Jay Royalty - International Paper Co. Mark S. Sutton - International Paper Co. Glenn R. Landau - International Paper Co. Tim S. Nicholls - International Paper Co. Jean-Michel Ribieras - International Paper Co. Catherine I. Slater - International Paper Co..

Chris D. Manuel - Wells Fargo Securities LLC George Leon Staphos - Bank of America Merrill Lynch Adam Jesse Josephson - KeyBanc Capital Markets, Inc. Mark Weintraub - The Buckingham Research Group, Inc. Salvator Tiano - Vertical Research Partners Scott L. Gaffner - Barclays Capital, Inc. Philip Ng - Jefferies LLC Debbie A.

Jones - Deutsche Bank Securities, Inc. Steven Pierre Chercover - D.A. Davidson & Co. Mark William Wilde - BMO Capital Markets (United States) Gail S. Glazerman - Roe Equity Research Paul Quinn - RBC Dominion Securities, Inc. Brian Maguire - Goldman Sachs & Co..

Ladies and gentlemen, thank you for standing by and welcome to International Paper First Quarter 2017 Earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to Mr.

Jay Royalty, Vice President of Investor Relations. Please go ahead, sir..

Thanks, Paula, and good morning, everyone. And thank you for joining International Paper's first quarter 2017 earnings conference call. Our key speakers this morning are Mark Sutton, Chairman and Chief Executive Officer and Glenn Landau, 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 two of our presentation. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures is available on our website.

Our website also contains copies of the first quarter 2017 earnings press release and today's presentation slides. Lastly, relative to the Ilim JV, slide four provides context around the joint venture's financial information and statistical measures. With that, I'll now turn the call over to Mark Sutton..

Thanks, Jay, and good morning, everyone. We appreciate you joining our first quarter call. I'm going to begin on slide five. International Paper delivered solid results in the first quarter in what was a transitional quarter with many moving parts.

And quite frankly, we see the second quarter as transitional as well given the heavy maintenance outages, some additional costs at Pensacola, input costs that are expected to remain high, and ongoing implementation of previous price increases. All of these should position IP for a very strong second half.

In the first quarter, price realizations were as expected, and we make several price increase announcement across our businesses. This includes a $50 per ton North American containerboard price increase effective in March, which was recognized by the publication index this past Friday.

In addition to that, we have announced and are implementing price increases across North American export containerboard, market softwood and fluff pulp, and our paper business in Brazil and EMEA, as well as the price increase in Consumer Packaging.

We effectively managed through a challenging situation following the January 22nd digester incident at our Pensacola mill and I'm pleased to report that the mill was back up and fully operational in early April. The integration of our newly acquired pulp business is off to a great start and we delivered $14 million in synergies in the first quarter.

Input costs across all businesses were a $55 million headwind with more than half of this driven by OCC as prices increased on average about $40 a ton versus the fourth quarter of 2016.

Additionally, IP received dividends from the Ilim JV in the first quarter totaling $127 million, reflecting a continued very strong year of financial performance at the JV in 2016. Moving to slide six, turning to the financial results. One area that stands out is revenue, which increased almost 8% year-over-year.

This was primarily driven by the addition of our newly acquired pulp business, which I would also note is a business that is growing from a demand standpoint at an annual rate of 5%. Turning to slide seven, I'd like to provide an update on the recovery at our Pensacola mill.

This, as we had said in the first quarter, was a very unfortunate incident, so I'd like to take a few moments to discuss it. First and foremost, I'd like to thank our IP employees for their extraordinary job of responding to a very difficult situation both at the mill and in the surrounding community.

In addition, I'd like to thank the Unified Command, which included representatives from the federal and state environmental protection agencies and the county health department for their cooperation and assistance in managing through to recovery.

I think, this is a great example of what we call the IP Way Forward, which is doing the right thing, the right way, for the right reasons all at a time. It's foundational to who we are as International Paper. Within the first 48 hours following the incident, remediation teams began cleaning and repairing common areas and effected home sites.

Most of this work is now complete. We took multiple steps to ensure that our customers' needs were met, including adjusting our outage schedule, shifting production to other mills, along with other mitigation efforts.

Fortunately, we were able to utilize the spare digester dome, which we had on hand to expedite the repair to get the mill back up and running in the shortest time possible.

As we shared publicly during the quarter, an unusual combination of naturally produced pulping gases and pressurized air led to the explosion, which occurred, an event that we've never seen before in IP and to our knowledge as we understand that never before seen in the forest product industry.

We have taken steps to ensure that this does not happen again, and we have shared our findings with the industry globally and hope that a similar situation can be prevented in any other company in the future. We feel very fortunate that no one was injured in this event.

And with that, I'll turn it over to Glenn and let him provide financial update on the incident. And then move into the details for the quarter.

Glenn?.

SG&A, commercial, manufacturing, supply chain. And as I said for the first quarter, we achieved $14 million in synergies split across these three categories. Notably, our annualized run rate coming out of the first quarter is $56 million, and this is ahead of our track and expectations.

On the right, you can also see how the $175 million total synergy target breaks out by category. So we remain very confident regarding our synergy opportunities and our ability to meet, more importantly, exceed this commitment over time. Moving to slide 13.

Printing Papers, was an uneventful quarter, primarily impacted by normal seasonality, largely in Brazil, resulting in lower volume and less favorable mix as we expected. Now on Slide 14.

Our Consumer Packaging segment earnings were off versus the fourth quarter of 2016 modestly as seasonally higher operating expenses, higher input costs, and a less favorable mix more than offset lower maintenance outages in the quarter. So taking a look and stepping back at the overall SBS market on slide 15.

Fundamentals have truly strengthened over the last few months. Backlogs are up 25% and operating rates improved as well. Shipments are up nearly 5% year-over-year, while inventory and trade flows have remained fairly constant. What we believe is driving the improvement in fundamentals is a combination of factors.

This includes some Q1 seasonality, a general pickup in consumer-driven demand as well as an increase in demand for place (13:34) stock and potentially some pre-buying before a relatively heavy spring outage season compared to last year. Overall, foodservice demand is up 2.5% year-to-date in the U.S.

and looking forward, continued improvements in labor markets, increases in hourly wages, strong consumer confidence, and increases in disposable income should lead to improved – continued improvements in SBS domestically going forward. Moving to Ilim.

The JV delivered a solid quarter as higher pulp prices were more than offset by seasonally lower volume and higher wood costs. The Russian ruble strengthened during the quarter resulting in an FX gain on the JV's U.S.-denominated debt.

Looking to the second quarter, the JV expects seasonally stronger volumes to be partially offset by heavy maintenance outages. Now turning to the outlook for the second quarter on page 17.

We expect to see, as I referenced earlier, the initial benefits of the March $50 per ton price increase in North America Industrial Packaging, along with continued realization of price increases on export containerboard, which just in quarter two together will amount to roughly a $30 million upside.

We also expect to see price increase benefits from Global Cellulose Fibers of roughly $20 million in the quarter. I would also note that our price initiatives in European papers and Brazil papers both continue to move smoothly, and we see full implementation and realization there as well.

For volume, we expect, and are experiencing at the moment typical seasonal increases in North American Industrial Packaging and Consumer Packaging which, together, should drive another $30 million increase in earnings across the businesses – across these businesses in Q2.

Looking across our remaining business, volume is expected to be relatively stable. In operations and cost, we expect significantly less costs at Pensacola, along with some seasonal improvements in our North American packaging businesses which will result in $40 million in additional earnings.

In our Global Cellulose Fibers business, the non-repeat of the issues we had at Pensacola as well as post start-up costs associated with Port Wentworth represent an additional $20 million quarter-over-quarter. Maintenance outage expenses will peak in Q2, for the year are expected to be $82 million higher quarter-over-quarter.

And input costs, we see as being generally flat, quick note back on outage expenses, 70% -- 75% of our annual outages will be completed for the year exiting Q2. In other items category, we listed our assumptions for corporate expense, interest expense, tax rate, and equity earnings from the Ilim JV. So with that, I'll turn it back over to Mark..

Thank you, Glenn. So I'm on Slide 18. So as Glenn just shared on the second quarter outlook on the previous slide, you can see on Slide 18 there's a lot of pricing activity underway across several of IP's businesses, so we thought it would be helpful to just put this in one place for you.

It won't go through all the details here, but we expect these changes to translate to a step-change improvement in earnings as we move into the second half of the year. And I would also note that this is just a snapshot of where we stand at this point in time relative to what's been announced and what's in progress.

On slide 19, I'll wrap-up by our comments. In addition to the pricing activity I just highlighted, we have a host of additional initiatives that set the stage for a particularly strong second half, and importantly, continued momentum as we exit 2017 and go into 2018.

These include operational and cost-savings initiatives across all of the businesses, significantly lower maintenance outages expenses in the second half and, as Glenn just outlined with 75% of those being behind us after Q2.

And accelerating benefits from the integration in Global Cellulose Fibers business as well as the start-up of the converted Madrid mill on high-performance recycled containerboard which will be for internal consumption by our European box business.

We will continue to focus on allocating capital to create value with a near-term focus, as I mentioned on the last quarter's call, on debt reduction. So with all this being said, I'm highly confident that IP can deliver year-over-year EBITDA growth with material upside to the 10% target we shared on our last earnings call.

And with that, I'd like to open the floor for questions..

[Operating Instructions] Your first question comes from Chris Manuel of Wells Fargo..

Thank you for taking my call. Just first question I want to ask was, as I look through slide 10, just to make sure I understand this right. This sort of suggest that you've got about 3% realization of box prices as I sit today during 1Q.

I mean, perhaps could you give us a sense of what the exit rate look like, I'm guessing it was probably closer to a 6%, 7% sort of range instead. And then that's again, not still inclusive of what you've got going forward with the current round of stuff that probably is another directionally 10% on top of that. So some color there will be helpful..

Yes Chris, it's Tim. We did end stronger in March as we went through the quarter. And you'll remember that in the fourth quarter, the price have already started moving up. So as we exited the first quarter, we were roughly 85%, 90% realized on the price increase from the fall..

Okay, so the kind of 3% that you've got there is what you think you're going to get out of the first piece?.

There's a little bit more to come as we go through the second quarter, just in terms of how contracts work. But we're right on track where we thought we were going to be..

Okay. The follow-up question I had also in relation to the box business. When I look further in the back, it look like your volumes were down just a tick under 1%. I think industry numbers through the first quarter were up 2% to 3% depending on what you looked at.

I do appreciate you had an outage, is there anything – how should we think about that, is it just perhaps customers kind of source from other folks in the near run while they knew you were having some issues and it kind of comes back towards market as the year progresses or do you feel you had any share losses or how would we think about that?.

I'm sorry, Chris.

I guess the first part of your question, you're talking about box volume?.

Yeah, in the back slide that showed down 0.7% through the quarter, I think the industry was up 2% to 3%. Just helping me put that together..

Yes, I mean, we look at it on an ongoing basis and there's noise in the quarter, right. So we had some exposure to our ag position given the heavy rains and the delay in crops. We also saw some weakness in beverage. I don't think it's a trend. I think that you're going to see noise quarter-to-quarter. Especially with us.

I mean, our focus is on managing margins at the end of the day. We're going to have some segment exposure from time to time, but over time we expect to grow in line with market..

Okay. That's helpful. Good luck guys..

Your next question comes from George Staphos of Bank of America Merrill Lynch..

Hi everyone. Good morning. Thanks for taking my call and the details. If we could talk at all about what kind of run rate you're seeing, recognizing it's early in the quarter, during 2Q. Within the containerboard and box system, but also across your other businesses, that's my first question.

And then secondly, I was just trying to do some quick math on your heat map chart and considering also the slight or a decline in Ilim sequentially. Should we ballpark the expecting sort of flat to slightly up in terms of earnings for 2Q versus 1Q, is that the correct takeaway, or did we miss something here? Thank you guys..

Hey George, its Tim. I'll start on the demand side. We continue to see really strong demand on the export side. In fact, our customers have been frustrated, but highly appreciative of the way that we work through the Pensacola incident in terms of being transparent with them and really working hard to cover their needs.

And our demand in the second quarter will grow. On the box side through April, it looks like we're trending close to 2% on a daily and still working through some of the Ag that is beginning to pick up and some of the other segment exposures that we have. We feel really good about box demand so far.

In fact, I think our view on the year total market is we're anticipating growth on a daily between 1.5% to 2%, probably closer to 2%..

Hi, George, this is Glenn responding to the heat map question and the direction for the second quarter. Yeah, I think, you're directionally correct. As Mark said, the second quarter is also another transitional quarter, but it's more than just flat. There's upside in the second quarter as we really go into the very, very strong second half..

George, this is Mark. Just to finish your demand question. I mentioned it in my remarks that strong demand plus 5% in our Cellulose Fibers business and we see that continuing. We've got a great customer list, and so we're well positioned geographically as well as with individual accounts.

We're seeing some strength in the part of Consumer Packaging markets that we participate in. And over in Europe, our packaging business demand is solid. Paper is a similar story to what it has been, but it's not different than what we thought, still declining in the developed markets, but we do see some growth in Brazil.

And, again, Brazil has tremendously powerful export position, so we serve multiple markets.

So I would say our view of demand across our products gets to some of the comments I made about good, strong business fundamentals, solid activity on the pricing front and the internal initiatives we have around cost savings and how we manage outages this year, all set us up very well for a really exciting second half..

Your next question comes from Adam Josephson of KeyBanc..

Thanks. Good morning, everyone. Tim, one on e-commerce. I would have thought you'd have been a big beneficiary of e-commerce growth in the quarter, but obviously, your volume was down close to 1%.

Can you talk about how much you're actually benefiting from e-commerce on the volume side as well as what impact you think e-commerce is having both on OCC costs as well as your price/mix?.

Yeah. I mean, some of this is speculative, right, because we only have our view. But I think e-commerce is growing more rapidly and will continue to grow more rapidly than brick-and-mortar. And I don't know where that stops. They're penetrating in a lot of areas. We had a very good quarter in the first quarter with e-commerce.

But compared to prior years, you go through the holiday season and then as you hit January, there's always a return period and there's promotions. And that part felt a little bit lighter this year, maybe people did a better job buying the right-size products through the holidays.

On the OCC front, I do believe that it is beginning to have an impact in terms of fiber flows and recovery. I just don't know how much and I don't know how far it goes. But it does feel like just given how much is being purchased online, that it is skewing OCC availability, at least at certain times of the year..

Thanks. And then just one on the box price increase, how would you characterize the fall ball box price increase implementation? And how do you think the spring box price implementation – increased implementation will differ, if at all, from the fall implementation? Thank you very much..

Yeah. I'm very positive on the spring price implementation. I think we see our supply chain has been very tight, now part of that is Pensacola. But we ran at what were historically low inventory levels in the first quarter and did a lot of scrambling quite frankly, just to try to keep up as much as we could.

I think box demand has been good, and so we look at it, and we see a normal type of implementation as we work through all of the conversations with our customers. And the bulk of it will start in the second quarter, the bulk of it will come in the third, and there will be a little tail as we go into the fourth quarter..

Go to next question....

Your next question comes from Mark Weintraub of Buckingham..

Thank you. With all the price action, I appreciate the slide, page 18. And just wanted to maybe flush out a little bit if possible.

So how much fluff pulp versus NBSK, SBSK would annual production be roughly?.

So, we are – hi, Jean-Michel speaking. Good morning, Mark. We are roughly 2 million tons, a bit more, 2.2 million tons on fluff and 800,000 tons on market pulp to-date, with the proportion going up in fluff and specialty and have (28:12) specialty with fluff in Consumer Products. (28:15) specialty.

So on the mix, which is one of the big initiative we're having around fluff and specialty is growing. Ultimately I think we'll probably be 2.3 million tons, 2.4 million tons plus specialty versus 600,000 tons on market pulp net short and that's the (28:33) target..

And on the slide on page 18, it notes that there's $115 per ton of announced and published price initiatives on fluff.

How should one think about how these increases tend to get put in, and how they tend to stays in over time? Is it fairly immediate, or is it that it does take a while because of the way contracts are set up for it to show up on the bottom line?.

So let me back up two seconds and then answer your question. You have to be fair what is SBSK, NBSKs and fluff. SBSK and NBSK is relatively fast, it's not immediate, but between the announcement and the realization, you might have 30 days, max 60 days. On the contract side, on the fluff side, you really have a mix.

You have a mix of regions where they're not indexed based; you have a mix of businesses, which are indexed based; and then even on the comp size based, sometimes they're very long before they're realized.

So between the time we announce and realization, there is a delay, I would say, no that was the dynamic we've had on different announcements, I'm quite positive we're going to start this quarter to see the impact significantly. So there is a delay. It varies with the product, it varies with the customers, the regions. But we are on a really good track.

Two have been published by index already. We have two more prices, which we have seen action on the non-indexed contracts. So I'm quite confident we're going this way. So it takes time, but we're getting there..

Great. Thanks very helpful..

Your next question comes from Chip Dillon of Vertical..

Yeah, hi, guys. This is Salvator Tiano filling in for Chip.

How are you?.

Doing well. Good morning..

So first of all, just to continue on the fluff pulp.

Can just you provide a little bit of color in your customer base, is it very concentrated? Is there a number for your top three or top five customer accounts that you can provide as a percentage of your sales?.

I think we are – our mix is roughly like the market. So we have the top 10 customers in this market are important, it represents maybe 45% to 50%. Our top 10 must be 45% to 50%, and the other is 50% of our sales are many, many customers around the world. So we are more or less aligned with the market.

I would say, the new mix we had will be a little bit more aligned with big customers and (31:33) so now the combination is roughly perfectly aligned with the market, even in terms of regional sales if you look at it. It's kind of almost to the percentage aligned with the market..

That makes a little sense. And just as a follow-up. Switching gears to the Ilim joint venture, we've noticed that you've been shifting the debt from U.S.

dollars to rubles, and can you explain a little bit the rationale? Is it to smooth out your EPS? Or is there any other reason behind that shift?.

Jean-Michel speaking again. We wanted to kind of naturally address Ilim, so we kind of had one third rubles, two-third – we're not trying to be all rubles or all U.S. dollars. As you know, we sell a lot in dollars, so the pulp is sold in dollars.

So by adding a debt of this content that allows us to not depend so much about FX situation and be much more naturally hedged. So that was the reason we did it, and we don't have intention to make bigger the move..

Great. Thank you very much..

Your next question comes from Scott Gaffner of Barclays..

Thanks. Good morning..

Good morning, Scott..

Just going back to slide 32 where you had the box shipments for the quarter. You noted the $22 of price/mix per ton sequentially from the fourth quarter, obviously, you got some of the benefits of the $40 increase in the fourth quarter.

Is there anything on the mix side of the business that's holding back some of the realization from that price increase?.

Yeah, we had a few dollars of negative mix just across segments in the first quarter relative to the fourth, roughly about $4 of – just in terms of customers and segments and the types of boxes that they buy..

Not structural?.

No, not structural, I mean, our mix just based on segments and how people buy fluctuates all the time. It can move positive or negatively a few dollars quarter-by-quarter..

Okay.

I mean, is there a way to sort of characterize the type of product or customer that would cause those temporary mix issues?.

It's all over the map. It depends on board construction, it depends on box style. It just depends on a lot of factors. So in a word, no..

Okay..

We understand it. We look at it. We do a lot of detailed analysis about it, but there's nothing that kind of repeat itself over and over again. It just depends on demand across the segments..

Okay. And then Mark, I thought I heard you mention earlier on the Consumer Packaging segment that you might have had some pre-buy, I think I heard that correctly.

If so, where are you seeing that and sort of how should we think about the impact as move into the second quarter?.

So this is Cathy Slater. Really, what we can say from the takeaway from our facilities that we saw higher shipping this quarter versus the same time last year. And we know that we have outages and kind of all of our customers know that as well in the second quarter.

And so really, we just continue to see the takeaway that occurred and we're really just speculating as to what our customers may have chosen to do to cover that..

Okay. Last one for me. Earlier this week RISI put out a notice that they're delaying the implementation of the recycled containerboard price index. And I think they're evaluating a more objective price index, which looks like it's across many different grades.

How should we think about that? Or what are your thoughts on that so far as to what you're seeing?.

Yeah. Hi, it's Tim. I mean, we're waiting to see exactly what they're going to do. I think they're proposing that they run a pilot of some type. I mean, our view would be, no index is perfect but the one that we have has worked well over time. There's moments of dislocation, probably up and down but on balance, we think it worked well over its history.

I guess, we would want to understand what the changes are going to be and if objective means, a practice of submitting data, we would really be concerned about making sure it passes regulatory muster..

Sure. All right, I appreciate it. Thank you..

Your next question comes from Phil Ng of Jefferies..

Hi guys. Pulp prices really have firmed up in the last few months across the spectrum globally.

Just curious, how sustainable is that just given some of the passes (36:45) that's coming on later, but obviously, we appreciate the 5% growth that you're seeing in the market?.

Hi. Jean-Michel speaking again. Like Tim, I cannot stipulate for the market, but if you look from our customer standpoint, the demand is very strong, and it's very strong not only in short-term. You know we have a long-term contract, so a lot of our sales are done three, six months in advance which forecast on our customers.

And we're seeing a lot of growth. One of the potential driver, and I'm sure it's not the only one, it's Asia, I think, there's a clear relation between consumer not the whole GDP, the specific consumer growth in Asia in terms of purchasing power, in terms of demand.

And this is impacting a lot of purchase of goods, which indirectly impact either SBSK or fluff because those are medical hygiene goods which we know they have a direct relation with the purchasing power.

So I think there is a trend on developing countries, which are getting not only growth of economy, but growth of purchasing power people, which is creating an incremental demand. So we think the demand more solid than we expected. So I'm recognizing that in some grade, not specifically fluff, in some grade there's going to be some new capacity coming.

But if the demand continues to be as good and if some of the indicators we're seeing are continuing like they are, we're feeling good about it..

That's helpful. I guess, due to the weather in the West Coast, Ag was under pressure in the quarter for your Corrugated Packaging business.

With things clearing up a bit, should we expect IP potentially outpacing the broader market since I believe you're more exposed to Ag versus some of your competitors and how should we think about mix from that type of the – from the Ag business?.

Yeah, I mean we're expecting a good quarter. Agriculture is an important segment for us. We are a bit disproportionately weighted to it. We did have a drag in the first quarter based on weather in terms of harvest and just timing on planting of row crops and whatnot. So we'll get a crop in the second quarter.

I don't know how it'll compare to others, but we have a big exposure and we're expecting a big quarter..

Okay. That's helpful. And just one last one for me, SBS actually soften a little bit in the fourth quarter, and we've seen a nice bounce back. Any concern that this is kind of inventory restock? And just curious, can you provide some color where you're seeing strength in SBS, any market, in particular? Thanks..

This is Cathy again, so just I guess, what I've said, where we're seeing strength is where we are good, which is in foodservice. And as Glenn already commented, as people are seeing improvement in wages and are on-the-go society where people are wanting to grab something quick and get a coffee, we're seeing some good strength there.

Overall though, I'd like say through this year, the backlogs have increased significantly whereas backlogs now that we haven't seen since 2014, so pretty good confidence about the strength of that price increase..

Okay. Thanks a lot..

Your next question comes from Debbie Jones of Deutsche Bank..

Hi, good morning..

Good morning, Debbie..

I wanted to ask about how you feel that the overall kind of portfolio of businesses that you have today. I think in the past we've talked about some optionality around consumer in LatAm and potentially some of those might be at a bit of an inflection point here.

So, I just was hoping you could comment overall and then specifically on those two units? And for lastly, I'm referring to corrugated..

Hi, Debbie, it's Mark. Great question. We're always looking at ways to build the best International Paper we can. We described at a high-level, our strategic framework as building competitive advantage positions in attractive markets. And we believe we're making a lot of progress on them when you look at the businesses we have.

The two you mentioned, they're still work in process. Cathy, just mentioned the part of Consumer that we're really, really competitive in, and we like integrated forward through foodservice converting, we're continuing to improve.

And we're continuing to evaluate options for whether we can actually build and should build a competitive advantage position in the right markets in Consumer Packaging. And those types of evaluations take some time, but the core focus right now is improving what we have. And that's what we're doing.

On corrugated in Latin America, it's along the same lines. We look at our corrugated packaging business, and you've heard me say this before, somewhat globally as we think about containerboard and its channel to market, we want to understand all markets that we should and could be a value creating player.

And so the standalone business we have in Latin America, we acquired it and sailed into the deepest recession Brazil has seen in modern history. And we have improved the business a lot, but with demand being negative, significantly negative tracking GDP, we haven't really seen the business perform in a more normalized market.

So, again, working on internal improvements and we'll assess it. I mean, Industrial Packaging and corrugated is core to the company, and we'd like to see what we can do in the major markets of the world. We've been in Brazil in paper. We know the country and the economy. We believe Brazil will improve.

And in the first quarter, our box business in Brazil was up over 6% against the market at about 5%. So a lot of the work we've put into establishing the right relationships with the right customers is starting to pay off.

So we still believe that business has some potential inside of IP, but we are continuously looking at ways to improve the company and the value that we create. And all of our businesses and subparts of the businesses are part of that strategic evaluation and I think that's healthy for a company to do that..

Okay. Thank you. And then my follow-up question, just switching gears a little bit. I won't ask a Trump question, but there have been some changes at the EPA. And I think in the past the industry, it felt like some of the regulation or evaluation was a bit too narrow.

And I just wanted to get your sense because I know you follow things going on there, what changes or things that could happen under the new administration that could be beneficial or maybe potentially worse for the industry kind of as we sit here today?.

I think our view, Debbie, on regulatory issues is that's not the primary issue for a company like International Paper, it definitely matters. But the biggest issue that we try to work on and that we see benefit is things that can improve the economy, which then improves demand for our products, but specifically for things like regulatory issues.

The number one issue that we've been working on as International Paper is really the way that we construct our business model where we take renewable national resources and we convert them into products that are consumer-oriented products.

In doing that, we generate 75% of our own energy from carbon-neutral biomass, and that is a tremendously powerful business model. And the work we've been doing with the EPA, both legislatively and directly with the agency for a while is to have a clear outcome on the recognition that wood-based biomass energy is carbon-neutral.

So whatever we do in the future as a nation on carbon, we're recognized for the role we're playing, which is a powerful business model. It helps the overall balance, fossil fuel and non-fossil fuel.

So that's the key issue that every time I'm in Washington and talking about regulatory issues with the EPA and anyone else, that's the issue that we talk about from our company and from our industry standpoint..

Okay, thanks. I will turn it over..

Your next question comes from Steve Chercover of Davidson..

Thanks. Good morning, everyone..

Good morning..

So I had a quick question on your OCC forecast, which is flat versus Q1. One of your peers suggested that Q2 average would be higher.

So I'm wondering if you expect prices to decline or maybe you're just better at procurement?.

Or what we had in inventory, right, as you consume it. So, I mean, we're up slightly. We stay flat, it's within a few dollars on average quarter-to-quarter. We see it pretty stable right now. So I don't expect any dramatic changes, no..

But Steve, we are good at procurement as every...Thank you for that..

Sure. And – well, Jean-Michel just answered one of my questions on pulp, so the other one is kind of just I suppose easy. The Madrid start up is one of your, I guess, benefits for a very strong second half.

And I'm just wondering, are there start-up costs that are incorporated and still going to be accretive?.

I think the best way, Steve, to think about Madrid is it's happening in the fourth quarter in terms of the conversion from newsprint to actually making and integrating in containerboard. It's a catalyst for 2018.

The biggest drivers for the second half of 2017 are the ones we've pointed out in our remarks, around the core businesses, and the pricing, and the internal initiatives and the fact that 75% of our outages will be behind us after the second quarter.

But we'll see a benefit in the quarter – in the fourth quarter for that conversion, and then it will really help the European packaging business for the full year of 2018..

Terrific. Thank you..

Your next question comes from Mark Wilde of Bank of Montreal..

Good morning, Mark..

Good morning.

How are you?.

Good. Listen, I wonder if you could just talk a little bit about kind of supply-demand in the domestic uncoated freesheet business. I mean we're running at about 90% operating rate, demand is easing.

How do you see this kind of playing out?.

I think at a strategic level, we see the end-use demand drivers as continuing along the recent track, so that's in that kind of minus 3-ish, minus 3% to 5% depending on what your exposure is to roll-based products versus cut size. We're actually continuing to have for a while doing a little bit better than that.

And it has to do just with the customer alignment and the mix of products.

International Paper still believes in the value of branded products in some of those end-use markets, especially cut size and we still see a benefit from that as our customers – in the way they present their total package to the market, probably the brands help them play a differentiated role.

And we obviously tried, as everyone does, to align ourselves up with the winning customers. So all that net-net in a market that's declined I think in the first quarter about 4%, we're down about half of that. So I don't see any major changes.

I think it puts a premium on commercial excellence, supply chain performance, and in our case, we still believe in brands. We've lowered our cost structure enough to be competitive in certain markets for certain products in exports, so we have a few – a little bit more export than we had before.

And again, I think that's something that we like the footprint we have and the assets, we're down to just a few mills, they're excellent at what they do and our commercial teams are top class..

Okay. And just to kind of tie that together with the containerboard business where we've got a high operating rate, we've been running kind of 96%, 97%. There's really not much capacity in the pipeline here in North America.

I just wondered, is there a point here where you might think about sort of a conversion at some place like Eastover or down in Selma similar to what happened down in Pensacola?.

So Mark, that's a great question. And I've said this publicly in the past that when I think about what we have in terms of our assets and our workforce, we have the ability in a number of our facilities to make a different product tomorrow than we make today, primarily because of the workforce quality and the asset configuration and access to fiber.

So yes, there are a couple of our uncoated freesheet operations that in the future could be candidates to make other products and obviously, packaging would be an obvious one. But we'd do only do that if that help to improve our business and create a significant value.

And I talked about our Printing Papers business as being well managed and adding that business, lacking a real better option gives us optionality on a number of fronts.

So we think about it all the time, and we think about the value of kraftliner long term and whether the world and our customers need more kraftliner, IP very well positioned uniquely in some ways to be able to act on that if necessary..

Okay.

And then last one I had, is it possible to talk about sort of what two or three kind of main fixes would be down at Orsa?.

I'll talk about one, plus 4% GDP versus minus 4%..

Okay..

And then two, we've got a partially integrated system with kraftliner and recycled liner and really figuring out the mill side of that business. We don't have the best-in-class assets on the paper side. So creating a more – or deciding a different business model, for example.

And then I think, third would be to continue, and we're making a lot of progress on this one, continue to restructure the customer portfolio in the segment.

We were, in some ways, playing in places that we weren't competitively advantaged and the reason we're doing better than the market right now is because we decided to try to serve people with better advantage than..

Okay. That's helpful. Thanks, Mark. Good luck in the second quarter and than in that second half..

Thank you..

Your next question comes from Gail Glazerman of Roe Equity Research..

Hey, good morning..

Hi, Gail..

Tim, I guess, the 1.5% to 2% box volume growth is up a little bit than I think what you mentioned in the last few calls.

I'm just wondering if you can give – if there's any specific part of the market that's kind of driving that confidence? Any color there?.

Yeah. I mean, the way we model it, we don't model it out segment-by-segment. We obviously know which ones have been performing better over time, like e-commerce and distribution, and protein and we expect Ag will come back. So the way we model the market on an annual basis has a variety of factors.

Nondurable goods production is only one of them, we think there's other things that drive demand. And we finished stronger in the fourth quarter last year and when we reran the numbers based on economic projections across different segments of the economy, it's looking like 2017 is going to be stronger by a fair amount than 2016 was..

Okay. Switching gear, the Ilim dividend was obviously a lot larger than what you even expected on the last earnings conference call, a lot larger than what you've received over the last few years. I'm just wondering if you can give some insight.

Do you think this level is sustainable? Is there any kind of pending major claim on cash at Ilim in terms of projects that might be coming up?.

Gail, the Ilim dividend of more than $100 million, is in the range that we talked about seeing the potential of this being $100 million a year dividend and it's starting to come to fruition. There is a strategic plan for llim and our view of Ilim is, there's tremendous potential with that business.

And over some period of time, along with our partners in Russia, is looking at building out the full potential of that business in two kind of the ways. One is for domestic and regional markets, and then the other is as Jean-Michel mentioned earlier, serving the softwood fiber needs of the greater Asian market, namely China.

So there is more potential in that business. It's not out of runway. But the dividend generation that you saw in this particular payout is very sustainable, and we expected it to get to this level and we are generating the kind of EBITDA and performance that should allow this dividend to remain strong..

Okay. Thank you..

Your next question comes from James Armstrong of Armstrong Investments..

Good morning. And thanks for taking my questions..

Hi, James..

The first one I have is actually about inventories in the containerboard. You mentioned that they are pretty low.

Do you see any risk of inventories becoming too tight during the maintenance season?.

I speak for us, I mean, yeah, we scrambled in the first quarter and we're going to continue to work pretty hard in the second quarter, even with Pensacola back up, the supply chain is pretty long, especially if you think about export. And as I mentioned, we've seen good demand from basically all regions for our export business.

So we've got a large flexible system that when we run it well, we run it really well. But we're recovering from, as I said, record low levels of inventory in the first quarter. But we manage a pretty tight system all the time. We saw our inventories go down last year, just because of supply chain effects and logistics being easier to manage.

So we stay close to it all the time, and we try to make sure that quarter-by-quarter, month-by-month, we're balancing appropriately to our demand signal and what we see in all three channels that we serve..

James, if I could add to Tim's point, and the absolute inventory numbers are very visible and very important in our industry. But it's really important the point Tim made about the inventory against the backdrop of transportation network.

Sometimes, it takes more inventory because of the supply-demand balance and transportation to perform in the same way that you could perform in a lot lower inventory with huge velocity improvements which, Tim mentioned, we saw at some point last year in the trucking industry.

So it really is inventory against the relative environment on transportation. And that whole analysis is what our supply chain tech systems and our IT systems monitor so we can confidently take our inventories to levels that look really, really low in a particular period of time, but may be against a really efficient transportation network.

And I would imagine that that's going to continue to be a challenge. And if the economy improves, which we would love to see happen, it's going to put some early stress on transportation and our supply chain team will respond accordingly with customer service and building the right margin structure as the number one objective..

That's exactly what I was looking for. Switching gears a little.

I know this is an impossible question, but what are you seeing in terms of China and OCC? Did do you see any inventory build as prices ran up? And do you think the – they're going to stay out of the market for an extended period of time?.

Well, I have no way of knowing what they'll do because I can't read minds, but it seems like it stabilized. This new program of National Sword that's going to ramp up in June, I think, will likely cause some volatility. We don't think it's targeted toward OCC as pure OCC grade.

We do think that it could have an impact on mix paper, even though we think it'll be broader than that and then also pick up plastics and whatnot. But I see OCC pretty stable as we said in the second quarter. And I think it's going to be elevated for the whole year the way it's looking right now..

Perfect. Thank you very much..

Your next question will come from Paul Quinn of International Paper (sic) [RBC]..

Welcome to the company, Paul..

When should I expect my first check. Thanks for taking the call, and sorry, but we'll see whether you've asked this question, or whether you've been asked this question before, but we got three conference calls at the same time, I've only got two ears here.

So the question was around pulp and I see – so what I'm looking for is a comment on realizations, a comment on volume, and a comment on your Ilim forecast.

So when I look at Global Cellulose Fibers, that price mix was down $27 a ton quarter-over-quarter, but Ilim's price mix was up $22, just wondering why one is lagging when one is pro? And then when I look at the Ilim volumes, they were down 24% quarter-over-quarter which was huge and just wondering what you're expecting in Q2? And then just on the Ilim forecast, you did $50 million in Q1, you're forecasting $40 million, but with the price increases, it looks like $40 million would be an easy layup.

So I'm just wondering if you've got a lot of maintenance at Ilim in Q2? Thanks..

So let me take the first one I think on the pricing. The pricing we show is really a mix of region, products. So sometimes, the comparison from one quarter to another is a little bit difficult. So we'll say you have a greater mix of (1:00:12) in the first Q than we normally have due to the outages.

So because of all these outages, we could not sell the – we sold more than last year, but not much as we wanted to. So I think it impacted prices in the midsized. Then you have contracts which are negotiated kind of in 2016 which took effect beginning of 2017 before the announcement of the price increase, so I think those impacted to the Q1 prices.

So that was, I would say, mostly temporary. If the markets have not gone up, it could have stayed like this but with the price announcement we've made and the realization we're seeing, you see our prices gone back to what they were and even above that..

Relative to the volume side of the equation, this is Glenn and I think I said earlier, clearly, the first quarter for Ilim is seasonally slow. And it was impacted by that significantly. We did have a big FX gain that helped buffer that exposure in the first quarter. It will improve seasonally in the second quarter.

In the second quarter we had even higher outages, which then offset some of that. So that basically ties out the month-to-month – the quarter-to-quarter view on volume..

All right. Thanks very much. Best of luck guys..

Your final question comes from Brian Maguire of Goldman Sachs..

Hey, good morning. Thanks for squeezing me in. I think you called out earlier a little bit of a less favorable mix in consumer.

I just wondered if I could get a little bit more color on what was driving that and what the outlook is for mix there?.

Okay. Well, looking at – this is Cathy Slater, hello. So in the mix, the comparison that we have of what we saw as a bit of a hurt was that we had lower aseptic volume, but we do have a lot stronger slate and cut volume that we're seeing, and that's where we feel good. So that's really what the differences are there..

Okay. And just one last one.

Just any thoughts on cash contribution to the pension through the year? And just kind of thoughts on the trade-off of whether you want to make any contributions?.

Yeah. It's a good question. This is Glenn speaking. Obviously, as we stated earlier, given the acquisition of Weyerhaeuser and the leveraged up condition of our balance sheet, clearly, this year is about debt reduction. And we put the pension in that bucket.

So we'll look at our options relative to reducing debt directly or contributing to the pension and make a decision along the way which one is optimal for us this year. So it's definitely in line of sight..

Okay. Thanks very much..

This concludes the question-and-answer session of today's conference. I will now turn the floor back over to Mr. Jay Royalty for any additional or closing remarks..

So thanks, everyone, for taking the time to join the call this morning. As always, Michele and I will be available after the call and our numbers are on slide 20 of the presentation. Have a great day..

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