Jay Royalty - Vice President-Investor Relations Mark S. Sutton - Chairman and Chief Executive Officer Carol Louise Roberts - Chief Financial Officer & Senior Vice President W. Michael Amick - SVP-Papers, Pulp & Consumer Packaging Timothy S. Nicholls - Senior VP-Printing & Communications Papers.

Steven Chercover - D.A. Davidson & Co. Gail S. Glazerman - UBS Securities LLC George L. Staphos - Bank of America Merrill Lynch Mark A. Weintraub - The Buckingham Research Group, Inc. Mark Wilde - BMO Capital Markets (United States) Mark W. Connelly - CLSA Americas LLC Chip A. Dillon - Vertical Research Partners LLC Scott L. Gaffner - Barclays Capital, Inc.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker) Chris D. Manuel - Wells Fargo Securities LLC Philip Ng - Jefferies LLC Debbie A. Jones - Deutsche Bank Securities, Inc. Paul C. Quinn - RBC Dominion Securities, Inc..

Ladies and gentlemen, thank you for standing by, and welcome to the International Paper Second Quarter 2015 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will open the call up for a question-and-answer session.

Now, it is my pleasure to hand the call over to, Jay Royalty, Vice President of Investor Relations. Please go ahead..

Thanks a lot, Kristin. Good morning, everyone, and thank you for joining International Paper's second quarter 2015 earnings conference call. Our key speakers this morning are Mark Sutton, Chairman and Chief Executive Officer, and Carol Roberts, Senior Vice President and Chief Financial Officer.

During this call we will make forward-looking statements that are subject to risks and uncertainties, which are outlined on slide 2 of our presentation. We'll 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 second quarter 2015 earnings press release and today's presentation slides. Lastly, relative to the Ilim JV, slide 4 provides context around the joint venture's financial information and statistical measures. With that I'll now turn the call over to Mark Sutton..

Thank you, Jay, and good morning everyone and thank you very much for joining our call to review our second quarter results and outlook for the third quarter. I'm going to start on slide 5. International Paper delivered another strong result in the second quarter. Our earnings per share was $0.97 compared with $0.93 last year.

In addition to the EPS, free cash flow was substantial at $511 million in the quarter, up from $377 million last year. Earnings were driven by outstanding results in our North American Industrial Packaging business with EBITDA margin just over 24%.

Operations performed well around the globe and we successfully executed 11 major maintenance outages across the entire enterprise. Solid performance continues at the Ilim JV, delivering equity earnings to IP of $67 million in the quarter.

I'm also very pleased to report that the number-three containerboard machine at our Valliant facility is fully online and ahead of schedule. The product's qualified, the machine is running great. Finally, I'd note that our return on invested capital for the first half of 2015 exceeded 10%. All-in, I think a very strong quarter for International Paper.

Moving to slide 6 and continuing with our financial results. As I mentioned, EPS was $0.97 for the second quarter. And when you set aside the benefit of the foreign exchange gain on Ilim's debt from both this year and last year, we had a year-over-year earnings per share growth of over 5%.

Now, while revenue was down year-over-year in the quarter and most of that was due to FX impact from our Brazil and Europe operations, we continue to have strong margin performance in the face of several global macro headwinds. With that, I'd like to ask Carol to take us through more detail in the quarter and our outlook for the third quarter.

I'll return at the end to wrap it up.

Carol?.

Thanks, Mark, and good morning, everyone. Taking a look at the bridge from the first to second quarter, you can see that our performance was solid across the board. Pricing and mix were essentially flat with a few puts and takes, and we'll talk about that as we go through the segment.

Volume was seasonally stronger predominantly in Industrial Packaging as we expected. Operations improved and were solid across the board. Maintenance outages, as Mark mentioned, were up significantly but in line with our expectation. Input costs were lower, which reduced energy and diesel costs being offset slightly by higher fiber costs.

And finally, the Ilim JV created a positive swing as the FX benefit was partly offset by higher cost associated with the outages and some general inflation. Turning to the segments, I'm going to slide 8. As Mark mentioned, the Industrial Packaging segment delivered an exceptional quarter resulting in $528 million of EBIT.

Prices were down slightly mostly on export containerboard volume as North American box prices, inclusive of mix, were essentially flat. Box margins in Europe were under continued pressure and did contribute $3 million to the decline. Volume for North American box was up 3% over the first quarter.

Operations performed well and maintenance outages came in as expected. Input costs were sequentially favorable. Asia box continues to experience some very intense competitive pressures which further negatively impacted results by about $1 million. So overall, strong results from the Industrial Packaging team.

Moving to slide 9, as Mark mentioned, the recently restarted and upgraded containerboard machine at Valliant is running very well and is fully ramped up and qualified within two months of start-up. This coincides well with the wind down of the purchase agreement that we've been operating under for the past few years.

And this enables us to supply our own needs and our customers' needs at a lower total delivered cost. The project's on track and we continue to expect an IRR above 25%.

On behalf of the business, I'm pleased to also announce that the board has approved a series of projects that like Valliant will enable us to further improve our world-class containerboard asset base.

These projects totaling about $300 million of total investment across our system have a collective IRR of 20% and will further improve flexibility across the network, enhance our product quality, and reduce manufacturing and supply chain cost.

We're excited about the benefits these investments will provide for our customers, the business and our shareowners. So, let me move on to Consumer Packaging, slide 10.

In Consumer Packaging, as you can see on the slide, total segment earnings were down $12 million sequentially, of which about $10 million is attributable to our business in Asia where earnings were substantially lower as depressed demand and intense competitive pressures resulted in lower prices and volume.

Earnings were also lower in Europe due to a number of unfavorable items including a lower volume, some higher operating expenses and the impact of unfavorable FX impact due to the weaker euro.

Conversely, earnings in North America were higher due to seasonally stronger volume and lower maintenance outage expenses partially offset by lower prices and a slightly less favorable mix.

Turning to slide 11, we wanted to provide an update on a couple of significant projects that are under way and that are focused on strengthening and creating more value in our North American Consumer Packaging business.

First, the sale of the Carolina Coated Bristols brand is complete, and the transition of the Coated Paperboard business at Riegelwood into our world-class assets at Texarkana and Augusta is on track for later this year.

Following that transition, we will begin the mill conversion project at Riegelwood, which will become 100% pulp, and activities to facilitate that conversion are under way now and on schedule. These changes will streamline and strengthen the Coated Paperboard business while improving and growing our world-class fluff pulp business.

Secondly, the expansion of Kenton, Ohio, facility to support growth in our food service business is on schedule as well, with the facility expansion complete and equipment being moved in as we speak, and to be online within the next 90 days.

This expansion will enable us to support the new business that we're being awarded by both existing and new customers that benefits both our Food Service Converting and Coated Paperboard businesses. Both of these moves reinforce our commitment to our customers in this important segment and will create long-term value for our shareowners.

Moving to Printing Papers on slide 12. Earnings increased in our North American paper and pulp business due to a more favorable product mix, better operations, and lower input costs. And this was partially offset by higher planned maintenance outage expenses.

Prices were higher in Europe, earnings were lower due to higher planned maintenance outage expenses. Brazil continues to be significantly impacted by the recession and reduced domestic demand that comes with that. Normally, we would have seen a pickup from the seasonally slower first quarter, but that did not materialize this year.

Second quarter earnings were down $18 million year-over-year in our Brazilian business. And we do expect the current conditions to persist through at least this year and into next. Turning to Ilim on slide 13, the JV delivered another – a very solid quarter of results on increased volume and improved pricing.

Costs were higher due to higher planned maintenance outage expenses and inflation. Operations continue to perform very well post the ramp-up of the major capital projects which were completed a year ago. As noted earlier, the FX impact on the JV's U.S. dollar-denominated debt was favorable in the quarter.

Looking ahead, the JV is expecting inflation headwinds to continue and to face some price pressure on softwood pulp in China. However, the outlook remains very favorable due to less maintenance outages, which will enable higher volumes and continued strong operation.

So before I move to the outlook, just a couple of other highlights that I'd like to talk about. First, on slide 14, we raised $2 billion of new debt at an average coupon of 4.6%, and this was for two purposes. One was to fund a tender offer for $1 billion of existing debt with an average coupon of 7.5%.

And secondly, to enable a $750 million contribution to the pension plan, which was voluntary. With both of these moves, we've clearly strengthened our already strong balance sheet.

We've also been very active with the share buyback program in 2015, having bought back $420 million in shares year-to-date, which brings our total purchases against the $3 billion authorization to about $1.9 billion.

So moving to the outlook for the third quarter on slide 15, volume will be seasonally higher in North America and Brazil Papers, while North American Industrial Packaging will be generally flat. We expect prices to be mostly stable across the board, with improving prices in European Papers offset by continued pressure in EMEA Packaging.

We expect the challenging conditions in Asia to persist into the third quarter. We expect good operational improvement in North American Papers & Pulp, and some improvement in Brazil as well.

We expect continued improvement in Industrial Packaging, due in part to Valliant start-up ramp-up cost not reoccurring in the third quarter and better performance in our Consumer Packaging business. All-in across our North American businesses, we expect this improvement to be around $25 million.

Input cost will be a headwind in the third quarter as energy, OCC and rail rate increases hit the North America Packaging businesses by roughly $35 million. Brazil faces some additional headwinds as well, mainly on wood and electricity cost.

Maintenance outage costs will be substantially lower, about $90 million, as we move from the heaviest to the lightest quarter of the year. As far as the Ilim JV, we expect operational earnings to improve due to fewer outrages in the third quarter, which will enable higher production and sales.

IP's share of this expected operational earnings improvement in the third quarter is roughly $10 million. And for the purposes of forecast, we don't attempt to forecast FX, so we have here FX stable as of the end of the second quarter, so a non-repeat of the positive $0.06 FX impact. So with that, now let me turn it back over to Mark..

Thanks, Carol. I will pick it up from Carol on slide 16. Before I do the wrap-up and open it up for questions, I want just to spend a minute looking at margins across our major businesses around the world. I think this slide captures the strength of IP and the major positions we have in the key markets that we want to serve.

The message here is that IP – the IP that we built today is less cyclical, and we continue to find ways to improve our position and our results.

In the businesses where we have some significant headwinds, cyclical headwinds, I would add, like Brazil, for example, we are generally holding our own with very strong margins, and we'll come out of this recessionary environment a much stronger company.

So in closing, moving to slide 17, International Paper continues to perform well and deliver results. When you look at what we're doing, given the severe headwinds in Brazil and in Asia, and with the strong dollar, it truly speaks of the strength and reliability of our company, and of our performance.

Some of these challenges are more significant than we originally thought coming into the year. On the flipside, we're enjoying strong performance out of our Ilim JV, which Carol covered earlier. And that positively impacts our earnings. Outside of some of these select areas, the rest of the company is performing pretty well.

Our margins, earnings, free cash flow, and our return on invested capital at a healthy spread above our cost of capital, are all evidence of this. We continue to achieve and grow our attractive margins through consistent execution and internal initiatives that are unique and value-creating to IP.

We have a pipeline of accretive investment options, the Kwidzyn Coated Paperboard investments, the Valliant number 3 machine, those are two of the more recent ones, and there are more to come, as we highlighted today, all making good businesses a lot better.

We are generating significant and reliable free cash flow year-after-year, and that enables us to return a meaningful amount of cash to our shareholders through our dividend, our share buyback programs, as well as fund some of these attractive value-creating investments.

Our capital allocation mission remains all about high-return generation for long-term value creation. That's our focus, and that's our commitment. And with that, I'd like to open it up for questions. Thanks..

Our first question comes from Steve Chercover with D. A. Davidson..

Thank you, good morning. I had a question about the Sun joint venture in China. I noticed the JV partner is transferring its ownership and it's an acknowledgement that performance has been inadequate.

So, does that have any implications for you?.

Good morning, Steve. This is Mark. Yeah. The – what you saw there is our partner has a couple of different legal entities, and he's transferring some of the shares from the JV into another legal entity, perfectly allowable under our shareholder agreement. We're not satisfied with the performance. We've said that a number of calls now.

China is really tough right now, overcapacity and some of the other challenges. But this transfer doesn't really affect our partnership. What we are doing is really working together with our partner in China to kind of manage the JV to the best possible outcome.

And we're not finished with that work, but this particular transfer doesn't change the way we're going to operate or doesn't change our partnership..

What I was wondering, if you were the sole owner of those assets, would you operate them differently?.

We're – no. We're operating as a majority partner, we're operating the International Paper way. So, we're trying to make the profit maximizing decisions. So, that's why we're working on the high-end mix and really running our capacity to the orders that we want for the economics that are available.

And I think we would do that and we do that in collaboration with our partner today. And we do it that way if we owned it all which is not our intent. But we wouldn't change a whole lot..

Well, that's good to know. So, ultimately, to use a phrase that you use, it comes down to industry structure in China. And then one other question, please, on Printing Papers. I just want to get a sense of what's going on domestically since it was amazing to me that the price and mix is up given what you said in Brazil.

So, are things going better domestically, or it's just that you're getting out of some of the commodity businesses?.

Steve, I'm going to ask Mike Amick who leads that business for us in North America to give you a perspective on that..

Thanks. Good morning, Mike..

Hi. Good morning. This is Mike Amick. We're having a – domestically, both the quarterly performance as well as kind of year-over-year is improved. Once we're seeing strong relative growth domestically with our business almost a factor of three kind of year-over-year versus the market. So, it's a real good commercial story around the brands.

Pricing is a little bit down domestically. But as you stated well, from a mix standpoint, we're overcoming a lot of that. So, it is a strong story..

Great. Thank you very much..

Our next question comes from Gail Glazerman with UBS..

Hey. Good morning..

Good morning, Gail..

Can you give a little bit more color on this $300 million capital program for Containerboard? Any sense of the timing? How many years that's going to lay out? And maybe a little bit more color on some of the work you're doing.

And specifically, is it expected to have any sort of material positive (19:00) component?.

Yeah. Hey, Gail. It's Tim. Yeah. The work – so, it's important because the work that we're doing will be done primarily as we go through our annual outages in the facilities that are affected. A lot of that work will start either very late this year or early next year and kind of go through the year.

So, impact to the business and having the capability is more of a 2017 type of timeframe. You ask about capacity. What we're doing is we're actually making investments that give us the flexibility that we need. In some cases, it's around products and around geography, also around seasonality.

So, these projects will add 250,000-plus tons to our system and that gives us the ability to optimize the system and make sure that we're supporting our customers in the best possible way.

So, I think 2017 timing, most of these are fairly straightforward from a technical standpoint, so they'll be completed in the annual outages and then they will come up fairly quickly and give us the flexibility that we need mostly on a seasonal basis, but also from a product standpoint as well..

Okay. Thank you.

And can you talk a little bit about Consumer Packaging and the price weakness there? Specifically, was any of that and to what extent in the domestic market?.

Hi, Gail. This is Mike Amick. Can you repeat the question? It was breaking up a little. I didn't....

Yeah. I guess, some perspective on the Consumer Packaging market domestically.

Were your issues really in the quarter predominantly international or was there any sort of weakness or softness in the U.S.?.

Yeah, from a, domestically, we are seeing it is a little sloppy out there. From a shipment standpoint domestically, we're down about 2.5% versus where we think the industry is about 1.5% overall, but most of that is due to exports. So, we're, domestically feel pretty good about the Coated – the Coated Paperboard business.

And most of the issues that were noted are international..

Okay. Thank you..

Gail, just let me add to Mike's. On the international piece, some of that was what we talked about earlier, the Asia piece is reported into Consumer Packaging, the Sun piece, and that was a significant piece of that. But also in Europe, we just had some onetime issues that are not chronic, just maintenance outages and some other onetime cost.

So, the real international issue, if you will, from – impacting the results is what we talked about with Sun..

Okay. Thank you..

Our next question comes from George Staphos with Bank of America..

Thanks, everyone. Good morning. Thanks for taking my question and the details. I guess maybe first start – first point, with the pension funding, Carol, what does this do to your required funding for the next several years if you haven't provided that in the past? Appreciate it..

Yeah. With this contribution, of course, a little bit will be dependent upon how the whole year ends, where the liability accounting goes and how the asset performance is. But generally speaking, I would say, this would, with our current projections, would push out any required contributions for the next three years.

We wouldn't have anything required..

Okay.

And, I mean, aside of the obvious where we saw that you were buying back stock even into the third quarter, could you update us perhaps a bit more in terms of your thoughts on that being an appropriate use of capital relative obviously to the balance use of capital for dividends? And I want to tie it back to some of your capital projects going on and then I'll turn it over after that..

So, George, what we said, of course, is our capital allocation strategy is we're generating a lot of cash and we believe that that cash generation allows us to both return some of that cash to our shareowners through the form of the dividend and then we've talked about 30% to 40% of free cash flow through the dividend.

We also have said that there's an opportunity to return cash through the buyback and that we would use the buyback, targeted opportunistically. And that also still, we believe we have enough cash flow then to also fund the good ideas. And we talked about some of those today. And so I think you'll continue to see us progress along that pathway..

But I guess, the fact that we saw you buy back more in the third quarter, does that suggest you see more opportunity with the shares here or this is just part of your normal program and balanced approach?.

(24:05) once again, as we said, it's part of our normal program. And we're going to make our decisions as we go. We're going to be opportunistic. And we're going to balance all those needs as we think about today and as we look forward..

Okay. Last question. And, I'll turn it over. Can you – you've mentioned the returns on the $300 million worth of projects and you mentioned some of the reasons you're bringing it in within Industrial Packaging.

Now, as we look at it, you said you're also adding within this about 250,000 tons of capacity in a market that I recognize you, take a longer term view than a quarter or two, that has been perhaps, at least from the vantage point of some people, a little bit softer than would've been expected.

You, in fact, had to take some economic downtime in the quarter from the data that you had in the slide deck, I think around 55,000 tons.

So, help us understand why, while adding flexibility, you're also adding capacity, why that is the right move in Industrial Packaging market where there's been a little bit of choppiness here in the last couple of quarters. Thanks, guys, and good luck in the quarter..

Yeah. Hey, George, it's Tim. Well, I think....

Hello, Tim..

Hey. We do take a longer-term view. We believe that the market will grow over time. If you wait until the growth occurs, to make these types of investments, you've waited too late. So, we're running a very large, very complicated system. And the way we think about it is, how do we optimize, maximize margins sustainably over time.

So, this just gives us more capability across the system to run it the way we need to. And these are the types of projects that we look for on a continual basis. So, we'll be looking for more of them. This is one of the ways that we think we can create shareowner value..

Tim, do you anticipate the returns would cover inflation at least?.

Oh, yeah. I mean, these are 20% returns. These are three times cost of capital. So....

Okay. We'll turn it over. Thanks..

Our next question comes from Mark Weintraub with Buckingham Research..

Thank you.

Sticking kind of on that, the capital allocation line of question, can you give us a bit of sense of an update of where you think cap spend might be next year? I realize you don't have any finalized plans probably, but a preliminary sense and what the run rate for the next couple of years might be in your opinion at this juncture?.

Yeah. Mark, Carol. We told you that for 2015, I think we said our CapEx targeted about $1.5 billion, and we said that was the plan. We've not finalized our plans for 2016. And as we've talked about it, if we have these ideas that are – the bigger ideas that are value-creating, we'll balance that against the overall needs of the system.

So, without giving you a 2016 number, it's logical to think that there could be an uptick in 2016 due to the significance of this level of project in our best business. But we'll firm that up when we get to – probably talk about the third quarter and then into the beginning of next year..

Okay.

As we think about the spend, how much of it is going to the 20%-plus type of return projects versus how much of it is more environmental, maintenance with lower returns? How might we think about that?.

So, as we've talked about it – and again, these are round numbers, we provide a lot of this information, and it changes a little bit. If you think about the company, about $1 billion for maintenance regulatory on an ongoing basis to take care of the fleet we have today.

And then if you think about the balance, the $400 million to $500 million, about half of that would go to what we would call, let's say strategic projects. A great example of that would be the expansion of Chem (28:22). Strategically, growing that business.

You could talk about that as the Riegelwood conversion, strategic project to, say, grow and then strengthen the fluff business.

And then the balance, which would be – and that would have – that would be returned capital – and then the balance, the $200 million or so would – $200 million to $250 million, would go towards high return cost reduction projects. And the returns on those projects are 30% plus. That's been the capital allocation for the company.

But once again, if we get good ideas where there's a bigger opportunity, like we've talked about in the Industrial Packaging business, it'll have to be balanced against those other things.

And one of the things that we'll think about is, if we can deploy capital at good returns that's value creating, we're going to stay constrained on CapEx, but we're not going to slow ourselves down intentionally when that's not a good idea..

Okay. That was really helpful. Thank you. And just one other one, if I could. Couple years ago, you had the annual Investor Day. And when you first mapped out the capital allocation strategy, you talked about ramping the dividend up pretty quickly for a few years and then probably getting to a more moderated rate.

And I think that, at the time, you kind of talked about like a three-year ramp in the dividend. And I think this would have been the third year.

Is that still the way we should be anticipating things, that we have one more sizeable ramp in the dividend before most likely moving into a more metered increase?.

You know, Mark, I would never predict what the dividend will be, of course that's Mark and the board to decision that, but our strategy is pretty clear. We said, as we can grow the earnings and the cash flow of the company, that the dividend's an important part of that, and we'll evaluate that.

We said the dividend is going to be meaningful, incremental, predictable and then there'll be an opportunity to reevaluate that at the right time..

Thank you..

Our next question comes from Dr. Mark Wilde with BMO Market..

Good morning, Carol..

Good morning..

To just to kind of follow on Mark's question. You guys have had a 5% EBITDA growth target sitting out there. Any updated thoughts on that? It looks like it will be a challenge for this year, just judging from the first half..

Hi, Mark. This is Mark. That's a great word. I think it's – another way to ask that is how realistic it is. It's definitely a challenge for this year. That 5% EBITDA growth target that I talked about before we started the year, as we headed into the year, had a certain set of economics assumptions attached to it, some of which are not materializing.

So, yeah. It makes it pretty difficult. It was a bit aspirational, as I mentioned in follow-up discussions. But that's the kind of growth level we need to be shooting for as a company, to really produce the kind of returns our investors expect. It won't be an even process, obviously.

But as we talked about in the results, we're pulling every lever we can with the company we have, and we're going to continue to shoot for levels like that. But it's definitely a challenge with some of the economic activity we see in Brazil, for example, being in a – I would say, a much deeper recession than we probably considered going in.

And China being a challenge. Those two areas alone, and stepping back a bit instead of moving forward, take a big chunk out of the ability to do that. Earnings per share, on the other side, it's not one metric. Earnings per share, it's also important and that is up in that neighborhood year-to-date.

And what is probably our overall guiding principle for long-term value creation, which is ROIC, we've got that in a zone that we want to be in, a couple hundred basis points above our cost of capital, and we'd like to be able to show that, through good times and bad times, we've got a company that's flexible enough to really sustain that, and generate that near $2 billion in cash, and have that be something that investors can depend on.

So, yeah, challenging is a good word for the 5% EBITDA goal. But we don't give up easily. So, we'll keep working on it..

All right. I'm glad to hear that. And Mark, I wondered if I could also get you to just maybe take two steps backward. We're at a period where we've got a lot of big foreign exchange moves out there.

And I wondered, if you look across the IP portfolio right now, where would you say the foreign exchange movements are creating the greatest stress, or the greatest changes, in your business?.

We got – we've got several impacts and, obviously, Carol is tracking that for us. There are puts and takes, and some of them are not completely intuitive, but I'll ask Carol to kind of give our summary of the overall.

And then if there's a specific area, we've talked about Containerboard and some of those long-term demand issues, be happy to comment on that.

But Carol, the overall summary?.

Sure. So, the easiest one to do the math on, and it is a headwind for us, is strictly the earnings that we get out of Europe, and the earnings that we get out of Brazil, are coming in a currency that's weaker. So when we convert that to dollars, there's less. And so, as we talked, the first quarter call, we said a 10% strengthening of the U.S.

dollar is a $50 million-type headwind. That's probably still pretty good math, and we know the dollar has strengthened more than that. So that's the easy math. Where it diverges, and it depends, is the currency in a country, how it impacts the market access and the competitiveness. In the case of Russia, the weak currency has been great.

We're doing well there. We make in rubles. We sell in dollars. We've got margin expansion. And then conversely, in Brazil, it's actually been – hurt us. So, you got a good guy. You got a bad guy. And then in the U.S., we are exporting 20% of what we produce, and so while we're able to export our products, our margins are down.

So, long answer is, there's pluses and takes on the market side. But overall, a stronger dollar is a headwind for International Paper, and it's probably a bit more of a headwind than when we first anticipated. But we're managing through it, I think, quite well..

Okay. And I just -just a couple of follow-ons on the FX impact? One is, you've talked over time about wanting to export kraft linerboard from the U.S. to supply your offshore operations.

I wondered, is the dollar strengthens, whether that strategy is shifting at all? And then I wondered if you could comment on some reports we've gotten of containerboard imports coming in from Europe and from Australia?.

Hey, Mark. It's Tim. No. It doesn't change the strategy. Currency moves up, it moves down over time. As Carol mentioned, it has hit our margins in certain places, but we believe in the channel for the long term. So – and we make good money in the channel. So, we would make more if the dollar was weaker, but we still like the business that we have today.

And so, if it changes dramatically from where it is, we can always reevaluate, but nothing that's happened that changes it today. Australian paper, I think we've had some market reports of West Coast activity, but not in a major or significant way that I'm aware of..

Okay. That's helpful.

And, anything on the East Coast? I'd been hearing a little bit about maybe some European paper, Tim?.

Hadn't heard it, no..

Okay. All right. That's helpful. Good luck in the second half..

Thanks..

Our next question comes from Mark Connelly with CLSA..

Thank you. Just two things. I wonder if you could tell us how significant the system optimization impact of Valliant might be. I'm thinking in a system as big as yours that the impact is going to be pretty regional, but it is in a pretty important region, so I'm just wondering if you could scale that for us..

Yeah. Hey, Mark, it's Tim. What it does for us is it gives us a product we need overall and certainly in a geography. So, it helps us as we shift down – product down into Texas. It helps us with the West Coast, and it also helps us with the Midwest. So, this 360,000 tons we're running primarily medium, which we're short on medium to begin with.

So, it's a product we need and it's freight-advantaged to the places we need to get to..

Okay. That's helpful.

And just one other question, how is Orsa doing and is that a place where you're likely to find attractive reinvestment?.

Hi Mark. It's Mark Sutton. Orsa is living in a containerboard and box market that tracks GDP exactly. So, GDP is heading toward minus 2 plus a little bit and that's what we're seeing in demand. So, we've got some big customers that are in special segments that are probably doing a little worse than GDP.

One of them is the electronic segment, big year last year with the World Cup and televisions, a soft year this year. And we've got big poultry and protein customers that are having issues with the regional drought. So, demand is down.

The good news is on the internal improvements, efficiency in our box plants and in the containerboard mills made a lot of improvement. So, further investment, I mean we'll keep our eyes and ears open.

We really do need to get the improvements that we think we can get even with a difficult economy at Orsa before we go to a next step, but we are improving internally. The market's challenging, though..

Okay. But it sounds like the assets are running pretty well..

We are – I mean, we've made some improvements on the mills and the box plants. We've done a lot of best practice transfer from our U.S. system which has really taken hold. And so, we're making some improvements that we can keep – hold and keep and we need to get the commercial piece – commercial piece up..

Very good. Thank you..

Thanks, Mark..

Our next question comes from Chip Dillon with Vertical Research..

Hi. Thank you. Good morning. Carol, just one quick clarification. You mentioned the prepayment on the pension plan would prevent the need for having to make a contribution for three years.

Not to be picky, is that – does that include 2018 or are we talking 2015, 2016, and 2017?.

So, I was talking 2016, 2017, 2018 generally speaking. Still, things can change so, but under the assumptions we would have today..

I understand. Got you, interest rates, et cetera. And then on the CapEx, you mentioned this year you're spending, I believe you said around – depreciate (39:47) $1.5 billion or so.

Would the projects and the good ideas you talked about including the Industrial Packaging $300 million initiative, does that alone, given the pace you expect that to take, likely take that number up for next year or would you have to find some other things? And I'm thinking there might perhaps be some offset from the Boiler MACT situation, I'm not sure when that actually phases out.

But maybe you could let us know how that looks right now..

Yeah. And that's why I said we haven't finalized our numbers for 2016, but with the slug of capital of that size coming in, a very important project. It's likely that it would be – might be difficult to maintain the spending at the one-size level, because we might not want to.

I mean, what we want to be careful about is not delaying some really good ideas that are the cost improvement ideas. So, we'll look at it, we're going to stay in a capital constrained environment. We're going to be very judicious. But we're going to want to make sure that we can run the system the way we want to..

Got you. And this is one for Tim. You know I know with the, you mentioned the volume. I think, Carol, in her comments, was up in boxes about 3%, if I'm not mistaken, year-to-year. And as you look at your system and I think about the whole country and the continent really not adding, to note, any virgin-quality linerboard.

Are you all having to pull tons in from offshore because the industry data don't seem to suggest that, or has so far you've been able to get those extra tons by flexing your system? And I suppose as you look at 2016, if we see another similar type growth year and kind of before this incremental tons come on, could you see yourself in a situation where you might have to pull some tons from offshore back into the states?.

No. I mean, situational, Chip, a moment in time but I don't think so. I mean, I think we have a pretty flexible system. We're adding to that flexibility, so that we can do what we need to do. And you mentioned the 3%. That was sequential not year-over-year.

But, yeah, generally, we have a more favorable view on longer term growth, and we want to make sure that we are doing now what is needed for future periods. So, that's the reason for some of this investment..

Okay. And then the last one I suppose for Mark. I noticed the U.S. portion of the Consumer Packaging business and it's great that you gave us that detail because the overall segment was down, but certainly the U.S. part was up nicely year-to-year. And I suppose some of the initiatives there including food service are helping.

Is that business sort of seen as a rising star within IP, the domestic Consumer Packaging business, or even though it appears its returns are still below the other major segment, Industrial Packaging, it still has a ways to go?.

Chip, this is Mark. I think Consumer Packaging in North America, as we've said, is an important business for us. We've got some really, really good customers both on the coated board side with the high-end SBS grades that we make in the U.S. and on the converting side with our cup business.

And it is growing and it is a business we think we can improve, I mean, really, Riegelwood was kind of a double, not a single. We're improving our fluff pulp business, but that also improves our Consumer Packaging business by putting all of our board production in two of the best mills in the world instead of spreading it across three.

And we're growing our Food Service business and continuing to look at strategic options to kind of improve that business. And so, it is important to us. International Paper increasingly is moving in more packaging. And Consumer Packaging, we made the investment in Kwidzyn in Europe for high-end board and that's working out really well.

And you mentioned Food Service here in the U.S. and it is – I don't know about a rising star, we don't use those terms, but it is a business we're excited about..

Got you. Thank you..

Our next question comes from Scott Gaffner with Barclays..

Morning..

Hi, Scott..

Just going back to these capital investments. Mark, you talked about your view of market growth going forward, I guess, the market's been relatively flat at least in North America over the last few years.

Can you talk about what's driving that view for potential market growth as maybe as we move in, later into 2016 and 2017?.

Yeah, Scott. I think one of the things we kind of probably need to just step back on, we've talked about our Industrial Packaging business as a multichannel business. So, we've got a Containerboard business that underpins the Industrial Packaging business.

And we view containerboards – the kraft liner component of Containerboard as a global – globally competitive product that the U.S. south is blessed with the right fiber to be globally competitive and we're the largest producer of that.

So, we've had long-term strategic outlets throughout the world, not because our price is good or our price is bad, because they need the product. So, when we talk about investing in our Containerboard system, think outside of just the U.S. market, we're thinking about all channels.

Our own box business, the open market customers we have which are fantastic customers in North America and the open market in IP-owned box plants overseas and non-IP box plants. That's the premise we start with, not the 1% or 2% or lack thereof in the U.S. market.

And, the other thing you got to remember is we're always going to have fluctuations in a converting value-add business. We're going to make the product for the orders we have in all three of those channels. We've got seasonality with maintenance outages. So, we end up having to manage inventory differently.

A lot of things that Tim described make that business better. And if there's growth, we capture it, absolute growth. If there's not growth, we lower our cost by making some other decisions down the road, what with capital or other types of decisions. So, it's a win-win strategy of making a really good business better.

And I don't think about it as a domestic issue of the box market in the U.S. driving every one of these decisions. And we've shown that quarter after quarter after quarter, in good FX times, bad FX times. When a product is good and it's needed, it works..

Great. I appreciate that.

And then on the returns from these projects, the 20% IRR, how much of that is driven by internalization of tons that you're currently buying in the market versus this overall system optimization strategy?.

Yeah. It's a mix of all those things. It's making more of the volumes that we've had to buy in the past as the agreement comes to the end, but it's also cost reductions, not only fixed because of the volume but variable as well. So, these projects, they help improve quality. They give us the flexibility we need.

Just to add on one point that Mark made, we're running a system where the way we think about servicing that system across all the channels is pretty critical. And the carrying costs on a few incremental tons of inventory to support our system is pretty low versus the operational cost of not having what you need, where you need it, when you need it.

We're trying to make decisions two months and three months out on somewhere between 12,000 SKUs and 15,000 SKUs of board that get used on any given day. And so, if we're wrong by 1% in terms of accuracy, it's costing us $10-plus-million to fix all of that, and sometimes a lot more.

So, all of these projects not only give us incremental capacity in a given region for a given product, but they help us manage and optimize that system..

Thanks for the answers. Good luck in the quarter..

Our next question comes from Anthony Pettinari with Citi..

Good morning. Just a follow-up on the containerboard system optimization. When you look at the capacity that you'll add, not only the 250,000 tons but maybe even thinking about opportunities for growth three years to five years beyond that.

Does the opportunity to add low cost capacity come from debottlenecking existing sites, or do you see a potential to repurpose assets that are producing other substrates, like white paper? And then just beyond containerboard, looking at fluff, following Riegelwood, can you talk about conversions generally?.

Anthony, this is Mark. I think we've got opportunities in, when you look at our asset base, and I've commented on this before, we've got very, very good assets in really all of our businesses.

They happen to make the product they make today, but can be reconfigured to make other products, and we've got the right work force, the right technical age of the assets, and what's probably more important than anything on the cost side, is the right fiber basket.

So, we've got opportunities, a lot of opportunities in the company, to make our good businesses better by organic debottlenecking, as you mentioned, but also by facility conversions. There's further opportunity in fluff if we need it, and our customers need it.

There's opportunities in converting assets that are currently making one type of product to make another type of product. And that's one of the benefits we have is, we have a lot of choices about how to do strategic projects that help our existing businesses. We built what we have by big M&A activity.

And what we didn't say is, we want to just kind of be satisfied with what we have. We want it to be the absolute best it can be. And now we're investing in what we built, in one way through M&A, we're investing in ourselves now by making what's really, I think, competitive and good, great..

Okay. That's helpful.

Just to clarify, is the 250,000 tons coming from existing containerboard mills, or could those – that 250,000 tons potentially come from another source?.

These investments are coming – that Tim described and that Carol described in the opening comments – are coming from our existing containerboard system..

Okay. Okay. That's helpful. And then I just had a question on the North American uncoated freesheet market. I mean, it's like we're hearing some conflicting things with anti-dumping duties potentially next month. It sounds like some importers have backed off from shipping into the U.S. but, at the same time, RISI had some price cuts last week.

Is the uncoated freesheet market, in terms of pricing in North America, is it getting better, is it getting worse? Is it stable? I was wondering if you could just provide any color there..

Hi. This is Mike Amick. And you see the – in terms of the pricing, we have seen a little bit of slippage. But in the context of the anti-dumping, overall the – you're seeing or maybe hearing some of the same things we are, this will play out over the coming months. In August, we expect to hear a ruling on the anti-dumping.

And we've – but right now, things are pretty stable. Our business right now, domestically, is pretty strong. Little of that is actually coming from what we would consider to be a tailwind from the case itself. This is just continuing to be the strengthening of our business and our brands, which is very encouraging.

So, I think we'll see this play out over the next 60 days or 90 days..

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

Our next question comes from Chris Manuel with Wells Fargo..

Good morning, and congratulations on a very strong quarter..

Thanks, Chris..

I kind of want to come back to – you've touched on this a couple different ways, but I just want to kind of maybe probe a little more about it. When we look at your box shipments, first quarter, second quarter, they were down 1% each. I know industry's been up.

Maybe, is that some related to just mix or timing or – you've been now a couple quarters below industry. And then two, kind of in relation with adding capacity and doing some work there, right? Clearly, you're, at least the data I'm looking at, shows your corrugated shipment's up. So, there's more going to export and other places.

But when you think about balancing that, it sounds like – just maybe help me understand the process of, you want to have the right grades, the right places, so maybe it's – even though you're going to have it, you don't necessarily operate it.

You take more downtime in it? Am I thinking about that the right way as well?.

Well, we run what we need to run to service the customers that we have. So, yeah. In a moment in time, I see the perspective of there being a contradiction there. But on the box side, it's all the things you mentioned.

We made some choices about customers late last year that kind of went through the pipeline, and exited our portfolio of customers earlier this year, and some of the newer business that's coming in is, as we mentioned last quarter, is ramping up over a period of time. So ,yeah.

In a given quarter or a given moment in time, you can have some of these disconnects, but we do believe that our business grows over time, and we want to make sure that we're supporting that growth the most economical way..

Is it your anticipation then that, probably as we get towards the end of the year or maybe into 4Q, that you'll begin to track sort of more in line with industry levels?.

Well, it depends on what the market does. We know we have a pipeline of business coming in. We know that we have a customer portfolio that is performing at various levels. In some cases, some of the customers that we have are suffering their own market-related issues around share and the type of products that they make. So – but yes.

Generally speaking, we would expect that over time, we would track closer to market..

Okay. That's helpful. And then, Carol, in the past you've talked about your capital spending plans that being in the – you hit about a $1 billion or so of maintenance, but being a $1.3 billion or $1.4 billion kind of those extra spending elements helped offset inflation in different components that way.

With the identification of some of the new projects and then this year I think you were already a bit elevated, should we think about as a whole across your system if you're spending $1.5 billion or so this year, and I think you kind of hinted that potentially it could be even taking a little tick up next year, that as a whole, you're spending more than offsets inflation or is there something you're seeing potentially on the inflation side that you think might be a bigger hole to offset?.

Chris, I think you really hit it on the head at the end. And once again, you step back from our capital allocation strategy. We have said we're going to return a lot of our free cash to our investors, which we're doing. But there's cash left. You can reinvest that cash in acquisitions which we've done, some with great success and some with challenges.

Or we could take some of that cash and reinvest that cash into businesses that are above cost of capital returns to create even more value. And we've been talking about this. So, the anticipation is, is that incremental investment is for earnings growth. It's to do more than offset inflation.

We think about that base spending as the kind of things we need to do, that $1.4 billion level, $1.4 billion , $1.5 billion and it just depends point in time of some the maintenance expense we have about as a sustain level to kind of just keep pace.

But what we're seeing, what you're seeing us do now is reinvest in businesses that we have a right to win and to create more value. Not just to stay still.

And we think that given where we sit as a company right now, that deploying some capital in that direction might possibly make more sense than say what we've done in the past which is spend it on a bolt-on acquisition. But at the end of the day, it's cash being deployed to create to value.

I hope that kind of answers your question and kind of puts a face on this incremental capital that we're talking about..

It does. Thank you..

Our next question is from Philip Ng with Jefferies..

Good morning, guys. You took some economic downtime 2Q in your Containerboard business. Can you kind of help us frame what your expectation is in 3Q and then back half in general? Are you comfortable with your inventory levels? I appreciate you know. You guys obviously have transportation (58:02).

But just kind of help frame how should we be thinking about it sequentially in Q3?.

Hey Philip. It's Tim. As a general rule, we don't forecast how we're going to run our system going forward, but the philosophy is that we try to maximize our earnings performance given all of the – if you heard earlier, all the considerations that we take into account, about how to have the product we need in the right place at the right time.

And so, the downtime that we took, export channel was a little bit softer than we had anticipated in the second quarter. And so, we balanced our system out to account for that. That's just how we run it..

Got you. And can you help frame how you thinking about box demand in the back half? I appreciate you got some new business coming in. And, Mark, you mentioned earlier, coming in the year, there's a more upbeat outlook on the macro. Obviously, Brazil and China slowed down a bit. But just curious to get your thoughts on the U.S.

economy and box shipments, broadly?.

Yeah, for – this is Tim again. For the indicators that we look at, we still think the second half of the year is going to be pretty good. We think that 2015, from a box demand standpoint, should be a fairly solid year. Now, we're not talking about 2.5% or 3% growth but in that 1% to 2% range based on the indicators we look at.

Those indicators, obviously, get a lot fuzzier the further you look out in time. But here, in the immediate future, we still are somewhat encouraged by market growth..

Okay, that's helpful. And then when you think about the investments you guys are making, you're obviously stepping a lot of that for internal investment.

Is that a, kind of a reflection on how your pipeline was looking for M&A? And do some of your recent investments abroad on the M&A front, has that kind of set the hurdle rate a little higher going forward if you, do you approach M&A abroad?.

Phil, that's a great question. And, what we've been saying is – what guides our investment strategy is creating value. And we've done a little bit of everything. Large M&A, as Carol said, some of it's worked out very well. Some smaller things in developing markets that are still a question mark or have not worked out very well.

And because of that, we haven't done as much, other than cost reduction, as much of reinvesting into some own organic businesses. The Containerboard business is a great example. We didn't have that business to invest in several years ago. But we have it now and it's the best opportunity to create value of all the choices we have.

So, it's not so much that the hurdle rate's changed. It's back to what guides us, and we believe we can create more value for the long term, which our shareholders should appreciated by making these investments instead of some other choices..

Okay. Very helpful, guys..

Our next question is from Debbie Jones of Deutsche Bank..

Good morning. You guys have highlighted a lot of expected investment in North America. Mark, in the past you've talked about potential for investment in containerboard in Russia through your Ilim JV.

Can you just talk about or frame this opportunity and whether or not it's something you'd be considering for 2016, or is this something we'd be looking at as more of a three-year or five-year time horizon?.

Well, obviously, the investments in Ilim are a process with the Ilim board, which we, of course, are members of. But we do make some containerboard in Ilim and it's going very well. And Russia is a great soft wood basket.

But right now the focus on Ilim is really getting the maximum potential of the investments we've already made, in specifically the Bratsk pulp mill, and that's going very well. And so, Ilim has a Board and a CEO and we're involved in that and strategy is being developed. But Russia is a great place for containerboard from a fiber standpoint.

More logistics issues have to be solved over time. But we have a small position in containerboard through our Ilim joint venture and it's going well. But there is no imminent next move. It's really optimizing what we're doing right now and that's going well..

Okay, thanks. And, just one last one on printing paper. Your maintenance target for the year seem to come back I think primarily related to Brazil and North America.

Is there anything that we should read into that there, anything being pushed out?.

No, not – This is Mike Amick, Debbie. This, our maintenance, for the large part, at least (1:02:41) the biggest piece of our maintenance is behind us in the first half. We still have some – a couple of outages here in the second half, but nothing is being pushed out in North America..

No, the maintenance outages outside of North America, they move around based on what we're trying to accomplish in the particular outage and then managing, obviously, seasonality issues with customers. Some of the mills like Kwidzyn are comingled with coated board products. And so, that is another market that drives the timing decision.

But, no, I wouldn't read anything into that. We're continuing to do our maintenance outages to make sure that what we run is, first and foremost, safe and reliable and can make it between outages in the best possible, lowest cost way..

Okay. Thanks. Good luck in the quarter..

Thank you, Debbie..

Our final question comes from Paul Quinn with RBC Capital Market..

Holy cow, snuck in there. Just two easy questions. One on the Pulp side, realizations in North America were up $8 quarter-over-quarter.

Just wondering, is that a mix issue?.

That, it is a, primarily driven by mix. We had a little bit better performance in our fluff system which was able to generate some, obviously, improvement from that standpoint. So, primarily, yes, Paul..

Okay. And then just over on India with Printing Papers, lost money again in the quarter.

Is there a longer-term plan here to reverse the slide?.

Paul, yeah. The India business – the volume is growing. We've got – we've had some cost issues. And so, there is a plan to improve the business. And as we said originally, what we're trying to figure out with the Paper business in India is we're trying to figure out the market and what our participation level could be in the future.

Some of the India numbers that we report are really other activity that we have beyond just the Paper business that just – is kind of the carrying cost when you start in a new region. But the underlying demand and how we're running has improved. But we definitely have that in this overall review that I've talked about doing with our portfolio.

And India, like everything, else is a part of that. And we're making progress on that..

Great. Thanks for the help. Best of luck..

Thank you. That concludes our Q&A portion for today's presentation. I will now hand the program back over to Jay for any closing remarks..

Well, that concludes the call. Thanks for taking the time to join us this morning. As always, Michele and I will be available after the call, and our numbers are on slide 18 of the appendix. Thanks, and have a great day..

Thank you for joining the International Paper Second Quarter 2015 Earnings Call. You may now disconnect your lines. And have a great day..