Guillermo Gutierrez - International Paper Co. Mark S. Sutton - International Paper Co. Glenn R. Landau - International Paper Co. Tim S. Nicholls - International Paper Co. Jean-Michel Ribiéras - International Paper Co. W. Michael Amick Jr. - International Paper Co..

George Leon Staphos - Bank of America Merrill Lynch Steven Pierre Chercover - D.A. Davidson & Co. Mark Weintraub - The Buckingham Research Group, Inc. Brian Maguire - Goldman Sachs & Co. LLC Gail Glazerman - Roe Equity Research LLC Chip Dillon - Vertical Research Partners LLC Mark william Connelly - Stephens, Inc. Chris D.

Manuel - Wells Fargo Securities LLC Adam Jesse Josephson - KeyBanc Capital Markets, Inc. Debbie A. Jones - Deutsche Bank Securities, Inc. Mark William Wilde - BMO Capital Markets (United States).

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2017 International Paper Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will open the call for your questions.

It is now my pleasure to handover program over to Guillermo Gutierrez, Vice President of Investor Relations. Please go ahead..

Thank you, Kristen. Good morning, and thank you for joining International Paper's third quarter 2017 earnings conference call. Our 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 2 of our presentation. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures is available on our website.

Our website also contains copies of the third quarter 2017 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 will now turn the call over to Mark Sutton..

Thanks, Guillermo, and good morning everyone and thank you for joining our call. I'm going to begin today's presentation on slide 5. International Paper delivered strong results in the third quarter, with earnings growth across all of our business segments.

These results were driven by continued solid business fundamentals and price realization, particularly within our North American Industrial Packaging and Global Cellulose Fibers businesses. Our Global Cellulose Fibers business also generated $52 million in synergies, which contributed to solid margins for the business in the quarter.

Our Papers business delivered solid results as well, underscoring the resiliency of our overall portfolio. Unfortunately, our operations were impacted by two hurricanes during the quarter.

And even as our teams managed the recovery extremely well and safely, often through very challenging personal circumstances, it was nevertheless a significant headwind in the quarter. We also faced record high OCC prices in the third quarter, with average prices $14 per ton higher than in the second quarter.

Our Ilim JV delivered solid operational results, driven by strong underlying demand and price realization. And yesterday, we announced a strategic decision to transfer our North American Consumer Packaging business to Graphic Packaging. I'd like to take a few minutes to share some thoughts regarding this announcement.

So turning to slide 6, I'd like just to start by revisiting how we think about strategy and value creation and how that framework shaped our decision to transfer our business, our North American Consumer Packaging business and to essentially invest in a stronger Graphic Packaging.

Quite simply, our strategy is to create value in fiber-based packaging, pulp and paper by establishing what we call advantaged positions and serving attractive markets.

What this means is that, when we choose the right products and the right markets and the right customers in those markets and importantly when we execute successfully, we create the most value for our shareholders.

So turning to slide 7, when you look at our North America Consumer Packaging business, we have a talented team of people, very good assets and really great customers.

However, we also realized that our business does lack the overall scale and broad portfolio offerings and the integration levels between board and converting required to grow value in this segment today.

At the same time, we recognize the strong potential of the consumer packaging space overall, and wanted to find the best way to participate and create the most value for our shareholders.

And so after evaluating a range of strategic options, we concluded that putting the business together with Graphic Packaging could unlock the full potential of our business today.

And at a high-level, we're transferring the business and establishing an ownership interest in Graphic Packaging through a very tax-efficient structure that captures the greatest value for our shareholders. IP is investing in a strong consumer packaging platform, that is well-positioned for long-term value creation.

We are creating option value in the consumer packaging space, while we remain focused on growing and improving our core businesses. And with that, I'll turn it over to Glenn, who will walk you through the details of the transaction and the rest of our third quarter performance discussion.

So, Glenn?.

to establish and leverage advantaged positions in attractive markets and to grow value by investing in high-return projects that support growth in our strategic segments. Further given our refocusing of resources to our core businesses, this project will be funded within our existing annual capital investment allocation run rate.

We are aiming for a mid 2019 startup, which is timed well given our outlook on incremental demand. Now on slide 13, our Global Cellulose Fibers business delivered very solid results as well in the third quarter.

Earnings improved $45 million, driven by better pricing, lower maintenance outage spending and strong synergy realization, despite having overcome a $5 million headwind from Hurricane Irma.

All-in, we're very pleased with the progress in Global Cellulose Fibers, which improved to a 19% average EBITDA margin in the quarter, again exemplifying our commitment to allocate our resources to growing profitable businesses. Project to date, Global Cellulose Fibers is performing well ahead of our initial acquisition financial model expectations.

Turning to slide 14, as you can see, our Global Cellulose Fibers business delivered very strong synergy realization performance in the third quarter, capturing $52 million across the enterprise, including approximately $17 million of one-time benefits for tax credits related to the energy projects I spoke of earlier.

All-in, we have high confidence in our ability to continue to deliver synergies at a faster rate than originally outlined. And we also want to take this opportunity to reaffirm our new synergy target of $200 million, which we view as an essential pillar to the sustained earnings potential of the business.

Moving to Printing Papers, results came in better than expected, driven by improved price and mix, particularly in our Brazil business, as well as continued price realization in European Papers. Maintenance outage expenses were significantly lower in the third quarter as expected, while input costs were impacted by higher fiber and energy.

On slide 16, as you can see, our Consumer Packaging business results improved sequentially across all components of the financial bridge. Commercially, pricing continued to improve on realization of the April 2017 price increase and planned mix upside was delivered.

Lastly, maintenance outage expenses were significantly lower in the quarter again as expected. Moving to Ilim, the JV again delivered solid results, driven by higher pricing, which was partially offset by lower volume related to the Bratsk maintenance outage. And equity earnings also benefited from a non-cash FX gain on the JV's U.S. denominated debt.

So, let me now turn to page 18. This is our outlook for the fourth quarter. We expect to see flow through benefits from the spring 2017 North American containerboard and box price increase as well as further price realization in export markets, which in the fourth quarter alone should amount to an incremental $20 million.

In Global Cellulose Fibers, we anticipate additional price realization and mix benefits of $15 million on continued strong global demand, particularly in China. We also want to note that Brazil Papers – in Brazil Papers, we expect an additional $10 million in earnings on better seasonal mix.

On volume, our North American box business will be unfavorably impacted by one less shipping day, even as we expect demand to remain very strong. Across our other businesses, we anticipate stable volumes with some modest seasonal improvement as noted in the heat map for a total benefit of about $15 million.

In operations, our North America Industrial Packaging business will improve by $35 million as we put the hurricanes and other operational issues we discussed earlier behind us.

Within our Global Cellulose Fibers business, operating costs will be modestly higher and planned maintenance outage expenses across the entire enterprise are expected to increase by $11 million in the fourth quarter. Input costs, again, in North America Industrial Packaging, are expected to improve by $35 million quarter-over-quarter.

This is driven by lower OCC costs, but partially offset by higher wood and chemical costs. Across our other businesses, we anticipate $15 million in higher input costs, partly driven by the lingering effects of the hurricanes primarily in wood and chemicals.

Lastly, in the other items category, we included our refined outlook for corporate expenses, interest expenses, tax rates and equity earnings from our Ilim JV. So to close, on page 19 for me and before I hand the call back over to Mark, we wanted to address our capital allocation priorities.

While we speak often about our balanced use of cash approach, it all starts with strong cash from operations. And we remain confident in our ability to continue to grow our cash generation.

With that said, in the near-term, we are clearly in a de-leveraging mode following our pulp acquisition last year as we aim to bring our leverage back to less than 3 times debt-to-EBITDA on a Moody's adjusted basis by the end of next year.

And as noted earlier, the cash contribution of the Graphic Packaging transaction was structured to ensure we have no obstacles and a clear path toward meeting our balance sheet commitments.

At the same time, within the quarter, we also took material risk off the table with targeted moves inside our pension plan, including the recently announced annuity purchase that essentially transferred $1.3 billion in pension benefit obligations to a highly rated retirements benefits provider.

All this enabled us to continue to increase our dividend. Earlier this month, we announced our sixth consecutive annual dividend increase since restoring it to pre-recession levels in 2011, keeping with our commitment to a competitive and sustainable dividend as earnings and cash flow expand.

And lastly, we will continue to reinvest in value-creating projects, and with a healthy spread above the cost of capital, such as the Madrid and Riverdale conversions we have discussed in detail. So in summary, the takeaway here is that we are confident in our cash generation and reinforce our commitment to a balanced use of cash as we enter 2018.

And with that, let me turn the call back over to Mark..

Thanks, Glenn. International Paper is well-positioned for a strong fourth quarter, and with solid results across the board and solid cash generation. We continue to see healthy global demand across our key businesses. And we expect additional margin expansion from our first half pricing initiatives.

On input costs, we expect some relief from record high OCC prices in the third quarter with some offsets on seasonally higher wood as well as higher chemicals and energy. We also anticipate another quarter of strong synergy generation in our Global Cellulose Fibers business and a seasonally light maintenance schedule across our mill system.

Net-net, we are optimistic for a solid performance in the fourth quarter with excellent cash generation and a very strong year for International Paper. With that, let me open it up for questions..

Our first question comes from George Staphos with Bank of America Merrill Lynch..

Good morning. Thanks for the details. And congratulations on the transaction announcement and the progress throughout the year. Just housekeeping, folks, I just want to double check.

On the bridge sequentially that you provided, unless I'm double counting something, I kind of came up with something between $0.15 and $0.20 sequential pick up in earnings fourth quarter versus third quarter.

Is that in the ballpark? Or did we miscalculate something?.

I think that's roughly in the ballpark, there is certainly a sequential uplift, George, quarter-over-quarter..

Okay. Thanks for that, Glenn. Second question I had regarding Consumer. Obviously you're putting the North American Consumer business into the venture with Graphic Packaging. When we think about Kwidzyn, obviously that was part of Consumer, it produces a lot of different grades, but one of them was coated board.

What's the role of Kwidzyn in the strategy for International Paper on a going-forward basis?.

George, it's a great question. We do have a board machine at Kwidzyn, and we also have one at our Svetogorsk mill in Russia. They serve targeted segments that are generally in the Consumer Packaging. That's not part of this transfer into Graphic Packaging.

And when we think about what we do in Europe, we have – we serve a number of markets, packaging, industrial and consumer, uncoated freesheet, we make boxes. We don't do any consumer packaging converting.

And really when you look at mills in countries like Poland and Russia, you tend to have the model where you use the wood advantage and you make some of the products that the market needs locally in all kind of segments. So, that's still an important part of our EMEA Paper and Packaging portfolio..

Okay. Mark, thanks for that. My last two and I will turn it over. One of the things that we were picking up at recent industry conferences and we're seeing a little bit in your results here as well, some building impact from inflation throughout the supply chain, everything from input cost to labor.

Can you comment on that and to the degree to which your customers are beginning ask you, maybe mostly in the box and containerboard business how you might be able to help them either with the systems or machinery approach or some other approach that help them take cost out of the supply chain, and how are you dealing with inflation as well on your business? And then Riverdale, a little bit more costly conversion than what we've seen in the most recent round of conversion, I know whitetop's a consideration there.

Is there anything else that we should consider in terms of the capital cost per ton on that conversion? Thank you..

Hey, George, it's Tim..

Hey, Tim..

On Riverdale, I'll start with that – hey. Start with Riverdale and then I'll go back to your previous question and Glenn may have something he wants to add. But on Riverdale, we know this internally, a machine is not a machine, a mill is not a mill, and so, it depends on what you're trying to do. This is going to be a two-ply sheet.

It's a bit more of a sophisticated – I mean, we understand that we've done it before, but sophisticated investment. And when you look at it on an annual ton basis, we still think it's very attractive with very attractive return. So, we're going to be making a whitetop liner, not a brown product as the lead product on the machine.

So, I think it's understandable on that basis. Your inflation question, I mean just from a box standpoint and Industrial Packaging standpoint, we work with our customers all the time on trying to help them take cost out of their system. And we do it through a number of means. We have technical experts inside.

We're either looking at case erecting equipment or we're looking at process flow. So it's pretty much ongoing. And we don't often talk about it, but just in general inflation internally to the business, we have a significant lift every year that we have to try to cover and then have initiatives that create value on top of that.

So I'm not familiar with the conference you're referencing or the comments, but that's just a little color on what we do..

Tim, the internal inflation, I'll let you go here, what is that roughly, can you remind us?.

It varies from year-to-year, but it's significant. I mean, it's over $100 million. So – and then in recent years, medical cost have jumped up a little bit, so it's not uncommon for us to have $120 million to $130 million of just general inflation built into the business that we have to cover..

Thank you, sir..

George, this is Mark. Just a final comment on inflation.

One of the things we target in our internal improvement, something we call non-price initiatives, so reliability improvements in our manufacturing operations and cost improvements in all our business processes, we target to overcome that internal inflation at a minimum and maybe in some cases do better than the internal inflation.

And then we work on input cost and all of that with our commercial terms. So it's part of our philosophy of how we need to operate every year. One last comment on Riverdale, capital costs are also relative to what system you're investing it in. And the way we look at this is, this will be the 17th containerboard mill in our world class systems.

So the investment in Riverdale also enables savings in other parts of the system that don't show up in just a capital cost per annual ton. We are currently buying bleached fiber to make whitetop in a mill that was designed to make brown linerboard, that mill will now be free to make brown linerboard.

So there's system effects, when you have a system our size, that the capital cost per ton can be a little deceiving..

Mark, thanks for that. I'll turn it over..

Our next question comes from the line of Steve Chercover with Davidson..

Good morning, Steve..

First of all – good morning. I had a question on pulp actually. It looks like the pulp price realizations were up $33 a ton year-over-year, with presumably a richer mix, but list prices were up easily $100. So, evidently the discounts are growing.

And I guess, question one is, is there a pent-up pricing that we're going to see in the future that we're going to start to catch up with realizations?.

Hi, Steve. Jean-Michel speaking. Good morning. I think there is a couple of things to look at.

First of all, there's a big mix effect, too, in the price of pulp because you get a price, which includes fluff, which includes softwood in general, so sometimes it doesn't appear really like it is, because if you just take fluff, our realization is more like $65. So, it's kind of high of what you have here.

The other thing is, we have – when we take what happen usually in the market, but then what happened this year is after the contract negotiation in 2016 and that's a (24:48) question of rebate or whatever, in general, the prices went down in Q1.

So, when we compare to last year, you have to be careful because you have the drop of $20 in Q1 that we have tendency to forget. So, if you take December to today or quarter-to-quarter, you have the increase was down, plus the drop, which will make up for. So, the actual price increase realization is more around $65..

So, thanks, Jean-Michel.

Does it make sense to reduce the discounts, so that the realizations are closer to what the lists are?.

So, to be honest with you, this is a – it's a complicated and complex question. Some customers wants to work with an index. And the reason is relatively logical, which is because we do multi-year contracts. And they feel that it's better with an index. But I'm not always sure that an index and a discount is the right way to make price.

Even if when you look at the long-term, ultimately it comes to the same number. But we don't sell on the index. Let's not forget that we have a lot of customers, which are list price quarter-to-quarter or monthly price, so the mix of contracts, list price, is always another difficulty to do, but I understand your point.

This being said, as of today, we haven't found a better way to look on very long-term contract pricing, that doesn't mean we're not trying to find one..

Got it. Okay. Thanks.

And then just a quick one on the Graphic Packaging deal, so I guess we're going to create a second equity earnings line similar to Ilim and you'll get a $25 million annual dividend, is that the way to model it?.

There'll be an equity earnings line and we will also get, from a cash basis, a $25 million dividend..

Great.

And if you were to monetize it and I – looks like a great investment, in the couple of years, would you get 64 million shares in GPK plus the 4% cash component?.

So, essentially it would be broken down, so 19% of that would be in shares and the remaining would be in cash..

Oh I was thinking it was 16% or 17% (27:14). Okay. Thanks, Glenn..

Yeah..

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

Thank you.

One, obviously waste paper OCC's been very, very volatile, wanted to get your take as to what you're seeing currently and what would you expect to happen in the months ahead?.

I'm sorry, Mark, that was for OCC?.

Yes..

Yeah. Hey, Mark, Tim. I don't know that my crystal ball or our crystal ball is any better than anyone else's. I think that we believe that there may be some elements in the China market that are starting to buy again.

I think there was a period of review given permit levels and making sure that no one exceeded a permit level in China for this year, caused a bit of review and maybe a cessation of some part of purchases. And now, it may be that some of that is starting to come back as we approach the end of the year.

But I think the full effect of what's happened in China is still rippling through the North American market. So, in big picture terms, I think OCC goes higher, it's hard to put an exact time on it until we see exactly what China does around not only re-issuing permits, but at what levels..

And do you have any intelligence on where that dialog on contamination levels in particular might be? And if, in fact, that were to be at the 0.3%, what type of capability do you have in your system to, for instance, bring OCC to meet those levels? And how might the market play out if, in fact, these very aggressive limits on contamination levels were to be put in place?.

That's a great question. I think it's a bit of wait and see. I don't know that we would say we have any differential capability that anyone else does not have, it's a challenge, it's at very low level. I think it's going to impact some grades of waste fiber more than others obviously.

But yeah, it's very low and I don't know how that ultimately gets worked out..

So Mark, let me add just a little bit. This will settle out given the importance of this input material for the Global Packaging business. So for example, if capital is needed to better screen OCC at different quality levels and the economics are there because by not doing it you've eliminated part of the supply, the capital will be spent.

There are other ways to manage fiber quality, the fiber quality gradient by treatments on recycled paper machine. So my view is, this is a really important long-term input material for the Global Packaging business. And as the market grows, the fiber quality will be stretched.

And over time, you will find capital solutions or other types of workarounds to manage a different quality of fiber, just like you manage in some cases different qualities of virgin wood fiber. And so, there is an engineering solution to most of this that the economics will drive..

Makes sense. And two real quick ones.

Can you tell us where your box prices were exiting the quarter versus where they were on average versus the quarter? And then maybe just what current demand trends through the first two weeks of October in containerboard and corrugated were?.

Demand has been good. We're having a very solid October so far. And you know it's a tough comp given what happened seasonally last year. Yeah, we exited the quarter higher on pricing. We were probably $8 to $10 above what the average there is in the appendix.

And we think we're getting full realization on both of the – both the $40 from last fall and the $50 from the spring. If you recall, there's a little bit of – it's customer-by-customer, but some customers were not impacted by the published down early last year.

And so, instead of getting a $40 or $50 they got, you know, $25 to $35 depending on the movement. The other thing is, it did not apply to all tons.

If you're looking at the number and thinking that it's below the $90, there's still a little bit more realization to go and some of the segments like agriculture, pricing was already set as price increase announcements came through and so that will catch up over time..

Great. Thank you..

Our next question comes from Brian Maguire with Goldman Sachs..

Hey, good morning, guys..

Hi, Brian..

Last month, obviously, some of your competitors floated a price increase in containerboard.

And I know you guys make your own determinations on price, obviously you chose not to participate in that, but just wondered, if you could comment on what the decision making process was like there? And your thoughts on the ability to pass through some of the inflation that you're seeing in some parts of the business now?.

Yeah, we don't talk about forecasting price going forward. I can share a little bit about the type of internal dynamics in general that we look at when we consider pricing. There's a number of macro factors that go into that consideration, but it's not just a numbers exercise.

So we try to think both tactically and strategically about pricing and how we want to manage through cycles. So we were looking at a number of factors, OCC cost being one of them, and trying to take into account – at the end of the day what we're trying to do is we're trying to grow margins sustainably.

And so all of the decisions that we take, whether it's commercially or operationally is about creating value and doing it on a sustainable basis..

Okay. Thanks.

And a question on Riverdale, I was wondering if you could comment on what made that the right asset to convert? And once the conversion is done, where do you think that it'll – where you think its cost position will lie against your other containerboard assets and versus the North American industry in general?.

Yeah. A good question. Well, we like Riverdale, it's a good mill, it's in a good fiber basket, and it's got good access to all the geographies that are important to us. So we like the mill a lot. It's got a great team there. And so we're excited to have those team members become a part of Industrial Packaging.

What was the second part of your question? I'm sorry..

Just a sense of where you think like maybe quartile wise....

Oh yeah..

...it will fit on the cost curve, yeah..

Well, yeah, comparing it to brown and white really doesn't make a whole lot of sense. From a white standpoint, we think it'll be first quartile. So we'll get a cost advantage. It's going to be a very high quality sheet.

So just everything about it looked good, and as Mark said, it does free up other machines that were producing whitetop for us, they now produce brown, and so we get a benefit there as well..

Okay. One last one.

Any initial (35:32) thoughts on 2018 maintenance expense or capital – CapEx numbers?.

Yes. This is Glenn speaking. Again, we'll lay out the full view of 2018 either later in the quarter or after the end of the year. But as we look at our outage schedule into next year, we have a heavy outage schedule coming at us as we move, continually move forward into our 18-month outage program.

So net-net, we can expect higher outages next year, but we did not quantify that for today..

Okay. Thanks very much..

Our next question comes from Gail Glazerman with Roe Equity..

Hi, good morning..

Morning, Gail..

In terms of the Graphic Packaging deal, is there any significant kind of corporate over – like overhead that might kind of be stranded with the company? Like, would we expect a fairly higher corporate line next year just as you work through that?.

Yeah, I think you're right on target, Gail. Certainly there will be some stranded overhead that we're going to put our energy around mitigating to the largest extent. We will plan to keep that at the corporate line next year as we work it down. We haven't quantified that exactly yet, but that's an expectation that was factored into all the analysis..

Okay. But you'll quantify it, I guess, as they start modeling next year. And just some of the outages and issues that you've had in containerboard between Pensacola and Orange this year.

Tim, can you just give any sense of where you are with your inventories? And where you might think you'll be kind of as we enter next year?.

Yeah. We've been tight all year, Gail. In fact it's starting with Hurricane Matthew last fall and working through that and then Pensacola as you managed, and now two hurricanes that impacted two different containerboard mills. So it's tight, we're managing it, we're getting better at how we manage it. I think we're on steady footing at the moment.

And I expect us – when you run tight, you build capability. And so I think we've demonstrated to ourselves that we can run with lower levels than we've carried in the past.

One wrinkle in all of that is what's happening with the transportation markets, which have been somewhat disrupted due to the same influences but also a lot tighter, given what some of the rail lines are doing around business model, but also trucking.

So when supply chain delivery times start stretching out, then we need to start working with more inventory to support our network..

Okay. And maybe just one last one. I don't think you quantified but can you give any sense of what your box shipments have been doing year-on-year through what you've seen in October to date? And I appreciate it's a tough comp, but....

Tough comp, but we are running on an absolute basis up about 4% so far through the month. So it feels very strong to us right now..

Okay. Thanks very much..

Our next question comes from Chip Dillon with Vertical..

Yes. Good morning, Mark and Glenn. First question has to do with the Riverdale conversion.

If you could give us the timing of when that starts to switch over from white paper, is it going to be one – like three months or two-month period, where you're doing all the work? Or are you going to stage it like one of the other conversions we know about? And then secondly, that's a lot of whitetop at once.

Are you planning to tweak your system, where maybe you'll focus more on your whitetop production at Riverdale and de-emphasize it elsewhere? Or how should we think about that?.

Hey Chip, it's Tim. Yeah. That's exactly the play, move it from where it's being produced today, get a better cost structure, get a very high quality sheet, and then free up those assets that are currently running it today to run other products. So that's exactly the play.

On the conversion, we said mid-2019, the long lead time on all of that is finishing the detailed engineering, getting the equipment on order, getting the equipment delivered, getting everything ready to go from a project standpoint, the actual conversion really doesn't take that long, 30 to 45 days and it can come off of uncoated freesheet and be back up on containerboard..

Okay. And then, one other quick one.

When you look at the pulp situation, I know there was a question earlier, but – and you mentioned the discount, I would imagine that varies when you re-strike contracts? And if you could just remind us, I understand that about maybe a third or so, maybe 40% are actually renewed or are subject to renewal each year and that's when that discount is addressed and I would imagine there are some movement there based on where the market is overall at that time.

Is that a fair way to look at it?.

Hi, Jean-Michel speaking again. Yes, you're correct, we are in the middle of – almost the end actually, the contract renegotiation. Some are more than one year, so every year roughly we do have 30% to 40% of our contracts, which are being renewed.

It's really customer per customer, because it will depend of the volume they want, the product they want, the mix, so it's difficult to give a trend. I will say so far our renewal, which is the most important, because it shows the confidence from our customers is going very well.

So I think that's the first thing, that means the customers are satisfied with new GCF. And this is what we wanted to achieve first and foremost. And then customer per customer really it varies tremendously..

Very helpful. Thank you..

Our next question comes from Mark Connelly with Stephens..

Hi, Mark. Welcome back..

Mark, if your line is closed, can you please unmute it at this time?.

Can you hear me?.

We can now..

We can hear you now, Mark..

Okay. Thank you. I'm sorry about that. So in your white paper outlook, you call the outlook stable in most places, I'm curious what your expectation is for white paper imports. And I was also hoping you could give us a sense of what the demand looks like from the Brazilian white paper perspective..

Mark, I'm going to ask Mike Amick, who runs our – most of our Paper – white paper business globally to take a shot at that.

Mike?.

Thanks, Mark. And hello, Mark, welcome back. Yeah, on demand from an import standpoint, as you know, North America has been down about roughly 20%. We saw that continue in the third quarter. And with respect to outlook, I don't know that it will change a whole lot.

We also with respect to Brazilian demand, and in particular across Latin America, we posted two positive quarters in Brazil domestically, let's say it was (43:18) about a 0.5%. So it continues to be a little on the light side, and I wouldn't call it robust. We do – are moving into a seasonally stronger period, and we....

Right..

...expect to see that pick up. And demand right now both across the Americas looks pretty good as we kind of closed out third week in October..

Okay. That's super helpful.

And just – I'm sorry to come back to Riverdale again, but as you move that whitetop to Riverdale and re-optimize at the other mills, is that going to actually free up productive capacity as well?.

Yes. So it's absolutely right, Mark. We currently produce whitetop at two other mills in our system, and we would move all of that to Riverdale, and then have the benefit of producing other products at those two mills..

And as you produce those products, is that going to reduce your changeovers et cetera, and will that actually increase the capacity of those assets?.

It'll increase a little bit incrementally, it's just – they'll be producing products that are easier to produce, and so we should be able to squeeze a little bit more volume out of those two mills..

That's super. Thank you very much..

Thank you..

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

Good morning, Chris..

Good morning. Just a couple of follow-up questions here. One, if I could come back to the cellulosic business, Jean-Michel or Mark which ever you want to take this, just so I make sure I understand this right.

When we look on a year-over-year basis, there is somewhere between $130 per ton to $160 per ton higher for various grades, with SBSK fluff et cetera.

And you guys produce about 4 million tons there just a tick under, when we think about – and appreciating that some of that maybe 20 (45:17) is already down or some movement in there, I mean there could be directionally $100 million of price lift year-over-year, that could be a $400 million swing.

Help me understand how that might phase in or help us scale and size what the opportunity may be appreciating that maybe not everything happens in one year and you talked about indices and different components, but I mean it sounds like a pretty big swing, and help us understand how this phasing could occur?.

Yeah. So, let me come back. We produced roughly 3.5 million metric tons, (45:55) most, we have on that about 65% fluff and specialty and 35% market pulp. So, they, as you know, move differently.

The market pulp moves faster even if in the NBSK from Grande Prairie, we work a lot with contracts too because NBSK from Grande Prairie is very, very well appreciated.

When you look at the upbeat on (46:23) prices compared to when we started the year, it's big, it's already in our number now, but you can see it, it does create an amount, which is maybe not far from the number you mentioned. And it's in our number now. I don't think there's – maybe a little bit more if Q4 continue to be strong like that.

So, yes, it is a strong dynamic. I mean, if you take a 3.5 million metric tons and you get just $20 increase, that's $70 million dollars, so any increase in pulp is very strong for us..

Are there not kind of contracts for example on the two-thirds that you make that's in the fluff side that those are generally locked for a year and then they get reset the following year or I guess for a bonus (47:15), I don't feel like that's all been realized when we look at spot versus contract in the numbers..

Yeah..

So, is there another substantial step-up, perhaps, in 2018? That's what I'm really trying to get at..

No, you won't have on 2018 from what we've announced in 2017. 2017, what we announced will be done by the end of the year. When we have a contract that moves, they – even if they are for one year, they are – most of them, most of them again is generality, a quarterly revision with index.

So, the time you get it, it's sometimes six months that you get it. And so far, most of our increase have been on the first half of the year. So, we're getting it this quarter, and so we got another 15 and we're planning to get on average another 10 or something like that, all grade included for next quarter..

But you have the average annual yield curve..

The average annual curve will be there, yes, because we've been very strong on the second half, if you compare to first half..

Okay. I'll follow up a bit later. One other question, I kind of wanted to touch on was, when I look at your corrugated business, it looks like you were – perhaps, Tim, you can help me with this. You were down a couple points in the quarter. I think the market was up a couple points.

Was there something in particular about your mix, in particular customer mix or would we kind of expect that to go back towards market levels as you work through the next couple quarters?.

Yeah we're actually – yeah. I mean, like any point in time in a business like converting, there's things moving in and things moving out. So, we had taken some decisions that hit us earlier. We also have some new business that's coming in, that hasn't been fully ramped up yet. So, I attribute it to just timing.

And you'll see our growth numbers go up as we go through the next couple of quarters with those wins coming in..

Was there anything potentially hurricane-related, that you had a bigger footprint through a region or something of that nature but....

A little bit, but it was – it hit us for about 7,000 tons. So, big enough but not significant in a way..

Okay. That's helpful. Good luck, guys. Thank you..

Our next question comes from Adam Josephson with KeyBanc Capital Markets..

Good morning, Adam..

Good morning. Thanks. Good morning, Glenn. Thanks, everyone. Mark or Jean-Michel, just a couple on pulp, if you don't mind.

In terms of the Chinese mills using more pulp in lieu of OCC at the moment, how sustainable do you think that is? And why?.

That's a very good question because I think, it's sustainable in the condition of – because they don't have the choice right now. I'm sure if they had more OCC or recycling product they could use, they would probably mix it up. So it's more a question of, is the OCC or is the recycled products going to be more available in China than anything.

In terms of is it possible, it is. Actually, you see in China that all grade prices are going up, so it's not only pulp or OCC, it's all the grades because pulp and other raw materials are more expensive, it has gone through and prices are up. Is it sustainable? I can't tell you that, I don't know. Really no idea.

I mean if we stay like we are today in terms of what's going on with the imports or what's going on with the government limiting the recycle, it could stay for some time..

Right. Related question Jean-Michel, I mean, some producers – pulp producers have talked about these global pulp market conditions being the best they've been in a decade, just given all the supply disruptions and the additional Chinese demand, because of the recycled fiber import restrictions.

How sustainable do you consider these conditions just based on all these unusual supply disruptions, the China situation et cetera?.

So I'm going to separate if you allow me, market pulp and fluff pulp..

Okay..

Because in fluff pulp, we don't see that impact. Fluff pulp is linked to the – and consumer consumption, and they use fluff, they cannot swing from something to another. So, the fluff pulp market worldwide continues to be very wealthy with a 4% to 5% growth. And we are growing about 4% to 5% as the market.

So, I think this is one thing you have to separate from the market pulp. The market pulp is today probably, I would say, more shake up than it should be, because there is a lot of things as you were mentioning both from the demand standpoint and from the supply standpoint, which are all going out in tightening it up.

How long it's going to last? I don't have a crystal ball, I don't know, but I do think with time that pressure should not be as big as it is right now..

Thanks. And one last question about fluff versus market a bit, over time fluff and softwood have moved roughly in tandem with each other.

Do you have reason to think that will not continue to be the case and if so why?.

So, I think it is always a question of supply/demand as you know. And they will lack (53:04) some trends, but fluff is always much less cyclical. So, when the market pulp goes very, very high, very, very fast, we go, but because – not so fast. And when the market goes down, we don't go down as fast either. So, it's a less cyclic market.

Then, of course, you have some products with sawmill which can go from fluff to SBSK (53:34) for example, so that can impact one market or the other. So this is more why I think you've seen some trend following each other. I kind of think that with time it could be that that link separates a little bit more..

Thanks a lot, Jean-Michel. I appreciate it..

You're welcome..

Our next question comes from Debbie Jones with Deutsche Bank..

Hi, Debbie..

Hi, good morning. I wanted to go back to Industrial Packaging. I think you addressed some of the questions on price mix and the hurricane impact.

Could you talk about Europe and Brazil specifically? I think Europe was a bit lower than I was expecting? And then just kind of the outlook for both of those regions going forward?.

I can start with Brazil. Yeah, we had a slightly better quarter, which was good to see in Brazil, volume was a little bit better. We've actually been performing quite well on a volume standpoint. Our operations ran very well during the quarter in Brazil as well.

We're nowhere near where we want to be, but it seems like the economy was starting to pick up a little bit more and volume was beginning to recover..

On the volume recovery, do you have any sense of what specifically is improving and driving that? Because there's been a lot of comments about the backdrop in Brazil improving and I don't think a lot of answers as to what specifically is driving that..

It took a little bit of a hit early in the quarter on protein, given all of the disruption from the news that you – I'm sure you've seen, related to some of the political scandals. But that didn't turn out to be as bad as we thought it might and actually recovered through the quarter. But it's fairly broad based.

It just seems like economic activity is picking up broadly in Brazil over the past quarter..

And, Debbie, in relation to the EMEA question, you're correct, couple factors. One is the seasonality in the third quarter that we spoke to, relative to box demand.

The other factor is we are in the full conversion of the Madrid mill and we didn't have any – or didn't have material newsprint sales or production in the quarter, which put some stress on fixed cost absorption..

Okay. So when we look to 2018 then I'm assuming that European contribution becomes positive....

Yes..

...in that segment. Okay. And then just final question. You talked a bit about the $210 million in EBITDA for NA consumer, but – and you're going to quantify the corporate later, but were there any other one-time items that you could call out? I think there was something maybe related to maintenance.

To help us just understand the deviations that we're already noticing?.

Inside the $210 million adjusted EBITDA, that we're using....

Yeah..

...it was largely Augusta, Debbie..

Okay.

And can you quantify that?.

Well, in the quarter it was $15 million to $20 million (56:56)..

Great. Thank you..

And we have time for one final question this morning. Our final question will come from Dr. Mark Wilde of BMO Capital Markets..

Good morning, Mark. Good morning, Glenn..

Good morning..

Hi, Mark..

You know, Mark, you've got two businesses now that are going to be reported below the EBITDA line.

And I just am curious as to whether this is making you think any more about potentially kind of raising your stake in consolidating Ilim going forward?.

So, Mark, the Ilim joint venture is, as you know, a very, very well advantaged business. And we continue to be happy with that investment and with our partners. And we will continue to grow that business together. The ownership structure, if we change it ever, will be done cooperatively and collaboratively with our partners.

But having it below the line isn't the driver. Making sure it's the right thing to do from a value creation. But I understand what you're saying around getting full recognition for that powerful EBITDA generation.

And that's strategically as we kind of think about what advantaged positions mean, that's one of the criteria we look at is what's the best way to structure it and make sure that it's properly recognized and that our investors can see it for what it is..

Okay. Just another one. Glenn, can you just help us with the transaction yesterday? If you guys monetize that position two plus years down the road....

Right..

...what's the tax implication of that?.

Okay. So essentially if we sold the business outright, we would basically have a $1.2 billion (58:47) tax basis on the $1.8 billion and we'd pay 38% of that.

On any appreciation above and beyond that, down – two years down the road, we do have a tax receivable agreement in place, so that would allow us to get an offset since there would be a – that we would have a gain, but the JV would also have a tax basis step up in the amount equal to that gain realized by us.

So basically Graphic [Packaging] would pay us the NPV of 50% of that gain back. So, there is an offset on the accretion of the deal on taxes that we would pay if we exited our original tax exposure, less the basis..

Okay. And then just a couple things on containerboard.

Can you tell us, Tim, did you get any benefit from that summer corrugating medium hike?.

No, it's fairly neutral to us. We do purchase a little bit of medium through trades and so it has a modest negative impact, but it's not substantial by any means. And most of our contracts on the box side are in terms of price pass through and what not are linerboard based, there's a few that have a medium component but not many..

Okay.

And then can you – with regards to Riverdale, can you just help us think about sort of the potential conversion of that second machine down there, at some point how you're thinking about that?.

I think that it gives us tremendous optionality. So we look out in time and there's still good demand on the uncoated freesheet side of the business for number 16 and – but we have the option at a point in time further down the road of thinking about other uses for it..

Are there any inefficiencies in trying to run it as a split mill right now or going forward?.

No. I mean, we do that in a number of places across the system where we have a landlord and tenant making multiple products, we know how to do that. So, I don't – it actually works quite well in terms of covering all the fixed costs that are in there in everything.

We did look at a point in time, what a conversion would look like, and so, we know that and it's just a matter of understanding what the business need is to support our customer growth at a point in time..

So, Mark, one thing interesting about Riverdale, it's a little unique for most of our mills, is it was built by Hammermill and it was built as two distinct process lines.

So many years later, it makes the conversion to one product on one line co-existing with another product on another line, actually a pretty good fit versus mills that were built to be multi-line mills with a common pulp mill and a common backend. So it's really working in our favor now..

Yeah. That actually gets to the question I was kind of – I was really curious about.

Finally, any thoughts about potentially converting white paper over to containerboard down in Brazil?.

That's not on our radar screen right now, given the two things, one is, it's probably the best place in the world to make high quality uncoated freesheet and it's – we competitively export it around the world.

And two, you've got to look at the forest, and most of the Brazilian softwood is spoken for, would take a long time to plant and grow, and you got mostly eucalyptus forest. So the fiber basket is really conditioned for hardwood based grade, so at least in the near future..

Okay. Fair enough. Good luck in the fourth quarter, guys..

Thanks, Mark..

Thanks..

That will conclude our Q&A session for today's call. It is now my pleasure to hand our program back over to Guillermo for any additional or closing remarks..

Thank you. And thank you, everyone for taking time to join us this morning. As always, Michele and I will be available after the call for – after this call. Our phone numbers are on slide 21 of the presentation. Have a great day..

Ladies and gentlemen, thank you for participating in the third quarter 2017 International Paper earnings conference call. You may now disconnect your lines..