the prepared comments. Europe is going to take a little bit longer. We see recovery starting in other regions of the world, some are better than others, but almost all of them are better than Europe. So there's a little bit more weakness there in the first quarter. But again, talking to customers, we expect that to moderate as we go through the second quarter.

Okay. And as far as the full year forecast on export, it sounded like you were mentioning that just you expected recovery in the second half but you don't expect recovery back to 2018 levels, did I hear that, right?

Right. It's going to be down versus last year, but it will start ramping back from the first half numbers as we get in the third and fourth quarter.

Okay. And just one last one here, I know we're late in the call. But Mark, when we look at be monthly data for the industry, whether it's box shipments, supply-demand, et cetera, a lot of other industries like retail and auto have really gotten away from this idea of having monthly sales data. Obviously, IP is the leader in this industry and that itself caused significant volatility in the shares 1Q and has historically. Is there any thoughts to why or why not you or the industry wouldn't go away from providing data on a monthly basis?

It's a good question, Scott. Honestly, I haven't talked about it that much. Some of the data comes from aggregation of industry trade associations and it's a question worth considering. I really haven't given it a whole lot of thought. I know that the -- some of the retail industries have gotten away from that, some of them are still in it with same-store sales and those things that tend to cause overreaction. I think it's something we’ll think about.

Okay. Fair enough. Looks forward to talking about in the future.

And our last question for today will come from the line of Brian Maguire, Goldman Sachs.

Hey, good morning. Thanks for squeezing me in. Two-parter on M&A. One public company multiple has come down a lot over the last year and obviously, the macro environment and even some of the business-specific outlook has become a little bit more muddled and uncertain. So just thinking how you kind of balance those two? And how you view M&A today versus how you view it a year ago in terms of your overall capital allocation strategy? And sort of the related question there is obviously, do the DS Smith investment package. I wonder if you could comment on what that might bring to the table? What that might give you that you didn't already have? And any expected EBITDA from that in 2019 and whether that would be included in the guidance at this point or not?

So on general question about M&A. It is true that sometimes valuations come down in periods where companies might not be prepared to do M&A. The way we think about it is it has to be a strategic fit, first and foremost and obviously, timing does matter. But if you're talking about public companies, a temporary valuation change usually doesn't win the day because Boards of Directors look at the value of the company over the past 12 months and all kinds of other valuation formulas. Right now, we really like the company we have. We have more run rate in the company we have today as we talked about in terms of our strategy is to improve International Paper. It's very possible and has proven to be true in the past that some M&A has helped out and it probably will in the future, but it's not a burning platform for us because we built a really good company, really since the transformation plan coming out of '05 and '06 and we're trying to bring this company to its full potential. So it's always a potential tool or a tool in a strategic toolbox to improve a company, but value creation, good returns, above our cost of capital and earnings growth leading to free cash flow growth is what we really want to focus on. And as I mentioned in my comments about our investor base that we have today and the investor base that we recruit, we recognize the balance capital allocation is a role that a company like International Paper needs to play, short, medium and long-term capital returns, and that's going to be remain a focus.

And just on the DS Smith business in particular?

Thank you for reminding me of that. DS Smith business. Well, it does two things. It's relatively small in the big scheme of things. But for the European business, it will have a meaningful impact. The Portugal plant is right in the backyard of the Madrid mill and it's so -- it's about capability and integration. And the other couple of plants that came with that, a little bit of integration, but also some high print capability that we lack in France and in the general Mediterranean regions and so this was a way for us to accomplish something that was already in our strategic list and doing it as an output from a sort of European antitrust type of sale, you're able to be made fair acquisition, addressed two of our strategic needs at a pretty good value. We haven't had time to factor in that into our forecast this year, but I would view that as upside.

Okay. Last one for me, Mark, a lot of discussion about demand and the weakness in 1Q and obviously some of that is tied to macro uncertainty. In your view, sitting here today, do you think that if we get trade deal with China, which has been rumored for a long time, that's going to lead to an acceleration in box shipments, both in the U.S. and the export markets? That could be a meaningful catalyst for getting us back on track to closer to 2018 levels? Or do you think looking at the end markets that you got a lot of food and beverage, it really won't show up that much on the numbers?

I actually think it's more likely to show up in the numbers than not. The China, I think we're learning every time there's a disruption with China, how much of a role it plays in the global economy. I think the uncertainty around on the margin, a lot of our U.S. customers for packaging, export a portion of their output whether it's food or other materials to China. It's not a big part of their business, but it's a meaningful part and it's disrupted to some extent due to tariffs and other things. When you add all that up, it's a U.S. box produced for an export product to China. It shows up as softness in U.S. demand but it really has nothing to do with the U.S. It has everything to do with them or that they can get to their product, marginal amount of their product to a market that's currently slowing down, number one, and number two, in some cases, has some additional tariffs applied to the products. I think it helps take some of the uncertainty in the economy away. And that typically, when you look at the drivers of box demand, the consumer components of GDP, nondurable production, those things tend to get better. And I think when we had a less uncertain environment with China, go back into early 2018 and 2017, we had better macroeconomic numbers that drive box demand. So I don't have any information to say that, that wouldn't return if we took the uncertainty off the table.

Got it. Appreciate the insight. Thanks very much.

Thank you. I'll now turn the call back over to Guillermo Gutierrez for closing comments.

Thank you, again for joining our first quarter earnings call. As always, Michelle and I will be available for follow up questions. Thank you.

Once again, we'd like to thank you for your participation in today's International Paper Company First Quarter 2019 Earnings Conference Call. You may now disconnect.