Jay Royalty - VP, IR Mark Sutton - Chairman & CEO Carol Roberts - SVP & CFO Mike Amick - SVP, North American Papers & Consumer Packaging Timothy Nicholls - SVP, Industrial Packaging

Chris Manuel - Wells Fargo Securities Philip Ng - Jefferies Mark Weintraub - Buckingham Research Group George Staphos - Bank of America Merrill Lynch Anthony Pettinari - Citigroup Chip Dillon - Vertical Research Partners Debbie Jones - Deutsche Bank Paul Quinn - RBC Capital Markets Gail Glazerman - Roe Equity Research Mark Connelly - CLSA Limited Adam Josephson - KeyBanc Capital Markets Steve Chercover - D.A. Davidson Mark Wilde - BMO Capital Markets Scott Gaffner - Barclays Capital

Good morning, I will be your conference operator today. At this time, I would like to welcome everyone to the International Paper Second Quarter 2016 Earnings Conference Call. [Operator Instructions]. Thank you. I would now like to turn the conference over to Mr. Jay Royalty, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good morning and thank you, everyone, for joining international Paper's second quarter 2016 earnings conference call. Our key speakers this morning are Mark Sutton, Chairman and Chief Executive Officer; and Carol Roberts; Senior Vice President and Chief Financial Officer. During this call, we will make forward-looking statements that are subject to risks and uncertainties which are outlined on Slide 2 of our presentation. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures are available on our website. Our website also contains copies of the second quarter 2016 earnings, press release and today's presentation slides. Lastly, relative to the Ilim JV, Slide 4 provides context around the joint ventures, financial information and statistical measures. With that I will now turn the call over to Mark Sutton.

Thanks, Jay. Good morning, everyone. Thank you for joining our call and Thank you for your interest in International Paper. I'm going to start on Slide 5. International Paper delivered a strong second quarter with solid contributions from our key businesses across our enterprise, resulting in an EBITDA margin of 17.6% which is 50 basis points higher than the second quarter of 2015. Free cash flow for the quarter was strong at $527 million. Operations performed well and a heavy quarter of maintenance outages was executed very effectively. The recently converted machine at the Riegelwood mill is running well and on schedule with our expectations. On the portfolio front, we completed the sale of the Asia box business and closed on the purchase of the Madrid mill. We have an agreement with Holmen to produce newsprint which they will sell until we start the recycle container work conversion in mid-2017. We expect the converted mill to be up and running in the fourth quarter of 2017. And in early May, we announced that we reached an agreement with Weyerhaeuser to buy their pulp business and we expect to close on that transaction in the fourth quarter. I'm pleased to reported that we successfully completed the lump sum buyout program for our term vested employees in the IP pension plan which we initiated to further derisk the plan, consistent with our balance sheet strategy. Finally, Ilim joint venture delivered another solid quarter of performance and International Paper received a $58 million dividend in the quarter. Turning to Slide 6 and speaking a little more specifically to the financial results for the quarter. Revenue was down year over year, primarily due to the sale of the Sun joint venture in China and the sale of our Carolina brand of coated bristols last year. EPS of $0.92 represented strong performance coming off a solid first quarter. And as you can see in the chart on the right, return on invested capital for the first half of 2016 was solidly above our cost of capital at 10.6%. This is an important metric that we watch very closely because it's a good indicator of whether IP is creating value for our shareholders over time. When we run our businesses well and when we deploy capital in a value-creating way, we see this metric improve. We've had six consecutive years above our cost of capital and we've been on an upward improvement trend for several years. All in all, I am pleased with our performance in the quarter and the first half of 2016. With that introduction, I'm going to turn it over to Carol Roberts to cover the business highlights and the outlook for the third quarter.

Thanks, Mark. Good morning. As Mark mentioned, IP delivered a strong quarter at $0.92 EPS, driven by seasonably stronger volume and good operational performance. Prices were lower, as expected and I will put some color on this as we get into the various business segments. We successfully executed a heavy outage quarter that was slightly lower than the first quarter due to less downtime from the mill conversion process at Riegelwood. And results for the Ilim JV were slightly lower than the first quarter, mainly due to planned maintenance outages in the quarter and some modest cost inflation. Turning to the business segment and beginning with industrial packaging, the business had another strong quarter, driven by seasonably stronger volume, good operational performance and some benefit from input cost. These were partially offset by lower containerboard export prices and lower box prices, due to the impact of the January Container Board Index change, Contract renewals and a slightly favorable -- less favorable mix. Maintenance outage expenses were higher as well. The North American system took 85,000 tons of economic downtime in the quarter to match our supply with our demand. Turning to Slide 9, I want to highlight some of the key levers we have within IP's North American Industrial Packaging business that enable us to build upon what is already a great business and make it even better. Our sales teams and designers are working with our customers every day to redesign packaging, leverage innovation and find ways to take cost out,. IP has a low-cost, world-class mill system, along with a vast box and specialty plant footprint with a diverse range of capability. And that footprint serves thousands of customers across every consumer segment. We're always working to improve our portfolio of business and grow with the highest value customers and we have a portfolio of customers and product second to none in the industry. On the manufacturing and supply chain front, our teams are using the most advanced tools and techniques to drive efficiency improvement and cost reduction. And this of course, positively impacts our margin. As Mark mentioned, we're committed discipline and targeted capital investment program, in the right places to maintain and improve this world-class system. For example, over the last few years, we have implemented a couple hundred million dollars of cost reduction projects in the areas of consumption reduction that have IRRs greater than 25%. We continue to have a robust pipeline of these types of opportunities across our broad network. As I said, lots of levers that have contributed to our success and will continue to do so as we move forward. Slide 10, moving now to consumer packaging, the business experienced a much improved quarter, driven by good operation, effective cost management and the lack of maintenance outages. Prices were slightly lower on folding carton and plate stock but this was fully offset by a more favorable mix. Within this segment, our Foods Service business benefited from increased volume as we moved through the summer cold cup season. In printing papers, earnings improved due to lower outage costs associated with the Riegelwood mill conversion, partly offset by a less favorable product mix and lower pulp prices. The negative $11 million in the price mix bucket is fully attributable to the less favorable mix associated with the ramp-up in qualification of the newly converted machine in Riegelwood. Paper volume was higher in Europe and Brazil and it is also worth noting that the significantly lower outage expense in pulp was partially offset by higher planned maintenance outage expense across the remaining paper business. Turning now to Ilim, the JV turned in another solid quarter of performance with volumes up almost 5% year over year. The JV had planned maintenance outages at two of the mills which negatively impacted earnings. FX was generally stable throughout the quarter and as Mark mentioned, IP received a dividend of $58 million during the quarter. The outlook for IP equity earnings for the third quarter is generally in line with the quarter just completed. But I would note that there was a positive gain of $0.01 on FX related to the JV's U.S. denominated debt in the second quarter that we assume will not repeat in the third quarter. Turning to Slide 13, before I move on to the outlook, I would like to give an update on actions we've taken or are planning to take around continued prudent management of IP's pension plan. As we previously disclosed in the first quarter 10-Q, we offered a voluntary pension buyout for term vested former employees. We completed the program and made the associated payments in the second quarter. We paid a total of $1.2 billion to approximately 25,000 former employees out of plan assets, settling the corresponding liability in keeping with our strategy to take risks off the table. A requirement of settling a liability of this magnitude resulted in IP taking a non-cash settlement charge of $439 million or $270 million after-tax for unamortized actuarial losses which impacted our non- operating pension expense for the quarter. Additionally, we elected to make a voluntary contribution of $250 million to the plan in the second quarter. And we plan to make additional contributions of $500 million by the end of the year. Based on our analysis, we believe these contributions make good sense in light of the tax benefits as well as the fee savings and is consistent with our strategy of derisking the plan over time and managing our balance sheet. So, on Slide 14 moving to the third quarter outlook, volume is expected to be mostly stable across the businesses, with the exception of EMEA packaging which will be lower due to normal seasonality in Morocco. Price for the quarter is expected to be lower in North American industrial packaging due to the flow-through effect of the January PPW Index change. This will negatively affect earnings by about $10 million. To a slightly lesser extent, earnings are expected to also be impacted by a less favorable mix in the pulp business as the majority of the tons coming off the new capacity at Riegelwood during ramp-up will be market softwood rolls. All other pricing should be largely stable. Operations are expected to continue to perform well and input costs, particularly energy and OCC in North America are expected to be higher in the third quarter by roughly $35 million. Maintenance outage expenses are forecasted to be lower by about $60 million. IP equity earnings from the Ilim JV are expected to be relatively flat, assuming a stable FX. With this assumption, there would be a non-repeat of the favorable $0.01 gain from FX on the JV's U.S. denominated debt in the prior quarter. And as you can see there are a few other minor items noted on the chart. I would also note that several of the trends we're seeing, as we move into the third quarter, such as input costs are likely to impact the fourth quarter as well. So with that, let me turn it back over to Mark.

Thanks, Carol, so before I wrap things up, I wanted to take a moment to touch on the strategic opportunity we announced during the quarter that IP has reached an agreement to acquire the assets of Weyerhaeuser for the pulp business. When we complete the transaction, International Paper will be a premier global producer of fluff pulp, with a strong position in North America and the ability to serve growing global markets. This strategic combination will also provide us with a talented team and superior research and development capabilities, including a valuable patent portfolio that will enable IP to better serve customers and make our combined businesses more competitive and more profitable. The valuation around the acquisition is very compelling and offers an attractive all-in multiple, along with solid double-digit financial returns through real and significant synergies and low integration risk. Again, we're very pleased with this acquisition and the integration opportunity ahead of us and look forward to strengthening this business and the rest of International Paper. Moving to Slide 16, I want to briefly come back to the bigger picture for International Paper as we've evolved over the last 18 months or so. Our strategy is to produce fiber-based packaging, pulp and paper where we have advantage production positions and we serve advantaged markets. When we choose the right products, make them in the right places and serve the right markets and the right customers and when we execute very effectively, we generate the greatest value for our customers and our shareholders. Looking at the recent decisions we've made, I believe our actions in Asia, the improvement in our North American Industrial Packaging business, the investment in European packaging and the opportunity of our Riegelwood Mill conversion and the purchase of Weyerhaeuser's fluff pulp businesses are all consistent with this strategy. So, in closing, I am encouraged how, by how International Paper continues to consistently perform in a challenging and changing global environment. Our focus is squarely on execution, from working closely with our customers to deliver superior value to running and improving our operations, to driving cost out of our system and supply chain, all to maintain and improve margins, as you've seen IP do over the last several years. Our financial discipline is evident from our constant vigilance to maintain a strong balance sheet through the rigorous capital allocation. We're committed to strengthening our portfolio businesses and to increase the value of the Company and ensure an attractive future for IP and our shareholders. Finally, we remain intensely focused on strong free cash flow generation and delivering returns well above our cost of capital to drive shareholder value. With that, I would like to turn it back over to the operator and open the lines for questions.

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

Carol, I just wanted to kind of come back to the pension item, if I could, for one second. I mean, as you now have this done, it looks like as a chunk that might go out this year, what might we -- how should we think about pension expense for IP, as I think you've got $360 million-ish or so running through this year, how might that change next year in 2017 both for expense and then cash out, et cetera, requirements?

So, a good question, Chris, so just one comment, relative to what will flow through the P&L next year from a service cost, I don't anticipate any big change relative to the service course. Of course, that goes through the P&L, as you would expect, again, on the non-operating pension expense, that moves around a bit. I would say directionally, given that we have settled out this current liability related to the buyout, in theory, it should go down some due to that but we won't know until we see how the end of the year comes, how interest rates come out and all the things that goes into that equation.

Your next question comes from the line of Philip Ng from Jefferies.

You guys had a very strong quarter on the operations front on consumer, can you give a little more color on that improvement? Is that stable going forward?

The operating cost associated with consumer was strong on a number of fronts. We had really good operations. We believe that is sustainable. Part of the cost picture was also the -- not having the Augusta outage which occurred in the first quarter. We don't have any outages in the third quarter as well, so we feel exceptionally confident about our runnability and our performance moving forward. The other thing I would add to this is we have made some pretty good headwinds around our supply chain cost and our cost to serve as well. So I am very encouraged about that in the context of certainly the quarter and our outlook.

Okay and I guess switching gears a little bit onto your printing paper business. If I look at your heat map chart, it is citing flattish price or a stable price? I would have thought with the increases in the marketplace, you would have seen an uptick. Is some of that being offset by lower pulp prices? Thanks.

You're referring to the page in the Appendix. Again, this is Mike Amick. Overall, prices are going up in papers and we expect that to continue to happen, as you can expect and would appreciate, mix comes into this thing, freight lines come into this thing from a transaction price standpoint. But overall, our paper prices are moving up. It could be -- it's just a factor of timing, a lot of times, more than anything else, Philip.

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

So just first -- actually one follow-up on the paper pricing. So is it reasonable to anticipate that, in the fourth quarter which actually typically though we see something weak for pricing in paper but should we see that the lagged impact and see better pricing in the fourth quarter, assuming no change in the marketplace from where things have trended? And then, additionally, if we could get some more color on what you're seeing in the Industrial Packaging business, an update on market conditions with some reasonably favorable data as of late?

So Mark, this is Mike again, so to make sure I answered your question, the lack -- you were breaking up a little bit. The lack of what? Which?

Basically, should we be anticipating that the prices would be higher in the fourth quarter than the third quarter due to the lagged impact of price increases going through?

Well, what we're not going to do is really forecast on pricing, as we shared with you in the last call, this is going to be, more or less, a second-half event. We will -- do expect to see prices to move as we kind of move forward. Where we settle out on the fourth quarter, there is still a fair amount of water under the bridge to pass there, so let's stay tuned for that as we report out on for -- the fourth quarter, okay?

Sure.

Market conditions, so far, I think are roughly in line with what we expected, through the first half, of the year on box. A little bit uneven from month to month, but overall, pretty much what we expected and I think we continue to look at 1% to 1.5% growth for the full year. So, I think in line with how we were thinking about it. On the export side, demand continues to be good for craft liner. Markets seemed like they started to firm as we went through the second quarter so we will have to see how that plays out, but on balance, it feels as expected and pretty stable.

Your next question comes from the line of George Staphos from Bank of America.

I had a couple of questions, maybe first seguewaying a little bit off of Mark's question. So, should we assume that if the outlook is 1% to 1.5% in growth for industrial that, that is what you've been seeing early in the third quarter, Tim? And have you seen any effect at all from Brexit in terms of customer expectations in Europe or even relative to the U.S.? Again, it would appear that we haven't but just wanted to ask that for the record.

Yes, so far, third quarter looks like it's playing out pretty much as we expected. In terms of Brexit, I will just speak for a containerboard, because there is a whole European business apart from what we do here in North America. But we have a very small position in the UK, so from a containerboard export standpoint, we don't expect any significant impact at all.

For the Company as a whole, the first order of effect is the Brexit action is pretty minor, given our market positions there. We really don't make any products in the UK. We do serve the market. Second order, I think everybody is still trying to figure that out.

My question is probably more on the second order than on the first order but I understand why there would be a little bit of lack of clarity at this juncture. Two other questions and then I will turn it over. Carol, can you talk a little bit -- or Tim, can you talk a little bit about what additional cost reduction opportunities you might have? What other leverage you might have to optimizing the mills? I think the number that's been cited in the past and again, on this call was around $200 million. And as you ultimately achieve that, as you look out another couple of years, does it get harder to get increased in improvement -- performance improvements at that level, given that you're already so low on the cost curve? That's question number one and then question number two, just a quickie, can you update us all on any things to be mindful of in terms of the progress and the process with the Weyerhaeuser closing? Thank you.

I'll just take the first part and Carol can jump in, but I will take the first part of the question around cost optimization. We feel like it's a pretty rich environment. When you've got such a large system, we move, on average, 200,000 tons a week from our mills to our box plants. So, a lot of productive capacity, a lot of supply chain. We've got people working in all of those spaces, looking for value creation, waste elimination-type opportunities, so is it easy? No, it is not easy. We worked pretty hard at it, but I think it's a pretty rich environment for us.

George, on Weyerhaeuser, as you know, we're going to the regulatory approval process. We've done this a couple of times in the recent past. In our experience, would say things are going as you would expect them to go. We still expect to close in the fourth quarter.

Your next question comes from the line of Anthony Pettinari from Citi.

Year-to-date, we've seen a really large number of acquisitions of independent box plants by some of your competitors. And I was wondering if you could just talk, maybe generally about how that's changed the commercial environment or if it's changed the commercial environment or has it impacted, the ton you sell into the open market? Or have you had to shift your board sales around? Just wondering if you could speak to that. And then in terms of your own integration rate, can you remind us, do you have a target integration rate or a preferred method for growing on integration rate or any thoughts you could share would be helpful.

Yes, let me start with the last and work backwards, on integration, we don't have a target. What we want to do is pick the right segments, pick the right customers and where we can deliver value proposition, take great positions and then grow with those customers over time and then it will be what it will be. We like our integrated channel. We like it here in North America. We also like it in the other parts of the world where we ship more to our converting businesses there. So we also like the two other channels that we participate in. In terms of the acquisitions, it hasn't impacted us directly. We haven't had to make any types of shifts and I don't think it -- from my standpoint, it's one opinion but I don't think it has yet had any material impact on the size of the independent market or it's very fragmented. There is a lot of players in that space. So we haven't seen any direct impact caused by acquisitions over the past few years at this point.

And then just a follow-up, you do have a decent sized presence in Turkey, given the events there. Have you seen any disruption to your shipments or your people there? And are you taking any steps to manage risk into the second half?

So, specifically to the events of the past couple of weeks, no, we have not seen any major impact. I think you look at that region of the world and Turkey, because of just where it is located approximate to some of the unrest, we've seen demand -- economy underperform and some diminishment of demand. But overall, it is a very good market for us. We believe in it long term and we manage day-to-day to balance out the risks that we have. But we've still got a sizable presence there and like it very much.

[Operator Instructions]. Your next question comes from the line of Chip Dillon, Vertical Research.

The question I have the first one is on the maintenance situation. It looks like you guys are I guess doing better than you thought you would. If I go back about six months, it looks like your expense was scheduled to be around $534 million for the year. And then in April, that fell to $508 million and now it's down to $462 million for the year. And I didn't know if that was more of a function of deferring or were you finding better ways to do what you'd normally do?

Chip, this is Carol and I will take a shot at that. I think it is both. I think we always look to find better and smarter ways to execute outages. I think we're also making choices about what works, do we need to do, do we have some headwinds against our expectations for the year. So Mark has challenged the organization pretty hard about what are some of the options we have. And then we have got a very large global footprint so one mill is -- we don't break it out at the level of detail but there is some work that we have been able to push into the next year with extending outage cycles. So it's all of the above and the main story here is it continues to be an important part of the work we do, vital to our running well, but we're going to spend our dollars very, very wisely. And so I think that's what you're seeing and we'll try to continue to provide the transparency such that you can see how that evolves through time.

Chip, I would just add on top of that, it is a strategy for us to get better in this area. So each year, we deploy more predictive tools than we did the year before. And that leads us to making different decisions in where we spend money and what we have to repair versus what we thought we had to repair. And we will continue to get better at that, there is a lot of technology and techniques, precision maintenance techniques and predictive tools that help you work on just what needs to be worked on. And we're getting better at that every year.

Okay, good. And one other question, is when I look at the balance sheet, the pension number has risen from about $3.5 billion to a little over $4 billion and I would assume that includes the impact of what you just settled and the $250 million. And so I guess my question is, when we include the $500 million you're going to put in the second half. And if we were to assume rates stay about where they are, would that be a fair number to see on the balance sheet or close to a fair number we should expect to see at the yearend again, assuming no change in rates from here?

Yes, Chip and the one clarification which I think I stated but if I didn't, I want to be clear, with this program that we did, it did require a remeasurement of the plan which normally we wouldn't be doing at the end of June. We would remeasure the plan at the end of the year, so the liability that shows on the balance sheet has been impacted by the very low interest rates that hit at the end of the June which was a combination of all kinds of things going on the globe. So a couple of things will happen, one is we will have a half of year of asset performance. We'll have the contributions that go in and we will also remeasure the plan, depending upon how interest rates move from June 30 for International Paper to the end of the year. So, yes, you are thinking about it correct.

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

A call earlier this week, I think one of your competitors, was asked about the ability to get permitting for craft mill capacity in the U.S. and suggested they didn't think it was really possible or more difficult. I was wondering if you could just give us your thoughts on that because I think it's important, not only for the fluff pulp business, but also longer term craft containerboard mill assets in the U.S.. I think the conventional wisdom has been that, that was impossible.

Debbie, I think we haven't tried to permit a new pulp mill in awhile in the U.S. so we can't speak from actual experience recently, but we think, just based on some of the things we know about existing mills and the way that you have to operate wood pulping operations, it's a pretty difficult process to imagine happening.

And then my follow-up question, just we haven't talked about D&A or CapEx that much on the call. Is the $1.3 billion still a good number for the year for each?

Debbie, this is Carol, I think the number is probably trending closer to $1.25 billion and that is a combination of a couple of things. One is we're on unit of operation, so as we run our North American containerboard system, we -- people can -- you can see our utilization of those assets has impacted it. So it has come down a little bit from our original expectations.

Our next question comes from the line of Paul Quinn from RBC Capital Markets.

Just a question on synergies with the prospective purchase of Weyerhaeuser's pulp business, just noting that whereas you got the $28 million in cost savings in 2014, $47 million; in 2015, they were targeting $40 million; to $50 million in 2016 so that totals $120 million and you are expecting $175 million. So I'm just wondering where that $175 million, where the major buckets are and is there that much synergy left in the business?

I think the $175 million we feel really good about and it's in the categories that we have demonstrated when you put two really good businesses together, you can find it. SO some of it's obviously an overhead, but sourcing and how we buy all the inputs and get synergies there. And big one for this business is supply chain, in bound supply chain, outbound supply chain and probably most importantly, making the right products at the right facility. So that your total cost to serve is the lowest and your total manufacturing cost is the lowest. There's other optimization opportunities but that's really the buckets that will drive the synergies.

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

I was wondering if you could give a little bit of color on fiber cost, both wood and OCC? So your wood costs have been coming down pretty nicely. You seem to be at a couple-year low; is that a trend you would expect to continue and just any thoughts on what has been driving the recent uptick in OCC and do you expect that to continue?

I'm going to comment on the wood and then I think I will probably let Tim comment on the OCC. The wood is a combination of effects. It's --have been -- I think we would have described it in years past as stubbornly high which it was above historic levels. For us, it has come down and that's been a combination of weather, of strategy, of inventories, of a lot of things that are going on. So we're pleased to see that. And we're hoping that the current level of wood cost will continue. We've got some concerns about other input headwinds and wood, quite honestly, is not one of the ones that we're anticipating, so a pretty good story on wood and then I will let Tim comment on the OCC.

I would just say more of a pull from China which is having some impact. You've seen prices in China go up over the past couple of months. Maybe because there is a little bit less generation of locally-sourced OCC in country, but I think this is what we expect, a normal type of variation around OCC pricing as we go through the year. It's going to up; it's going to go down based on generation and usage. Our long term view is that it will continue to rise over time, but I think this is just a normal seasonal type of variation that we're experiencing at the moment.

And just on consumer board, we're I guess four to five months into the start of the MESA board project, been only a week or two into the start of the Kaukau mills but I'm just wondering if you could give some perspective, particularly given your position in the European market, how -- where that board is going and how it is impacting the markets, if at all in any global region?

I can start here, we know that from an import standpoint, that we've seen imports in North America up, let's call it roughly 10% to 12%. That is off of a fairly smaller base so it amounts to about 20,000 tons and we know that some of the product is here. We haven't seen it at an appreciable level right now, so from a significant standpoint, at least at this state, nothing significant in North America.

Gail, I think in the European context, we redesigned our product offering out of our Kwidzyn mill and it's a real specialty, high-end, high-yield board and so the customers we have in the segments we play in, we haven't seen any disruption. I do think that board you mentioned is finding its way into some of the market, but not exactly in the spot that we're.

Okay and just on that, any sense that it's causing a repatriation of exports domestically? Is it fine for global markets?

Directly, we've certainly seen some, as you see published, a drop in exports here in North America, particularly around SBS but attributing that to a specific event is a little bit, would be a little bit challenging to do at this stage.

I don't think we've had a personal experience with our export customers and have made -- closing a position to that particular product, but could it be happening more broadly? I think we'll figure that out, but we haven't had that exact experience.

And your next question comes from the line of Mark Connelly from CLSA.

First question is on consumer, that business has now been cut back with Sun and all that and it's now at a point where the business looks pretty good and attractive but the scale is small enough that we're starting to wonder what its significance is. Do you see enough opportunities to grow that business over the next couple of years, whether it is internal spend or M&A, consistent with the strategy that you've laid out? And if you do, is that going to be more likely in the U.S. or elsewhere?

The consumer business is still an important business and you think about that strategic framework around fiber-based packaging. It fits squarely in there and we have a niche business, that's no doubt. SBS on the board side and one type of converting but we also have in Europe, a very good, also niche, high-end FBB business. When you take them all together, our challenge internally is to figure out the ways that we can create value by improving those business and/or growing, but when you put the two together and you look at the size of International Paper, they are not insignificant in the size of our Company. The ways to improve -- there are the ways you would imagine, should we make more converting? Should we offer other substrates? That is constantly in our strategic evaluation. And I wouldn't necessarily comment on whether we would do more or do less or more in another part of the world, but the U.S. business and the consumer behavior for these types of products is pretty strong.

And the second question, I was happy to see that you highlighted the higher-value pulps beyond fluff that you're going to have in your portfolio. Those have not gotten a lot of attention and of course, IP has some historical experience there. Is that an opportunity, do you expect to try to expand now that you've got this nicer, deeper portfolio?

I think, the way to create value in a specialty fibers business is obviously to continue to trade up to the higher value, whatever the product is doing for the customer and some of those higher value pulps provide a tremendous technical value or service. And so, we will have and to the question I got on synergies, we will have enough capacity with the two systems together to really optimize and make more of those higher-value products as the customers that we have need them. So we're excited about that and we will continue, like we do in a number of our other businesses, start with a product mix and a customer mix and work to improve that over time, with more of the higher value mix in the portfolio than when we started.

Adam Josephson from KeyBanc, your line is open.

Tim, just one on your containerboard inventories exiting the second quarter. How would you characterize -- Tim?

Yes, I'm here.

Sorry about that. Do you expect further reductions over the balance of the year or do you think you've sufficiently right-sized your inventories, if you will, to reflect the current freight and logistics situation?

I think we made a lot of progress. We were down in the quarter again and look, we try to run a lean supply chain to begin with, so we're managing it real-time, day to day, week to week. And we're making adjustments as we need to. As I mentioned earlier, we moved roughly 200,000 tons a week in board out to our system, so I think we came in lower in the second quarter. I think we have adjusted to supply chain. For the moment, we will have to see what happens. The thing about supply chain is, it doesn't stay static. If you talk to the rails -- the rail companies or their parking cars and trying to make adjustments and so, I think we're nimble enough that hopefully, we see those changes coming soon enough and we react ahead of time.

And Carol, just two quick one's for you, just on the EBIT bridge that you talked about. You've got the $60 million lower maintenance but you have the $35 million or so higher input costs and then $15 million or so of lower price mix In North America. Are those the big buckets that you would point us to, just to be clear?

Yes, Adam, I think those are the big movers and the big buckets. And I think the one for the second half that will be interesting to see how it plays out is going to be those input costs. Clearly, the outages are pretty clear and some of the commentary we gave around prices, things that we have the line of sight to. So we'll have to see how the input cost evolves over this second half of the year.

And just one last one on pension. So after the $500 million of contributions in the second half and given whatever you expect asset returns to be, what do you expect your pension gap to be at year end? And will these contributions that you're making have any impact on your share repurchases? Thanks very much.

So, on the pension, I think you can think about the contribution into the pension should definitely contribute toward closing the gap. The big unknowns will be really discount rates and interest rates and I've got to think they should only go up from where they were on June 30 and then asset returns, so it would be hard to speculate on those things but clearly, the $500 million should be helpful. And your second part of your question, Adam?

Carol, just given the pending acquisition of the fluff pulp business and given the pension contributions you're making, will that have any bearing on your stock repurchases, either this year or next year?

Yes, so, we remain committed to the buyback and as we all know, we have probably a little less than 1 billion left, that said, we've always said that if there were opportunities for reinvestment into the business to create value, that they -- those would be important priorities and with the size and scale of the Weyerhaeuser pulp acquisition, getting the funds to take care of that and addressing our debt profile will probably be our highest priority in the next year or so. So then you could draw a conclusion about what does that mean for the buyback? I think it will depend very much on how things progress, the business conditions we see. I feel very good about our ability to continue to generate very strong free cash flow, so we will have to see how that manifests and unfolds over the next 12 to 24 months.

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

So my first question is on free sheet, it doesn't appear that you had any impact from the price hike but I'm wondering if that is a function of mix and should we expect any benefit in the second half of the year?

Price has been and will continue to move up, there is some impact, as you rightly stated. It centers around mix; it's also timing and so forth. But we do expect to see prices continue to go up.

And then secondly, it was kind of a weird press release from the FERC, indicating that you had regulatory approval for the Weyerhaeuser assets. So I'm, A, I don't even know if that was real, but if it is, is that a good precedent for the DOJ process?

That is the Federal Energy Regulatory Commission. We have gotten that approval, but that is a different process than the DOJ process. It's one -- when we say we're under regulatory approvals, that is one of the regulatory approvals. Everybody focuses on the DOJ but there are more than just the Department of Justice.

Your next question comes from the line of Mark Wilde from BMO Capital Markets.

Mark, I wondered, to start off, if we could talk a little bit about what you're doing on both sides of the business down in Brazil right now to improve performance?

So, Mark, I will start on the packaging side which is the business that's challenged because of the exposure to the Brazil economy. As I said the last couple of calls, what we're trying to do with that business is improve it from a cost profile standpoint and redesigning the way we're organize from a people standpoint and redesigning the way that we make and supply the containerboard to our box plants. And then, be as strong as we can and perform where we think we can perform in a positive economy versus a minus 4%. That business has the potential to perform much better at a plus 4% and being able to cover inflation with some degree of pricing versus a minus 4% market and being behind the inflation wheel. So what we're trying to do is change the cost structure, make sure we continue to focus on the customers we have, even though everybody in almost every segment is hurting right now and be well-positioned when Brazil's economy begins to pick up. That is what we can control and we're being very careful with any investments and really trying to do, what I would say, is fundamental basic blocking and tackling on the commercial side And on the operational side. On the paper business, we continue to perform very well in that business. Part of it is because it fits squarely into being, if you're going to make uncoated free sheet and be a global provider. That is the place to make it and it starts with the fiber cost structure and our fiber availability. So given our export position and given the fact that the paper market in Brazil hasn't been hit as much as some of the consumer product markets that hit the box business, we're continuing to perform well and it is part of the same story, is getting our cost even lower and making sure that we go the extra mile to take care of our customers, both in Brazil and outside of Brazil. And we still have some of the strongest EBITDA margins in all of IP in our Brazil paper business.

Just on those margins, Mark, one time when Champion had that, those margins would be in the 35% to 40% range. Is there any prospect of those returning, do you think?

I think if you take the recent past, we've been in the mid-30%s on several quarterly reports and if you look at the FX impact that has occurred over the last couple of quarters, if you just strip that out which you can't, but if you did, you would back into the low 30%s. It is a 30%-plus EBITDA margin business over time.

Okay, all right. And then I just had a follow-on for Tim Nicholls. Tim, you've taken a little over 600,000 tons of economic downtime in containerboard in the last four quarters. Should we think about IP going forward as just being willing to carry that much flex in the system?

I don't want to quantify and said there's going to be X number of tons but there is going to be some amount of system flex that we actually need. We're managing a system that is huge and just normal seasonality. The way we run our supply chain and the way we try to service customers and our businesses, we believe that we're better off flexing over time than trying to cover it with positioning inventory. You always get it wrong. So we will have some amount of downtime every year as we go through the year just balancing out.

Your next question comes from the line of Scott Gaffner from Barclays.

Carol, just another question on the pension and then I hate to harp on it but the issue is if you look at the last three years, you've had to put $1.8 billion of cash into the pension which is -- looks like about a third of the free cash flow over the period. So I guess as we move into 2017 and then really based on the interest rates today, do you plan any more cash contributions over the next three years, let's say?

Yes, Scott and just a qualifier on what you said is, the contributions we made, while real, were essentially voluntary. Voluntary meaning as we look at our balance sheet, as we think about where to take the cash to manage our debt, we have looked at the economics around the pension and said that is not a bad place to go with some excess cash right now. Part of it's the tax advantage way of doing it. The other thing we always consider is we're always looking out and thinking about will we have a regret factor long term and we never want to have too much where we put money and then we say, why did we do that? So it's a balancing act based upon options. So I think what you're seeing us do is right now, this is what makes sense for us given the point we're relative to our overall debt profile. And there will be no required contributions out until 2019 and even 2019 is a very -- pretty, very small number, so that gives us choices and we will continue to make the choices around all those variables that we think meets our needs the best.

Okay and is the comment on no cash contributions tile 2019 based on the year-end 2015 discount rates and expected rates of return or is it based on today's -- on the reevaluation that you were talking about?

Well, remember, there's two ways you have to look at your pension, there is one for accounting and that's your pension benefit obligation, that is the balance sheet. And then there is the funding. The funding is impacted by other factors, considering just the policy out of Washington. Remember we talked a couple of years ago about MAP and how that was the acronym for the smoothing of interest rates, so we have very good line of sight on the required contributions, based upon those things and they are smoothed out. So we know pretty certainly where that is. Now what we don't know is that accounting piece that hits at the end of the year which comes from discount rate -- remember 100 basis points for us is about $1.5 billion to $1.6 billion Delta in that liability.

Okay. And then Mark, if I look at return on invested capital year to date, 10.6% which is in line with the first half of last year and for the full year 2015, you had the records, 11% return on invested capital, so is there anything in the second half and you hit those numbers despite some headwinds in the first half of the year. Is there anything in the second half that would preclude you from getting back to that 11% return on invested capital in 2016?

Well, I think the one new thing we have is the Weyerhaeuser acquisition which we think will close in the fourth quarter and that will have a temporary effect, as we bring that debt on and we will see it go back up. But what's important, Scott, is we think about the return on invested capital over a long period of time and we think about it in bands. So the first band is get it to your cost of capital. We've demonstrated we can do that and then we look at two -- as I mentioned before, 200 or 300 basis points above our cost of capital and finding a way to settle in that band. And then the question is always, do you create more value by making your enterprise a larger enterprise at that return or do you create more value by raising that return even further? And, there is analytical approaches to that, that back up the solid business case, so the point number is a blood pressure check, but over time, we want to be in that zone where we have a couple of hundred or more basis points between our 8% cost of capital and our actual returns.

Your next question comes from the line of Chris Manuel of Wells Fargo Securities.

I wanted to come back to some of the Weyerhaeuser assets in the fluff pulp, some of the different pieces there. Once you put this all together, can you talk about your ability to flex between making fluff pulp when you want to but some of the other grades, whether it's SBSK, et cetera. What you view -- I think we all know what long term demand looks like for fluff but perhaps maybe what some of the other end markets are? What you think long term demand looks like there and your ability to toggle back and forth?

Well, Chris, we obviously haven't been able to do any detailed integration work, but when you look at our system and we look at what we can publicly get available on the assets and the products that Weyerhaeuser makes and we will have, as I mentioned early, enough capacity to really optimize the production, but the real focus in this business for us is the higher value-added specialty fibers, starting with fluff and moving up. The rest of the pulp is important and you will always have to make some of it as you make transitions and we have really good customers for that pulp, but the focus is really from fluff, basic fluff, all the way up to the high-value added specialty fibers. And we will have on day one, when these businesses come together because we have invested in the business recently and Weyerhaeuser has invested in the business, but we will have the capacity we need to make the products we want to make for the foreseeable future.

I will now turn the call back over to Mr. Royalty for final remarks.

Thanks, operator and thanks Mark and everyone for joining the call this morning. As always Michele and I will be available after the call and our numbers are on Slide 18 of the presentation.

Have a great day. This concludes today's conference. You may now disconnect.