Good morning. My name is Crystal and I will be your conference operator today. At this time I would like to welcome everyone to the International Paper Second Quarter 2008 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. [Operator Instructions]. I would now like to turn the call over to Tom Cleves, Vice President of Investor Relations. Please go ahead. Thomas A. Cleves: Thank you, Crystal. Good morning, everyone and thanks for joining International Paper's second quarter 2008 earnings conference call. This call is also being webcast. Our key speakers this morning are Chairman and Chief Executive Officer, John Faraci, and Senior Vice President and Chief Financial Officer Tim Nicholls. During this call, we will make forward-looking statements that are subject to risks and uncertainties, which are outlined on slide two of our earnings presentation and at the end of our press release. 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 at internationpaper.com under Investors. Our website also contains copies of the second quarter earnings press release, and today's presentation slides. I'll now turn he call over to John Faraci. John V. Faraci: Thanks Tom and good morning, everybody. Thanks for joining us. This morning Tim Nicholls and I will review our second quarter results and performances in individual businesses. We'll also discuss our third quarter outlook, including an update of our acquisitions of Weyerhaeuser's Packaging business which we expect to complete shortly, and then we'll take your questions. So summing up the second quarter, I'd say despite very tough market conditions, we delivered solid results and total earnings par share increased by 8% versus the second quarter of 2007 and by 37% versus the first-quarter of 2008. Second quarter earnings from continuing operations, before special charges, were $0.56 a share, and we achieved these strong results despite input costs that increased by $0.34 a share, since the second-quarter of 2007. Earnings from our operating businesses that is, businesses. excluding forest resources, were $0.50 per share. Our strong second quarter results reflected strong no operations around the world, good cost reduction and global balance, when I say that I mean earnings from our businesses outside North America. Turning to the next slide here, if you look at this $0.56 a share, it represents our second best quarter since 2000. And now I'll ask Tim to comment on our results in more detail and I'll come back in a couple of minutes and talk about the outlook. Tim S. Nicholls: Okay. Thanks John and good morning everyone. I'm on slide 6, and if you look at the comparison of our second-quarter results with the second quarter of 2007, we achieved improvements in price costs and mix, but improvements were offset by the continuing increase of input costs. Corporate and other category includes $0.05 which was a favorable pension adjustment, or a favorable pension expense, which reflects the benefit of our $1 billion pension contribution at the end of 2006. The other item in there is the benefit of $0.02 from the sale of our Natchez mill property. Ilim contributed $0.08 per share and Vicksburg reduced earnings by $0.02. During the third quarter we expect to begin receiving our business interruption payments from our insurance providers and that will offset the loss of Vicksburg profits. Now let me turn to some of the factors that impacted earnings in the quarter. On slide 7, we are showing sales revenue by operating business and all of the segments had increases in revenue with the exception of Forest Products. And selling prices were higher in all businesses. Total sales revenue increased by about 10%. Slide eight, we show the breakout of input cost inflation that we typically saw. And another large increase in the quarter is global input cost increased by $211 million or $0.34 per share, as John mentioned with, energy and chemicals continued to account for the large increases. But even looking at spread, most of that is related to fuel surcharges and other fuel related costs. Comparing selling price increases to input costs, looking at North America, in 2006 and 2007 our price increases exceeded input cost escalation. But we've fallen behind in the first six months of 2008 as input costs are rising at a faster rate. And just looking at the businesses, printing papers prices are nearly keeping pace with input cost but inflation is lagging behind. So with that, let me turn to the business segments themselves, and I'll start with Printing Papers. On slide 10, we see earnings increased by $38 million despite the $119 million increase in input costs. Prices increased by $95 million and operating cost improvements in the U.S., Brazil, and Europe added to $51 million. And a big portion of this is related to the fact that we've now taken out all our high cost capacity in North America by shifting into linerboard production and pulp production. North American Printing Papers earnings improved by $32 million. Slide 11 is showing a little bit more data on the segment's earnings and relative to the second quarter of 2007, earnings increased 20% and margins increased to 12.6% of sales. North American paper volumes of course were down, a big part of this reflecting the conversion of the Pensacola mill to linerboard production and the conversion of our Louisiana mill to market pulp, but also impacted by the sluggish demand, given the weak U.S. economy. Market pulp volumes increased reflecting the conversion of the Louisiana mill again but also reflecting our volume increases at Riegelwood. And year-over-year, our prices increased in all of the global regions with a significant increase in North America. Turning to Industrial Packaging, it's on slide12, highlights the year-over-year Industrial Packaging earnings, which decreased by $21 million. We did have improvements in price volume, cost mix which totaled $66 million but these were largely offset by $57 million of input cost increases. The $28 million improvement in cost mix includes the positive year-over-year impact of $13 million in one-time cost at Pensacola during the second quarter of last year. We had increased maintenance outages and that reduced earnings by $21 million. However, it was a little bit better than what we had projected as we took an abbreviated outage at one of our mills, as a reaction to the Vicksburg explosion, and Vicksburg did impact us by $15 million. So, through June Industrial Packaging is... in terms of outages, it's already completed 80% of the planned outages for this year. And if you look at the earnings in normalized for outage expense across the year and also add back the Vicksburg expense, we feel pretty good about performance. We would have posted year-over-year earnings that were slightly improved. Industrial Packaging margins decreased as a result of not being able to keep up with the input cost inflation. Volumes declined slightly in North America for boxes. European container volumes also declined due to a combination of both weak industrial demand and also weaker than normal fruit and vegetable harvest. However, board and box prices increased in all of our regions. Consumer Packaging, relative to the second quarter, earnings declined by $4 million. Coated Paperboard and Foodservice earnings declined as again input costs add into margins. Consumer Packaging did absorb $38 million in input cost inflation, which looks like an inordinate amount but we did suffer from higher wood costs at our Canton mill, energy related costs at Riegelwood and heavy use of chemicals for bleaching and coating. Polyethylene prices have increased significantly during the quarter. In Shorewood, results improved but the division, still posted a loss for the quarter, so still work to do there. On slide 15 highlights U.S. Coated Paperboard volumes that grew slightly and prices increased but again not enough to overcome the inflation that the business experienced. On slide 16, I'll turn to xpedx, where we are showing sales revenue increase relative to second quarter of last year. But sales volumes in commercial printing and packaging declined reflecting the weakening U.S. economy, especially in the financial sector. Sales volumes for facility supplies increased by 2% and again even in xpedx we're facing cost pressure related to fuel and freight costs, and we've experienced about $1.5 million per month in increased operating costs. On the next slide just to share a little bit more about xpedx. While a lot of the paper distribution channels were struggling with slow growth in the traditional commercial printing markets, xpedx has been successful in increasing its sales revenue with a diverse offering of printing and packaging and facility supplies. Xpedx is a market leader paper merchant in North America and continues to pick up market share. Commercial printers primarily use coated freesheet and while the industry for... industry demand for coated freesheet has declined by 11% in the first half. Xpedx has increased its shipments by 3%. So despite the weak U.S. economy on commercial printing volumes, xpedx continues to win customers and to increase its overall sales. Forest Products, again the focus here is to continue maximizing value. We show that year-over-year Forest Products' earnings decreased by $53 million, reflecting the changes in volume and mix of the land that we currently hold versus what we had last year. During the quarter there we did continue to sell our land at or above the original appraised values per acre. With that, let me turn to some of our International operations. I'd like to start with Asia. We're building new capabilities in Asia, and our investments in China are going to allow us to capitalize on a high demand growth market. Where margins tend to be lower but we also benefit from a very low capital cost. For instance, we just completed the construction of a world-class coated paperboard machine at a dramatically lower cost than what would have cost to build it just about anywhere else in the world. And if you turn to slide 20, you can see pictures of the facility. This is a 420,000 ton machine which has started up. It's been running for a couple of weeks now. The machine was from start to finish built in just over a year's time. And even in the first two weeks of startup we've already had a 1000 ton a day which should be a 100% of the ramper and A1 production. So a great story here, during the quarter we also had the start-up of a new box plant and also a folding carton plant in China. Ilim joint venture had a very good quarter. Their first quarter earnings $32 million reported, and now our second quarter was $0.08 per share. This did include a $14 million after-tax foreign exchange gain and also a $3 million after-tax charge to write-off a share repurchase option. Relative to the quarter, Ilim benefited from increased paper and containerboard volumes, steady pulp volumes and prices that were increasing in both domestic and exports markets. Ilim is facing the same input cost increases that are being experienced in other parts of the world, and they showed higher cost for wood, chemicals, energy and freight, which were partially offset by very good manufacturing operations. So we... just as a reminder, we continue to report Ilim's earnings on a one quarter lag. And we'll be reporting their second quarter earnings in our third quarter numbers, and we expect a decline of some significant, since they had extended maintenance outages in their second quarter at the mill. And also, we don't expect the foreign exchange benefits to repeat. So earnings are going to be lumpy quarter-over-quarter, but we expect solid earnings for the full year. One other item related to Ilim during the quarter, Ilim did sign an agreement to sell its share of a waste paperboard mill to Knauf which is its joint venture partner in that mill. This is 220,000 ton per year mill that manufactures folding box board and wallpaper board. And we are expecting, or they are expecting the transaction to close in the third quarter. This mill really was not part of our reason for investing in the joint venture and really not strategic to the business plans. And so after the divestiture, we will expect Ilim to continue concentrating on the core businesses of market pulp, industrial packaging, and paper. With that, I'll turn to cash flow. On slide 23, cash flow for the quarter increased three fold from the second quarter of 2007. We saw changes in working capital components, accounts receivable inventory payables that were significantly more favorable in 2008, reflecting improved working capital management. And in fact, year-over-year, our operating working capital as a percent of sales improved by 70 basis points. So looking at the first six months of this year, input costs are a big part of the story and we've experienced about $380 million in increase cost which has decreased our earnings by $0.60 per share for the first half of 2008. Increased energy cost accounts for the majority of it, prices for oil natural gas, coal have increased our costs directly. But energy costs are also indirectly driving cost increases for wood and for chemicals. Even with that, we had a solid first half, as we increased our profits by $0.20 per share, excluding Forest Products. So we felt like we had a good solid quarter and a solid first half of the year. With that, I'll shift from earnings to giving you a bit of an update on the Weyerhaeuser acquisition. Right now we are on schedule to close the transaction early next month. We've got the management team in place, right down to the facility level. And they are ready to start executing on day one. Having worked with the integration teams over the past four months, we are even more confident now in our ability to generate synergies at a faster pace than originally planned. The acquisition in 2008 is going to be slightly dilutive to our earnings but we're expecting that the cash flow will be positive this year. We'll start to also enjoy the reduced cash taxes immediately in 2008. If you recall this is the tax benefit that we had estimated at net present value of $1.4 billion as we step up the assets, because of the nature of the transaction being an asset sale. On the next page, just cover the financing plan, when we announced the acquisition we talked about $2 billion five-year term loan and a $4 billion, 18 months bridge. And since the announcement, we've been able to have a very successful bank syndication. And so we are now increasing the five-year term from $2 billion to $2.5 billion. We also issued $3 billion in bonds in late in May and we're expecting that it will bring about $500 million in cash and short-term debt to the close. During the third quarter, we expect that we will repay the short-term debt and we're also thinking that we will be de-leverage some of the incremental debt more quickly than we had originally forecasted. On slide 28, just to give you a few financial statistics here, based on the work that we've already completed, we're expecting the acquisition to dilute our earnings this year as I mentioned, but to be cash flow positive. And we're expecting about $50 million in merging benefits by the end of the year. It will cost us $80 million in one-time inauguration cost this year to achieve those. And there is also a $35 million non-cash charge related to the write-off of the inventory at the acquisition date. Interest expenses is expected to be incremental higher at $160 million to $180 million. But, we feel very good about where we are with the team and the forecasts for the back half of the year. Separate from the $400 million in synergies that we've talked about. If you recall we had $400 million in synergies identified by the end of year three on a run rate basis. We're also targeting other improvements in the company and we're expecting by 2010 to reduce overhead by somewhere between $150 million and $200 million. So, we're not just focusing on Weyerhaeuser. We're focusing on other opportunities around the company. So, with that, I'll turn it back over to John, he will wrap up with the outlook for the third quarter. John V. Faraci: Thanks Tim. For those of you following along, I'm now on slide 29. Just looking ahead and talking about the third-quarter for a minute. I anticipate that we're going to face a challenging environment. No question about it. We expect some continuing escalation in input costs especially for wood, chemicals, and freight. We also expect energy costs to remain high during the quarter and we're going to manage our capacity to meet our customers' needs and manage price increase to stay ahead of this input cost escalation, which we think is going to be with us for a while. With respect to pricing in the third quarter, we expect prices for uncoated freesheet, coated paperboard, containerboard and corrugated boxes to increase as we continue to realize the announced pricing... our announced price increases, but we don't expect the full benefit of price increases until the fourth quarter. So in essence, we're still looking at a margin squeeze. We do expect volume for printing papers to remain similar to second quarter levels, and we could see a slight seasonal lift at this point of time and, but that's not what we're expecting. Demand for market pulp is expected to increase and we expect demand for container board and boxes to be vacant and flat from where it's been. Our third quarter earnings will reflect a significant decrease in our North American maintenance outages and a $15 million increase in our outages in our European paper operations. So despite the anticipated price improvements, which are coming, we expect third quarter earnings from our operating businesses, that is excluding product resources to be less in second quarter earnings as input cost are still going to outpace the price increases. I think that'll be the case as we get into the fourth quarter So, now let me give you a separate outlook or update on our outlook for Forest Resources' earnings. We have signed an agreement to sell certain minerals rights on land in Louisiana it's called part of the Haynesville Shale, the name it goes by, for about $260 million. These are mineral rights that we retained on land that we sold earlier. We expect to close this transaction in the third quarter. At the end of the second quarter our Forest Products portfolio includes 270,000 acres of land and some oil and gas price rights with a total net present value of $675 million to $775 million. That range includes the sale I just spoke to you. So this the Haynesville Shale we expect 2008 forest product earnings to be in a $350 million to $450 million and obviously those increased earnings will enable us to pay down the acquisition debt faster than we anticipated So let me just end up before I take your questions. Despite a very tough market environment especially North America International Paper delivered solid results. We experienced unprecedented input cost increases, and a weakening U.S. economy at the same time. But despite that we increased our earnings by 8% versus the second quarter and 37% versus the first quarter of this year. We achieved those earnings despite input cost that increased our cost but $0.34 a share compared to the second quarter of last year. We've announced price increases for all of our major products in order to offset the input cost inflation over the balance of the year. Our strong second quarter results reflect reduced mill operating cost and a benefit of our global operations, which Tim talked about. We're cautious about the third quarter. We are increasing prices for our product as I said earlier, I don't think we're going to realize the full benefit of the increases until we get to the fourth quarter. Over the last couple of weeks, energy costs have moderated. If you can call $125 barrel oil moderating, but we're very uncertain, which direction these are going to go, going forward. And we expect chemical cost and wood costs to continue to increase. Even if input costs remain, I will be able to regain our margins, but probably not until the fourth quarter. So, now let's turn it to back to Tom and we'll l open up the session for question and answers. Thomas A. Cleves: Thanks John. Crystal, we are now ready to entertain questions. Question And Answer

[Operator Instructions]. Your first question is coming from the line of Chip Dillon with Citi.

Yes. Good morning and congratulations on a nice quarter. As we look ahead... my first question has to do with the forest land that you still have left and also with the minerals rights. John, did you have any idea like a year or two ago that you had this kind of value or is it something that has kind of come up more recently in terms of what people would pay for them? And then secondly, I'm sort of calculation that you have about $400 million to $500 million dollars left and is it still a good guess to assume you will get back realized that is in income in forest lands over the next three years assuming the demand is there? John V. Faraci: Well Chip, we knew we had mineral rights and the reason we held back that roughly at half a million acres that wasn't straight coming from timberland, as we knew there were values there that were beyond very commercial timberland, some of it in the land, some of it in minerals rights which we knew we had. And to be honest with you, the price we got for those rights were substantially better than we would have gotten, had we sold them earlier in the year. And the transactions have gone from $1000 an acre up to $20,000 an acre. We're at the high end of that. So our timing was good and that's why we kept some of the land and some of the mineral rights out of the large sale that we did a year or so ago. In terms of the remaining portfolio, the objective here is to maximize the value, and we'll monetize it very quickly. If we think that's the way to maximize the value or monetize it slower if that gives the best values. The land that we continue to hold is not commercial timberland and it's not all what I would call conventional real estate development land. It's kind of a mix [ph]. We've been getting sales prices that have been above our appraisal. We haven't been selling very much of it.

Got you. Now a second question quickly is, we've seen natural gas prices drop about 25% in the last month. And I certainly can appreciate your caution for the third quarter. Are you building in this drop, recent drop in energy prices and how that might impact your chemical and freight as well in the third quarter? Or is your forecast more based on where we saw prices a few weeks ago? John V. Faraci: Well, we do hedge our gas purchases, kind of on a rolling basis. So we're going to get benefit of lower gas prices, as they stick around for a bit in terms of our hedge strategy. But we're not re-forecasting and we're not smart enough Chip to figure out what's happening in the energy prices on the flow and effect. They are a lot higher than we anticipated when we put together our operating plant last November. And what we are telling everybody in the company is that soon they're going to be high and we love to be surprised in the upside, the upside being they go lower.

Got you and last question, you didn't have this table in this quarter, because maybe things are kind of moving around, but could you give us your best guess as to what the tax rate will be in the third quarter and maybe for the year and an update on where you might see depreciation for both... CapEx both this year and next year? Tim S. Nicholls: Chip, hi it's Tim. We... the tax rate we're still estimating between 32-33% for the year now. The capital we've said that we're... and this is for IP standalone and not including Weyerhaeuser that we would be around $1 billion for the year, depreciation about $1.1 billion. It's really too early to start estimating and giving out lot of forecast on what Weyerhaeuser is going to do with that but we'll update it in the third quarter.

Got it. Thank you.

Your next question comes from the line of Claudia Hueston with J.P. Morgan.

Thanks, very much. Good morning. John V. Faraci: Hi Claudia.

Hi. I was hoping, you could just talk a little bit more about the Industrial Packaging business, the results there were very strong. Can you just talk a little bit about what drove this strength there? John V. Faraci: You want to comment on that. Tim S. Nicholls: Sure. Well volumes held up reasonably well even though we had a strong softening economy. We also had a good mill performance, and as I mentioned in my comments, even though it was down from last year and we did take a little bit less in terms of maintenance outages. When you normalize the Vicksburg impact and maintenance outages is very strong. So we had weaker volumes in Europe, but margins improves... and increased box pricing in both U.S. and Europe. John V. Faraci: Claudia, I would just add to that. All around our North American businesses, what we saw in the second quarter was a lot of cost reduction efforts getting into the bottom line. And there are things we've been working on that are longer term and there are also some short term things that we ask the organization to kind of call guidance [ph] and all that stuff started to show up.

Do you think there's still more room to go from here to some sort of the legacy IP business in that regard? John V. Faraci: Well absolutely, as Tim said, we obviously got Weyerhaeuser coming in, so we're going to get the merger benefits associated with that. And Tim said probably more faster, but beyond that and kind of rest of International Paper, we're looking to take another $150 million to $200 million of F&A costs out over the next 12 to 18 months. And we'll be doing that not kind of in one day, but we'll be doing it kind of already all round the businesses at IP both domestically and internationally, but a lot of will be here in North America. Tim S. Nicholls: Claudia, if you look at the back half of this year, the business has already taken 80% of the outages that they had scheduled for the year. So that's going to help the second half of the year plus we'll get recovery on business interruption starting in the third quarter. And so there is not only in terms of the performance in the business second quarter, but going forward there should be a little bit of upside there.

Okay. Thanks that's helpful and then just quickly on the corporate expenses. Is there any guidance for that either for just IP standalone or for IP plus Weyerhaeuser? Tim S. Nicholls: Not from the standpoint of IP plus Weyerhaeuser. Our corporate expense in the second quarter was flat with the first quarter.

Is that a good run rate to use going forward? Tim S. Nicholls: No, I think it's in the range of we said. It was $21 million in the quarter, $21 million in the first quarter. And I think that's consistent with the range that we've provided before.

Okay. Thanks

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

Good morning John, good morning Tim. John V. Faraci: Hey Mark.

I wondered if we could dig in a little bit on consumer packaging and you could give us sort of some sense kind of how the mill versus the converting side of that business are working? John V. Faraci: Well, let me talk about the mills. There are three mills in the consumer packaging business Riegelwood, Augusta, and Texarkana. Texarkana is running very well and Riegelwood had a good quarter. Augusta had a bunch of operating problems. The real issue in consumer packaging that's bleached board business, the mill side of it is our costs are going up more than our prices are. And we're working on that account-by-account. So they had...industrial packaging and consumer packaging had a big margin squeezes in North America when we look at price versus cost. And we're starting.... we're making progress on those. We got to deal with the month customer at a time.

Okay. John over in the industrial packaging area, is it possible to give us some sense of what the Vicksburg restart looks like right now? John V. Faraci: We're looking at the fourth-quarter.

You know when in the fourth-quarter? John V. Faraci: No, we don't. That's is going to depend on timing. We've got materials ordered, labor scheduled, and we're mobilizing to get that done.

Okay and now that you haven't put on a date on when the Weyerhaeuser closing. I'm just curious once the deal does close will you be able to talk with us a little more clearly about sort of plans for the business and plans for the integration going forward or should we just wait to see kind of how that rolls out through press releases and things? John V. Faraci: Well, we'll announce the Weyerhaeuser closing when it occurs, and we expect that to be early next month. Early next month is just around the corner. Since today is almost the last day of the month. And I think what we do is, on our third quarter release, which will be at the end of October. On the 31st, we will give you. Carol will be here... Carol Roberts will be here and we'll give you an deep-dive as we can give you on the Weyerhaeuser based on the first couple months of operation.

Would you said John just because the backdrop looks more difficult from an economic standpoint than it did when you announced the deal that you're more in clients to take action, sooner rather than later as you integrate these businesses? John V. Faraci: That's really not the reason Mark, although you're right the economic environment is worse although looking at the GDP numbers this morning. I actually feel like its not at 1.9% GDP for the quarter. Really the fact that we can move faster is the integration planning that we've done. We've got all the management name, write down the facility managers. And as you know in this business, you want to have good alignment, because it's a decentralized business when you get off the box plants. People know what their jobs are. There's no uncertainty. We've announced the leadership team. We've got names of the Weyerhaeuser employee and also of the company. We are going to run a big chunk of the box business. So it's the planning we've done, both in the mill side and the box side that gives us the confidence that we can get more faster.

And final question. Anything that you can tell us about freight and fuel surcharges that you were looking at in the business. I think you had an invoice charge over at xpedx. I don't whether that's struck. And I don't know whether you're doing anything in the manufacturing businesses to try to try to recoup transport costs. John V. Faraci: It's account-by account, business-by-business. We're not as successful as getting the surcharges in as our suppliers are getting surcharges into us. And we've got some pretty catch, but our pricing practices really don't work in high inflation level. The lessons we've learned is we've going back and re-thinking how we're doing pricing, again very aggressively in some business to remove faster, because the pricing decisions that we used to make don't work in a high inflation environment.

Good luck with Weyerhaeuser.. John V. Faraci: Can't wait to give you an update on it in a couple of months.

All right.

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

Hi good morning. Going back to industrial packing, can you talk a little bit about the sequential price improvement you had. And just give a sense of how much of that would just be normal mix versus maybe something related how you shift your business to cope with the [indiscernible]? John V. Faraci: Well if you look at the slide. I think it's 13 Gale. We really didn't get much price at all in North America, most of which are looking there at $2 a ton on board and $5 a ton on containers, it's going to be mess. So our prices I think... the way I think about is they are flat quarter-to-quarter and input costs went up $21 million. So we've announced the price increase to our customers and that will flow in a little bit in the third quarter, but most of it will flow in fourth quarter. So, we're behind the curve on industrial packaging.

know you're behind the curve, but I was just wondering if there was anything sustainable in terms of mix improvement. Just another question looking at the slides on the back on wood cost. There is a pretty steep trajectory I guess in the last data point. And I'm just wondering how much... is that really just or is there something going on with the underlying cost of the wood? John V. Faraci: No, that's it's mostly transportation driven Gale by two things, lack of chips because of what's happened in the housing market. We're having to go further for round wood, because we don't have the chips available to us that we're getting and fuel surcharges, with diesel over $5 or whatever it is today, our surcharges are starting in the low 2s. Tim S. Nicholls: Harvesting costs. John V. Faraci: Whichimpacts harvesting cost and transportation.

Okay. And just last question. If you can give a little more color on demand both in terms of industrial packaging and one could appreciate, the reported data has been very choppy at that. I'm just wondering if you can help us figure out what the real trend line might be. John V. Faraci: The real trend line. If I knew that Gale, I would out there on our website. We're down 5% year-to-date. The industry... [indiscernible] is to sub-date its logistics. We couldn't figure out how seven was working when we looked at our business. And I'd ask Tom Kadien who is here. I mean he is right in the middle of commercial frame, kind of all around the country to stock, receives the customers' goods. It does vary market-to-market, customer-to-customer. Thomas G. Kadien: Yes I think that commercial printing is still weak. Put it all together, as I call it printing and writing including coated and uncoated, but we're seeing, I'll say a flat spot in market. It has not gotten worse from where it was in May and June but... July is not a month where you are going to see anything get better either. So, it's kind of a weak market out there in print and office supplies. John V. Faraci: If you look at the segments Gale, offset, envelope foam, imaging, they're all down about the same amount. There is nothing that's positive and something down double digits. You know our box business, again it's a segment-by-segment and we are up a little bit, quarter-over-quarter 2%, the industry is down and I think that this goes back to the next of durables, non-durables and food customers are winning in the marketplace. And we've got some customers who're growing with even though the market's down, because they are growing their business. And no question that weak dollar, or the dollar is helping some of our customers who are much more export competitive, when we're lined up with the right customers. And we got the business that helps on demand side. But, fundamentally all feels like a very, very weak economy coupled with high inflation.

Okay. But, I mean similar to the comment about, slot and printing and writing, is the trend relatively stable kind of weakened, but stable, or is it getting... are you seeing any acceleration? John V. Faraci: Well, we've got some areas where it's slow. We get back to school, which may be a bit of a lift. The elections are going to happen, and that duty supports paper demand that nothing and not for us to say, that we're going to see improvement. We just see a continuation of the trends that we've been living with since... really since about April. And, first part of the year start off a little stronger, and then it got progressively softer as the economy got softer. And that's kind of where we are.

Okay. Thank you.

Your next question comes in the line of George Staphos with Banc Of America Securities. John V. Faraci: Good morning, George.

Hey guys, very good quarter. Congratulations on it. I guess the first question more of knit type of question. The one time costs associated with the warehouse Weyerhaeuser I think you said $50 million or so. Will that largely hit third quarter or fourth quarter, or will it be spread pretty evenly as we try to model out? Tim S. Nicholls: Hi, George, it's Tim.

Hi, Tim. Tim S. Nicholls: It's going to be a bit lumpy, and it's not 50, we're expecting 50 and merger benefits this year.

Okay. Tim S. Nicholls: 80 and it's a variety of things. I think it's going to depend as we close on the transaction and get in and start implementing. We'll be dealing with a number of factors. So, I'm not comfortable splitting that out at this point between the third and the second quarter.

That's fine. You mentioned that with Weyerhaeuser imply that the synergies looked to be, in line or better than you expected. And you clearly, it sounds like you're more enthusiastic with the transaction. What have you found, if you can share some of that detail? I know we'll have till wait for October 31 to get more of the detail, but what have you found thus far that's incrementally a bit better than perhaps you would even expected? John V. Faraci: Well, we think... we're going to got new organizations, organized and defined, quicker than we thought. Everybody knows our job. So, we're able to make all the changes that we thought we might take several months to make. Make them faster. Warehouse has got some good facilities, and some good operations. And, we never thought, we're going to go have to go in for a fix it up type thing. But, we also found some things I think were going to benefit International Paper. They can't people out of project. They're doing we see some upside in that, in terms of capabilities going forward. But, I think, lot of it right now, George, and think about the merger benefits are going be bigger. We're thinking they're going to be faster. And, we're got to try to make them bigger, but, I think that the news here is, when we said the $400 million, we had it. I think we had $175 million in the first year. Tim S. Nicholls: Yes. John V. Faraci: And usually those things, not much happens for the first couple of months.

Sure. John V. Faraci: We're going to get out of the shoot faster than we thought. So, that's the good news which makes Weyerhaeuser a positive cash flow as Tim said. And the only thing that helps this is Weyerhaeuser, people are pretty damn busy active about their packaging business becoming part of International Paper. And I think, that's a... from our previous experience that's a huge plus. We've got, everybody want the rug above the same way they want.

It's nice to be loved. And John is any of that shared learning if you want to call that part of the incremental IP, reduction you're talking about by 2010, or is that really separate in the way, you did... John V. Faraci: That's just... of the $400 million of merger benefits, Weyerhaeuser were about $200 million of that. And that's kind of rounding here to make it simple, about $200 million of that is cost of estimate [ph]. Some out of Weyerhaeuser, some out of IP, is just how we do it. Over and above that, we're looking at our cost structure even if Weyerhaeuser wasn't happening to get another $150 million to $200 million or some of that happens with attrition. Some of it's actually happening now in different businesses, but we're committed to taking out some additional cost over and above the merger benefits.

Alright. Last question, and I'll turn it over, switching gears to uncoated freesheet. And within papers you are doing a terrific job and managing the decline and raising prices to offset inflation. Is there a demand environment, either a magnitude of decline or a greater than expected sustained period of decline that would begin to test your overall thesis regarding on credit free sheet within North America here, I'm speaking, and your strategy. Thanks guys. Good luck on quarter. John V. Faraci: Yes, I'm just not going to speculate on what... how that would play out George. We're committed to balancing our capacity with our demand. We think we've got now, got low cost assets with recent run. But, we're going to balance supply and demand for our customers demand. And, the... so far that's working out. So, I don't want to forecast what we do it, we'll wait to see what it is, and then we'll respond to it.

Okay. Thanks very much.

Your next question comes from the line of Peter Ruschmeier with Lehman Brothers.

Thanks. Good morning. Congratulations on a very good quarter. Maybe a question for Tim if I could. For raw materials, I believe that you're using primarily LIFO accounting. But, can you remind us in order the roughly what the sport is between FIFO, LIFO on your inputs? Tim S. Nicholls: Off of the top of my head, Pete. John V. Faraci: We've got some other experts sitting around. Tim S. Nicholls: We have our Chief Accounting Officer sitting here with us. Pete, I suspect he is willing to say something on it.

Principally, the raw materials and work in process, and finished goods in our North American operations are on a LIFO basis, whereas the non-U.S. operations are on different FIFO cost basis.

Okay. That's helpful. And then John, I was curious if you could share a view that you may have on whether Russia will implement the export duties on logs. And if so, how will this affect Ilim if at all going forward? John V. Faraci: Well, it can only be whatever they do, it can only be positive. It can't be a negative because we're both Ilim joint venture and in our 100% our own IP or almost 100% of our IP operations. We're processing all the fiber in Russia, and then shipping the product not shipping any fiber outside the country that we processed. Russia announced a set of log import duties which wood import duties, with export duties which go up significantly, and those are being negotiated with the affected country's right now, they can more of an issue in Scandinavia and it might be in China. But, wherever regardless to how that plays out, it can't be anything but a positive for us. And we're also... Ilim has moved ahead and started to apply capital to some of its forestry operations, which have substantially reduced their wood costs, because the infrastructure and equipment related investments which will lower wood costs significantly.

You know Pete, just to add on to that. This is all a sign of course to increase investment in Russia for adding value to fiber. Those probably are most likely types of investments. First out will be on the wood product side. So, if you think about saw mills and plywood, increasing residual chip availability, it's a good thing for the paper and pulp mills as well.

And, I guess, on related point, can you provide an update on the timing and amount of the various growth initiatives of Ilim? And do you have much of a timeframe yet for the pulp and packaging expansions going forward? John V. Faraci: Well, I think Ilim announced, because they've had their opening ceremony, just opened box plant, which was part of the strategy to expand the industrial packaging business. They're working on the business plan. And Ilim Board is involved with CapEx in 2008 is going to be about $350 million, for Ilim which is flying away more than a center for them. They're working through that now so.

Big chunk of that on the forestry side to upgrade, harvesting capabilities.

Very good. Thank again.

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

Thank you. And also congrats on a solid quarter and a challenging economy. Just quickly following up on the Russia, you trucked much your product through Finland? John V. Faraci: We truck the product into Russia, most of what we produce in Russian is categorized [ph]... is sold in Russia. And that I think, we saw little bit in the Ukraine, but its..

Okay great. Great. so, you're not trucking a lot through Finland. John V. Faraci: No, no.

Second-- John V. Faraci: The border is about three miles west of where our mill is.

Second, on the Weyerhaeuser acquisition, I guess one of the things that really captures my attention is that it can generate a lot more free cash, than earnings in the year ahead, -- John V. Faraci: That we think too.

Right. And can you help us a little bit better to understand the spreads between where cash taxes and book taxes will be, and only to the extent you can give us more color, on cap spending needs for the Weyerhaeuser business versus the DD&A? Tim S. Nicholls: Well, what we said is that for 2009, our capital spending will be a $1 billion which will include the incremental spending for Weyerhaeuser. So, if you think about $200 million to $250 for Weyerhaeuser, and the rest of the company being around the $800 million level. So, the benefit... and I don't want to provide a forecast looking out of this point, what we said is, that the big benefit is in the tax shield getting the step-up on the assets. So, but we think it's a very powerful cash flow story.

And the book DD&A for the Weyerhaeuser business, is that close to $500 million? Tim S. Nicholls: Yes. You are around that.

Okay. Can you, are you willing to guess me what cash, the cash tax rate for the overall company might me, next year? Tim S. Nicholls: Not yet.

Okay, fair enough. And then lastly on the mineral rights, what you're selling here to Chesapeake, was that land that you owned, or is that from land which you had previously sold, but you held on to the sub-surface mineral rights? John V. Faraci: It's land that we previously owned. We sold when we held on to sub-surface mineral rights.

And when you listed in that slide, the net present value et cetera. of your land and mineral right holdings was that just for land that you owned, or did that also include your view potential value for mineral rights that you still hold from lands that you had sold? John V. Faraci: It's just what you said Mark, it includes the land, plus the value of the mineral rights that we held in that land, including the transaction that we anticipate will close in the third quarter, Chesapeake Energy Corporation.

Okay. Thank you.

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

Thank you. First of all, just on freesheet. The improvement we saw in June, is there any chance that there was some pre-buying, do you have any opinion on that? John V. Faraci: Yes, there's no question there was some pre-buying and Tom Kadien is sitting here, he probably did some of that.

Okay. And can you give us the status of those machines that are under construction in Brazil? John V. Faraci: Yes, the well, there is one machine, started up this plant for February... it's one machine and right on schedule. The really good news is, we're seeing very strong growth in Latin American market, both in Brazil and in the surrounding countries, and growing our volume in the region which, that for that machine was built to do serve the region. And as the Brazilian economy grows, consecutively now for a couple of years, you'll see less and less of that capacity go outside the region. Then the team... it's under construction in China, as Tim said started up last week, a couple of months ahead of schedule. And we're already making a close of production quantities of bleached board again. Almost all that of product is going to be sold in local markets.

So,that will be a little bit of accretion for the current quarter and then ramping from there? John V. Faraci: Yes. And that capital is already in the ground, and the story in Asia, is the margins aren't as good, if you like to return on sales. But, the capital is we need to invest to get dollar of revenue is 30 to 40% of what it is here in North America or in Brazil.

Okay. And switching gears kind of follow on to Mark Weintraub's question. The mineral rights you just sold to Chesapeake apparently went up almost 20 fold in the last year. But, I'm not sure that you NPV for all the land change all that much. So, could be there some incremental value elsewhere, or did something change, you got a lot more for the mineral rights and yet the NPV didn't change that much? John V. Faraci: In our view, the land value is down a little bit, and our view is the mineral value obviously is way up. And but, we're not selling land below our prices; we're just selling less of it. So, we're being very selective here about how we go at this. But, I'd say the conservative way to look at this would be the mineral value, the last [ph] leakage we've had in the land values.

And what's funny that you should say that. Why do you think the land values are going down, is it because some of this development land, or because timber values are going down. So, people are doing in NPV, because I think some of your other friends in REIT land haven't been talking that way? John V. Faraci: Have what?

Haven't necessarily been saying that land values are going down. John V. Faraci: Well. We can't speak to that because we've sold all our land about a year and half ago. And we know our price solid for it, we are not selling a lot of straight timberland. I think hurdle rates and discount rates have gone up. What people are looking at, they're going to invest in land that's got some development potential whether it's commercial or residential down the road. In each properties we have, are adjacent to some land owner or recreation properties really different markets. But, I think just to be conservative, since we haven't banked all the value yet, they've monetized it all. We're saying, we still see about $1.5 billion of value in that whole portfolio which we talked to you about two years ago, and maybe will be a little more, maybe not. But, we think that the there certainly is some buffer to whatever happens on the real estate side, with what's happening on the mineral rights and energy side.

Okay. Great. Last two question on that front. Would you still be willing to crystallize the entire NPV today, if the right bit came along? And are you seeing any friction from people who would finance these transactions? John V. Faraci: The answer to that is, yes and no. Yes, we would. No, we haven't.

Thank you very much. Congratulations.

Your next question is coming from the line of Richard Skidmore with Goldman Sachs.

Good morning, John. John V. Faraci: Good morning.

Just a quick question on slide 9, which is the price cost slide. If you were to look at the end of 2008, and given what you've currently announced for price and your expectations for inflation, would you expect that pricing cost to be in line, at the end of the year or do you need some additional price to offset cost inflation? John V. Faraci: And I think Richard... I think you have look at the different businesses, be closer on papers, be behind on packaging and probably we'll need more price to catch up, given the current view of input costs.

And then, just maybe to clarify on the paper side of things. Would you expect that you're closer to the cost inflation in paper in the third quarter, given that the pricing was going in, in June? John V. Faraci: Please, I'm sorry Richard, say that one more time?

Well, just... I guess, just in terms of the price cost for the printing papers business, with the price increase that was announced and being implemented in June, would you expect that sort of in the third quarter you'd be closer to in line with the inflation? John V. Faraci: Yes.

Okay. Thank you.

Your last question comes from the line of Joshua Zaret with Longbow Research.

Well, thank you. I want sort of look at, what you're doing to lower your energy costs in terms of energy related projects. And I think I'll ask that by... the question I had is what percentage of your $1 billion CapEx this year is dedicated to energy-related projects? And can you give us an example of the most potent project? And then going forward, I mean, your CapEx goes down for the Weyerhaeuser business, will you be expanding that given the environment we're in? So, if can you address that please? John V. Faraci: well, it's probably a couple of $100 million, over the last two years or roughly say, maybe 15% to 20% of our capital budget, it's been going to energy consumption reduction projects. And, they vary by mill. But what we're doing is we're working on substituting lower cost energy sources, but the best way to attack this is to reduce the Btus for a paper made, and we're down about 25% over the last couple of years. And Tim is saying a little more than that. And the hurdle rate we're using on these projects, is about 35%. So, we're investing ones that are very, very attractive, with short paybacks. And we'll be looking at the Weyerhaeuser mills, to see if there are any opportunities to do that. Tim S. Nicholls: The fall-off in capital spending for IP's base business before Weyerhaeuser is just a reflection of the conclusion of some of the strategic projects we've been investing in like the paper machine in Brazil, and the board machine in China. So, we still have rooms for energy consumption reduction projects in our capital plan.

Is that something you see accelerating given the current environment? John V. Faraci: Well, we're going to continue to apply a higher hurdle rate, and short payback. I think the energy prices over the last five or six years, and say they have been quite volatile. No one thought they go as low as they did go. And certainly, no one thought which we didn't think they go as high as they are currently are. So, we are not going to invest in sizeable capital projects that have seven year paybacks. And, we're going to do all the ones that have short paybacks as very attractive returns, first, then we got a long list of those to work on. As we get into Weyerhaeuser mills and to box plants, we'll see what those opportunities are. And start to pick off the low hanging fruit first but, I feel pretty good about our capital spending Josh in terms of being able to do the things you needed to keep up facilities competitive or also take advantage of some of the cost reduction opportunities. We are not investing in North America to add any capacity. And as Tim said, our two capacity projects will be completed by the basically end of this year.

Okay. And final question, there was a... there seems to be a jump in your intercompany pulp sales, where did that occur and what was the reason? Tim S. Nicholls: Would you say it again Josh, I'm sorry?

There seems to be a jump in the quarter in your intercompany pulp sales. And I was wondering, where that was occurring and the reason? Thomas A. Cleves: I'll follow up with you Josh, I'm not sure we know that level of detail, but I'll find out and come back to you.

Okay. Thank you. John V. Faraci: Don't know. Thomas A. Cleves: You stopped the panel on the last question Josh.

Okay, great thanks. Thomas A. Cleves: You're welcome. Thanks everybody, this is Tom again. Crystal now, thanks for all your today. Emery and I'll be available via phone for any follow-up questions. Thank you. John V. Faraci: Thanks a lot.

This concludes today's conference call. You may now disconnect.