International Paper (IP) Mark S. Sutton on Q4 2015 Results - Earnings Call Transcript

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International Paper Co. (NYSE:IP)

Q4 2015 Earnings Call

February 03, 2016 10:00 am ET

Executives

Jay Royalty - Vice President-Investor Relations

Mark S. Sutton - Chairman & Chief Executive Officer

Carol Louise Roberts - Chief Financial Officer & Senior Vice President

Timothy S. Nicholls - Senior Vice President, Industrial Packaging

W. Michael Amick Jr. - Senior Vice President, North American Papers, Pulp & Consumer Packaging

Analysts

Mark A. Weintraub - The Buckingham Research Group, Inc.

Chip A. Dillon - Vertical Research Partners LLC

Philip Ng - Jefferies LLC

Adam Jesse Josephson - KeyBanc Capital Markets, Inc.

Mark William Wilde - BMO Capital Markets (United States)

Mark Connelly - CLSA Americas LLC

Chris D. Manuel - Wells Fargo Securities LLC

John Dunigan - Barclays Capital

George Leon Staphos - Bank of America Merrill Lynch

Debbie A. Jones - Deutsche Bank Securities, Inc.

Danny Moran - Macquarie Capital (NYSE:USA), Inc.

Paul Quinn - RBC Capital Markets

Operator

Good morning. My name is Melinda, and I will be your conference operator today. At this time, I would like to welcome everyone to the International Paper Fourth Quarter and Full Year 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

I would now like to turn the conference over to Vice President, Investor Relations, Jay Royalty. Please go ahead.

Jay Royalty - Vice President-Investor Relations

Thanks, Melinda, and good morning, everyone. And thank you for joining International Paper's Fourth Quarter and Full Year 2015 Earnings Conference Call. Our key speakers this morning are Mark Sutton, Chairman and Chief Executive Officer; and Carol Roberts, Senior Vice President and Chief Financial Officer.

During this call, we will make forward-looking statements that are subject to risks and uncertainties, which are outlined on slide two of our presentation. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures are available on our website. Our website also contains copies of the fourth quarter and 2015 earnings press release and today's presentation slides.

Lastly, relative to the Ilim JV, slide four provides context around the joint venture's financial information and statistical measures.

With that, I'll turn the call over to Mark Sutton.

Mark S. Sutton - Chairman & Chief Executive Officer

Thank you, Jay, and good morning, everyone. Thanks for joining International Paper's fourth quarter and full year call. I want to quickly go over the format we're going to use this morning. I will review the full year 2015 results first. And then I'll turn it over to Carol to discuss our fourth quarter results and the performances of our individual businesses, then come back and cover the outlook before we open it for Q&A.

So I'm going to begin on slide five. International Paper finished a very solid year in 2015. We achieved a return on invested capital of 11%, well above our cost of capital. And this makes it the sixth consecutive year that our actual returns are above our cost of capital. Our free cash flow came in strong as well at $1.8 billion and our earnings per share of $3.65 was the highest EPS in 20 years. That was largely driven by strong results in our North American Industrial Packaging business and record level of results from our Ilim joint venture in Russia.

Additionally, we completed the sale of our 55% stake in the Sun JV in China at the beginning of the fourth quarter. We received $25 million in cash in addition to eliminating approximately $400 million of consolidated debt from our balance sheet.

We also made another meaningful increase to our dividend by 10% in the fourth quarter, and we enhanced our dividend policy, moving the target payout range to 40% to 50% of free cash flow, up from 30% to 40%. We feel confident in this change because it's based on a pressure test we did and updated, which provides a level of confidence to us that our businesses in different economic times have the ability to produce a very sustainable cash, and hence, a sustainable dividend.

And finally, we continued our strong track record on share buyback as an additional means of returning cash to shareholders, buying more than 500 million shares in 2015. As of this call, total purchases since the inception of the buyback program in September of 2013 amount to about $2.1 billion.

Moving to slide six and turning to the full year financial results, I'd like to highlight a couple of items on this slide. Year-over-year EPS, when adjusted for the non-cash FX charge on Ilim's U.S. dollar denominated debt, was up 5.5%. Revenue was down roughly 5% with the most significant factor being FX translation. And overall EBITDA margins continue to be strong at 17.6%.

On slide seven, you can see that 2015 continued the trend of strong sustainable free cash flow, which has averaged $1.8 billion over the last several years. As we look into 2016 and beyond, we remain confident that IP has a portfolio that can continue to generate strong free cash flow results. We believe free cash flow generation and ROIC above the cost of capital are two key drivers of shareholder value. So we think we're on the right track.

With that, I'll turn it over to Carol to discuss the specifics of the fourth quarter.

Carol Louise Roberts - Chief Financial Officer & Senior Vice President

Thanks, Mark, and good morning, everyone. I'm on slide eight. As Mark said earlier, EPS of $3.65 per share is the highest level in 20 years and compares favorably to $3 per share in 2014. Looking at the details, price and mix declines across the North American businesses were essentially offset by favorable input cost.

Volume was generally flat across most businesses with the exception of reduced export volume from the North American containerboard business. Operations largely performed in line with expectations with cost reduction initiatives offsetting the majority of inflation for the year.

Slightly higher taxes were more than offset by lower interest expense and a lower share count. And the Ilim JV posted significantly higher results due to improved operations, increased margins and a less negative FX impact on the JV's U.S. dollar-denominated debt.

Turning to the fourth quarter. Free cash flow was strong at $501 million. Industrial Packaging delivered another solid quarter based on steady daily box demand. Additional downtime was taken to balance our supply with our demand as the overall demand was impacted by three fewer shipping days as compared to the third quarter.

Domestic prices were generally stable across our North American businesses, and volumes were seasonally higher along with increased prices in Brazil, Russia and Europe, primarily in our paper businesses. And finally, the Ilim JV turned in another strong quarter of results but was unfavorably impacted by a $0.05 non-cash FX charge on the JV's U.S. dollar-denominated debt.

Moving to the quarter-over-quarter bridge. As I mentioned, prices were generally stable across the businesses. Volume was unfavorably impacted by three less shipping days in the fourth quarter for the North American box business and we did have reduced export volume. This was partially offset by stronger volume in Europe and Brazil. Operations were negatively impacted by weather and flooding on the East Coast and were further impacted by higher operating costs in the quarter, including costs associated with the increased levels of maintenance and downtime taken to balance our supply with our demand. Quarterly earnings benefited from the favorable input costs and a lower non-cash FX charge at the Ilim JV.

Turning to the businesses and beginning with Industrial Packaging on slide 11. Volume, as I said, was impacted by three fewer shipping days in our U.S. box business and we did have lower export shipments. The daily shipment rate for boxes was up almost 4% over the third quarter and was flat year-over-year against a strong comp for IP. Operational costs were higher, significantly impacted by 322,000 tons of downtime, 230,000 tons of which was taken to balance our supply with our demand, and operating costs were also slightly higher in our Brazil and European Packaging businesses.

Turning to slide 12, I want to provide some color on the North American box business and what we're experiencing in our shipments and the key segments we serve. As you can see, we experienced a 2% increase in year-over-year shipments on a per day basis from the fourth quarter of 2013 to the fourth quarter of 2014. And then in the fourth quarter of this year or last year, we essentially held that increased level of demand. I would say the market has even been a bit stronger than what we have experienced.

From a key segment standpoint, we continue to be encouraged by some of the trends we're seeing. We continue to see substantial growth in the e-commerce and distribution segment in which we are a strong player. Another important trend is in the agricultural segment, which is benefiting from shifting consumer trends to more healthy foods. And new product offerings in the beverage segment are also driving some pockets of new growth. Overall, we see a healthy box market that will continue to benefit from evolving consumer trends.

Moving to Consumer Packaging, the business experienced a less favorable mix and lower volume due to three less shipping days. The fourth quarter was a higher operating cost quarter, and the North American business experienced some transition cost associated with the shutdown of the Coated Paperboard machine at Riegelwood related to preparations for the conversion project. Outage expenses were higher as expected and input costs were favorable. Finally, earnings improved due to the sale of our share of the Sun JV.

Turning to slide 14 in the paper business, IP experienced price increases in Brazil, Europe and Russia as well as the seasonally favorable mix improvement in Brazil that was partially offset by pulp price pressure in the quarter. Volume was higher primarily due to seasonal strength in Brazil and Europe. Operations were negatively impacted in North America due to extreme weather and flooding on the East Coast, some effects which will linger into the first quarter. Operating costs were seasonally higher as well. The negative FX swing here is simply the non-repeat of the favorable Brazilian FX impact that we experienced in the third quarter.

Turning to slide 15, I want to provide an update on the Riegelwood Mill conversion project. As we announced last year, we are converting the mill to 100% pulp with the capability to run an additional 400,000 tons of softwood and/or fluff pulp. This will bring our total North American system to a capacity of 1.7 million tons, of which, 1.5 million tons can produce fluff pulp.

The project is well underway, having shut down the first Coated Paperboard machine PM18, which is the one that's actually being converted, and we did that in December. And we've shut down the second machine PM15 in January.

We will bring the converted machine back online in May, which means half the mill will be down for roughly half the year. Once online, we expect to fully ramp up on softwood pulp and qualify PM18 on fluff pulp by the end of the year. This will ensure we have adequate capacity for our key fluff customers as their demand grows.

For the balance of the year, we expect to run and sell mostly market softwood pulp. We will incur costs associated with the conversion and the ramp up. In total, we expect the conversion impact in 2016 to impact earnings by roughly $75 million to $80 million with about $50 million impacting our first quarter earnings, and that's when the bulk of the conversion work will be done and much of the mill will be down, actually also for the annual outage. And then there'll be some ramp up costs beyond that, that will spread into the second and third quarters.

Now turning to Ilim. The JV concluded a strong year of operational and financial results as the focus shifted to optimizing and leveraging the completed investments, and their very advantaged export positions. The JV achieved record operational EBITDA results of $724 million in 2015 and IP's corresponding equity earnings were $131 million.

During the quarter, the JV refinanced a portion of their U.S. dollar debt to rubles. Relative to the first quarter outlook, the JV expects to continue its strong operational and cost performance against higher inflation, lower pulp prices and the expected weaker seasonality.

Before I turn to the outlook for the first quarter, I want to just give a quick update on IP's balance sheet. As of December 31, 2015, our balance sheet debt declined slightly to $9.3 billion. The pension gap declined by $300 million. In 2015, we made a $750 million voluntary contribution to the pension in the second quarter.

Additionally, we had a bond issue and tender offer, which further reduced our debt towers in 2018 and 2021 at lower interest rates. And I'd also remind you that we increased our divided, as Mark said, 10% to $1.76 and bought back a little more than $500 million of stock in 2015. And currently, we're maintaining a cash balance of about $1 billion.

So moving to the first quarter outlook on slide 18. Earnings associated with volume will be lower for the following reasons. Number one, channel mix in our North American Industrial Packaging business will impact earnings by $25 million as box volume will be seasonally weaker and export volume will be stronger.

Secondly, our North American Consumer Packaging business will be impacted by roughly $5 million due to the exit of the Bristols, of the Carolina volume. And third, seasonally lower volume in Brazil will impact earnings by roughly $25 million. Pricing is expected to be lower for the North American pulp and paper businesses. These are expected to impact earnings by roughly $20 million. Price for our North American Industrial Packaging will be impacted by continued lower export pricing, along with the recent PPW index change.

All in, this is expected to impact earnings by $20 million. Prices are expected to improve in both European, Russia and Brazil papers as recent price increase announcements are implemented. These will be somewhat offset by inflationary cost pressures in those regions.

Operations are expected to be generally at the same level as the fourth quarter. Operational costs are expected to improve modestly in North American Industrial Packaging. Maintenance outage expense will increase collectively by $56 million as shown on the slide, inclusive of the higher outage costs associated with the Riegelwood conversion as I mentioned earlier. And as always, we provide an outlook for Ilim, assuming stable FX coming out of the quarter. So the first quarter outlook assumes a non-repeat of the $0.05 charge we incurred in the fourth quarter.

So, with that, let me turn it back over to Mark.

Mark S. Sutton - Chairman & Chief Executive Officer

Thanks, Carol. Before I would turn to 2016, I just like to reiterate that I feel really good about our results in 2015. I'm on slide 19 right now. The year didn't play out the way we envisioned coming into it, but given how things unfolded across the globe, I think we played our hand pretty well and had a number of significant accomplishments in 2015. I'm really proud of the way our team stepped up and dealt with the environment that we were really dealing with, not the one we thought we were going to be dealing with.

Turning now to 2016. Sitting here today, it's real difficult to predict where things might go from a global macro standpoint. We feel good about how we're positioned to deal with whatever the market brings and the agility that we have in IP to adjust as needed. As you can see from the chart, CapEx for 2016 is $1.3 billion. This will ensure we get the most important things done and it reinforces our commitment to remain highly focused on maximizing free cash flow. As we highlighted earlier on this call, IP has delivered consistently strong results and return on invested capital and free cash flow for the last several years. And I have every confidence we'll do so again in 2015.

Turning to slide 20. Beyond keeping our employee safe and being a good steward to the environment and being good citizens in the communities in which we operate, we have a robust list of focus items for 2016. At the top of that list and for very good reason is continuing to improve our North American Industrial Packaging system. We have a great foundation to build upon, but we certainly have many opportunities to optimize further across all aspects of the business.

The Riegelwood conversion has begun with the objective of having the mill up and running in May and fully ramped up by the fourth quarter. Our teams are keenly focused on making this happen safely and on time and getting the new machine qualified in quick order to supply fluff pulp.

Additionally, we are executing our plan to grow our cup business at our recently expanded Canton, Ohio cup facility. This will enable us to take care of our key customers' growing needs in this important segment as consumers drive the shift – continue to drive the shift from foam to fiber-based packaging.

Another focus item for us in 2016 is to optimize our North American paper portfolio by aligning with the most attractive customers and the opportunities to deliver a strong value proposition to those customers. We're also working toward the sale of our Asia box business as we announced last October. And the Ilim JV had a strong year in 2015 and we expect another strong performance in 2016. And finally, we remain focused on maximizing free cash flow generation and deploying that capital in a way that creates additional value for our shareholders. All of this positions International Paper to have another successful year in 2016.

And as I wrap up, in closing, before we go to Q&A, I go back to the investment thesis for International Paper. We built a portfolio with strong competitive positions in key markets where IP has a right to win. I like our portfolio, and we'll continue to look for opportunities to improve the company as we move forward. Our strategy is enabling us to achieve and increase the spread of our return on invested capital above our cost of capital. And we've been doing this for the last six years. In addition to that, we've proven that we can generate strong sustainable free cash flow year in and year out and we've been doing that for several years now. We remain highly focused on a capital allocation strategy that's based on some very simple principles of creating value, rewarding our shareholders and making International Paper better.

And with that, I'd like to turn it back over to the operator and open the floor for questions.

Question-and-Answer Session

Operator

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

Mark A. Weintraub - The Buckingham Research Group, Inc.

Thank you. I first wanted to understand on the downtime or – sorry, the maintenance outage expense, it was a good bit higher in 2016 now than what it had been in 2015. Is that primarily the Riegelwood or are there other things going on? Kind of connected to that, I just wanted to clarify, because it didn't seem like the Consumer Packaging had a lot higher maintenance expense. It seemed like it was Printing Papers and Industrial Packaging. And maybe if you could just clarify all that, that'd be helpful.

Carol Louise Roberts - Chief Financial Officer & Senior Vice President

Mark, this is Carol. I'm going to start and then I'm going to turn it over to Tim. So you've got two things happening. One is Riegelwood is now going to be classified in the paper business because it's North American paper and pulp. So that's why you don't see the impact in consumer. And so the increase you see on the paper side in the appendix is around Riegelwood.

And then I'm going to let Tim comment on the Industrial Packaging piece.

Timothy S. Nicholls - Senior Vice President, Industrial Packaging

Thanks, Carol. Good morning, Mark. Most of it is just additional – it's the nature of the projects that we have in the mills. From year-to-year, we get variation, and depending on what comes up in the cycle for maintenance in one year can be different from the next. And so, in five of our larger mills, we have more expensive items to deal with in 2016 than we did in 2015.

Mark A. Weintraub - The Buckingham Research Group, Inc.

Great. And then – and if I could real quickly, could you update us on how business in Industrial Packaging has been looking through January? And also maybe a little bit more color on the e-commerce side of things. What percentage of your Industrial Packaging is e-commerce now and what type of growth have you been seeing?

Timothy S. Nicholls - Senior Vice President, Industrial Packaging

Yeah. While the growth is good, it's a relatively small segment in terms of the total business. But it's a rapidly growing segment. So we had a strong fourth quarter, especially in December around e-commerce that continued into the first part of January. As you know, if you've ordered something online, you get a box when you receive it. And then if you have to return it, you use another box to send it back and swap it out. So it carried over a little bit into January. Our January was, I'd say more or less the way we expected it. We did have a little bit of impact from weather with the snowstorms that moved through. And if you remember, January last year was a bit of an anomalous month with January 2, the way it fell right before a weekend and was it a workday, wasn't it a workday. So it's a pretty strong comp with some confused workdays for January. But as we look through all of that, January was expected and first quarter looks to be more or less as we expect.

We're expecting that we'll be flat on an absolute basis in the first quarter. But we do model our – the market demand growth, what we're anticipating. And things could change, but the model right now says that it could be as much as 1% in the first quarter.

Mark A. Weintraub - The Buckingham Research Group, Inc.

Great. Thank you.

Operator

Your next question comes from the line of Chip Dillon with Vertical Research Partners.

Chip A. Dillon - Vertical Research Partners LLC

Hi. Good morning, everyone. First question is on the pension situation. I know you all made a big payment last year and you made some headway at least as of year end with the net pension balance. But how should we think about whether the contributions may or may not be, let's say in the next three years? If you could give us some view on that.

Carol Louise Roberts - Chief Financial Officer & Senior Vice President

Sure, Chip. This is Carol. So, yeah, the pension gap was reduced by $300 million. We did make the contribution. Of course, we had other moving parts, which is the rate change was helpful. There was some actuarial changes on some demographic data that was unhelpful. And as we all know, asset performance the way we're invested wasn't a particularly stellar year last year.

So, all in, we saw the benefit of $300 million. As it relates to required contribution, we have no required contribution for 2016 or 2017. And then when you get out to 2018, it's going to be all around our asset performance over the next two years and then where interest rate goes and if there's any more policy changing.

So that would be how to think about it.

Chip A. Dillon - Vertical Research Partners LLC

And so at this point, there's no plans to make any kind of voluntary payments this year or next year?

Carol Louise Roberts - Chief Financial Officer & Senior Vice President

At this point, I wouldn't speculate on that. Things could always change depending upon what may happen. But at this point, I would say that we don't anticipate any contribution.

Chip A. Dillon - Vertical Research Partners LLC

And then as we look at CapEx, I might be mistaken but I think you just kind of come down twice. I know that you announced the containerboard system initiative back in July and we kind of added that and then I think in October, I believe you sort of gave us a view of about $1.4 billion, now it's down to $1.3 billion. And my question is what should we expect it to be in sort of on an ongoing basis 2017, 2018? Is – in other words, with the containerboard initiative, I would think unless there's something similar to back that up a bit beyond that, you could even see it maybe slip further in the future?

Mark S. Sutton - Chairman & Chief Executive Officer

Chip, good morning. This is Mark. I think you said it correctly. When we announced these containerboard projects, we didn't say we were raising capital. I think the assumption in the marketplace that we were. So I don't view it coming down twice. We said $1.4 billion was probably the preliminary scope we had in the fourth quarter. We refined that in looking at the actual year and the projects and our capital allocation policy. And so we come in at $1.3 billion. And I think we've said before with the asset base that we have and the culture we have in our company to operate safe environmentally sound and reliable operations, we tend to have a base load in that $1 billion range. And then above that, it's to hopefully improve the company, be it cost reduction, strategic investments, for example, like our cup project at Kenton. And that's got some flexibility in it over time, again, against the backdrop of our capital allocation principles.

Chip A. Dillon - Vertical Research Partners LLC

Okay. And then last question, you certainly gave a nice boost to the dividend late last year, how do you view I guess buybacks versus other possible uses beyond the dividend, of course, in light of where the stock price might be, especially given the decline we've seen in the last six months?

Mark S. Sutton - Chairman & Chief Executive Officer

Yeah, that's a good question, Chip. I think, we use the word, balanced use of cash and then finding the right ways to return cash to investors. We like what we've done with the dividend and that 40% to 50% target area. We plan on maintaining. And the share buybacks will continue to be opportunistic. And hopefully, we do a really good job of buying as much as we can at the right value, below the intrinsic value of the company. And we'll continue to do that. We've still got $900 million left on the authorization. So we've got more that we can do and we plan on doing it.

Chip A. Dillon - Vertical Research Partners LLC

Thank you.

Operator

Your next question comes from the line of Phil Ng with Jefferies.

Philip Ng - Jefferies LLC

Last year, in the fourth quarter, you provided some outlook for the full year, can you kind of provide some guidance whether it's free cash flow or EBITDA for 2016, or just wider trends? That'd be helpful.

Carol Louise Roberts - Chief Financial Officer & Senior Vice President

So this is Carol. Again, what I would say is, as we all know, we're living in a very uncertain outlook for the world. And so it's very difficult to pin it down on any one metric. But I think what you can see is the things that we feel very confident about is our underlying businesses, their strength, the ability to sustain the cash flow and that's why we raised the dividend. So I feel very good about cash flow. We'll make adjustments as we go, and we have not in the past provided guidance and we're not intending to do that in the future.

Philip Ng - Jefferies LLC

Okay. I guess can you – switching gears a little bit, can you talk about market conditions in bleached board? A competitor of yours mentioned there has been more imports coming in primarily on the commodity side of the business. Can you talk about what you're seeing on that side and what's your overlap on the commodity side of the business?

W. Michael Amick Jr. - Senior Vice President, North American Papers, Pulp & Consumer Packaging

Hey, Phil. This is Mike Amick. As we look at the board business, clearly, Q4 is a seasonally slower time and we certainly saw that. But what we're seeing as we move into this year is backlogs and orders are responding as we expect to see. We're starting to see some of that pick up a little bit, which is typical for this time of the year. We have a good solid business and good customers and really targeted segments around food service. On the import side we are seeing some imports coming in. Our experience has been, primarily if you look across North America, that's in Latin America where we see that in some of the commodity segments.

Philip Ng - Jefferies LLC

Okay. And just one last one from me, I know seasonally, the containerboard business is weakest in November and February. Can you just kind of talk about broader market conditions, especially accounting for some of the capacity closures and downtime that industry has taken. I know there's certain limitations you can comment on pricing, but any color would be helpful because obviously investors are a little nervous that with the PPW cut, it's not one-and-done. Any color would be great. Thanks.

Timothy S. Nicholls - Senior Vice President, Industrial Packaging

Yeah. Hi, it's Tim. Well, I can't comment on the industry; I'll comment on what we're doing and what we see. We're a big player in the export markets. Export markets have been volatile as we went through the second half of last year. But it's really been a volatility around price and margin, not a volatility around demand. There are some pockets where demand is a little bit weaker, mainly Turkey, which we're a very large supplier to that market and some of the Mid East conflict has spilled over. But on balance, demand has held up fairly well. And we continue to see that in the first quarter. January was right as we expected and February looks to be pretty solid from an advanced (31:41) standpoint.

In the box business, as I said a minute ago, we're expecting roughly a flat absolute tonnage first quarter versus last year. And our model, our demand model that we use, says that the market could grow upwards of a percent in the first quarter. We've got some segment mix issues that we've been working through. We've been trailing market. We did up for all of 2015. So we'll probably underperform in the first quarter to what we think the market's going to grow. But overall, it's about like what we expected.

Philip Ng - Jefferies LLC

Okay. That's helpful just because comps are pretty tough in the first quarter, if I remember correctly last year. Thanks.

Timothy S. Nicholls - Senior Vice President, Industrial Packaging

Yeah, they are. It's the toughest quarter of the year.

Operator

Your next question comes from the line of Adam Josephson with KeyBanc.

Adam Jesse Josephson - KeyBanc Capital Markets, Inc.

Thanks. Good morning, everyone. One, Tim, perhaps for you, just on the sequential decline of box prices in North America in the fourth quarter, what drove that exactly and is it fair to assume that, that had nothing to do with anything that Pulp & Paper Week did in recent months?

Timothy S. Nicholls - Senior Vice President, Industrial Packaging

Yeah, that's correct. It did not. And a big portion of that was mix. So what you see flowing through the EBIT impact is about $1, or maybe slightly more than $1 in price that came through as we went through contract negotiations with customers during the course of the year. The rest of it was mix, which means it hits price, but it doesn't necessarily hit margin. So boxes sell for different prices. As your customer mix and your segment mix changes, it can move price, but it doesn't change margin. So that's what it was, just a little bit of contract renegotiations that were flowing through.

Adam Jesse Josephson - KeyBanc Capital Markets, Inc.

And is that a seasonal issue, Tim, or not necessarily? And should we see that every fourth quarter?

Timothy S. Nicholls - Senior Vice President, Industrial Packaging

Not necessarily. I mean we can, in any given year or given the size of the business, we can renegotiate anywhere from 1 million tons to 2 million tons of business with large customers, just because of how the contract periods fall. So it just depends on what's happening in the quarter and what gets agreed to and finalized in the quarter.

Adam Jesse Josephson - KeyBanc Capital Markets, Inc.

Thanks. And, Carol, one for you, just on taxes. Can you talk about what your cash taxes were in 2015 versus your book taxes? I mean, obviously, there has been a substantial gap between the two over the past several years, and I'm just wondering what it was in 2015 or what your expectations are in 2016 and beyond for that matter?

Carol Louise Roberts - Chief Financial Officer & Senior Vice President

Yes. There was a gap between book and actual again in 2015 and you'll see that when the K will come out very shortly. And that was driven of course by the voluntary contribution to the pension, which creates a nice tax deduction. Over time, as we've told everybody, we do anticipate that our cash taxes will go up and start to approach the statutory rate. But there's still some time before that actually comes totally to fruition.

Adam Jesse Josephson - KeyBanc Capital Markets, Inc.

Thanks very much.

Operator

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

Mark William Wilde - BMO Capital Markets (United States)

Tim, I wondered if you could just talk about that 230,000 tons of containerboard downtime in the fourth quarter. How much of that is seasonal or transitional or does it maybe suggest that you need to think about your – rethink your footprint?

Timothy S. Nicholls - Senior Vice President, Industrial Packaging

No, I don't think it's a question of footprint. There's a number of factors, Mark, that played into it. First of all, we did have more of a shortfall in our export channel in the fourth quarter than we anticipated now. As I said a moment ago, it has bounced back in the first quarter, so that was one element, fewer days. But the other thing that's going on, we've got a much better in-stock position of our old stock in our box plants than we've traditionally had over the past two years or three years. So that helped as well. And then probably the last one, we did see an improved efficiency in our supply chain network. There were more railcars available. There were more trucks available. It could be that that's just a point in time and it doesn't continue as a trend. But we were reacting to just the velocity at which inventory was flowing through the system as well.

So it's just you look at a macro number for what we do around downtime, but that's not how we manage it. We're managing thousands of SKUs, 200 locations and trying to get the right product in the right place at the right time. And so that all factors into the amount of downtime we take or don't take.

Mark William Wilde - BMO Capital Markets (United States)

Okay. And then if I could kind of follow on with you, Tim, on packaging. The Brazilian businesses is significantly underperforming, can you kind of help us understand the issues there, and then what do you think the timeline looks like to getting that business at least close to the peers?

Mark S. Sutton - Chairman & Chief Executive Officer

Hey, good morning, Mark. This is Mark Sutton. I'll take the Brazil question and relieve Tim of that because...

Mark William Wilde - BMO Capital Markets (United States)

Okay.

Mark S. Sutton - Chairman & Chief Executive Officer

...we've got that as part of our Brazil team. The challenges with the business is obviously Brazil's in a pretty significant recession. The business we have it is pretty much all a domestic business. It doesn't have a large export, it doesn't have an export position, which is the model that's more typical, which is exporting kraftliner. We use everything we make. And so you got demand down pretty much tracking with negative GDP and what's been a challenge and we're making progress is the ability to get pricing to, at a minimum, offset inflation.

So we raised containerboard prices in the fourth quarter. Those are implemented and we're in the process of raising box prices. But being 100% dependent on the Brazilian economy, which I think for the long-term is not a bad thing, for the last couple of years and for this year and maybe the next year, it's a bit of a challenge. So we're just trying to stabilize our business, make sure we have the right customers. We've taken out a lot of cost, but we obviously have to get some inflation recovery and that's what we're working on.

Mark William Wilde - BMO Capital Markets (United States)

Okay. And then finally, I wondered if you could just talk a little bit about the impact of the duties in the North American white paper market and whether you – how you read the impact as we roll into 2016?

W. Michael Amick Jr. - Senior Vice President, North American Papers, Pulp & Consumer Packaging

Hey, Mark. This is Mike Amick. Good question. As you know, there was a ruling here a couple weeks ago with respect to kind of finalizing the duties and there was some movement there. There's – ITC will basically have their hearing on the second week in February and then we'll kind of know the outcome relative to injury. The best way to answer that right now is to kind of look at – what we kind of expect to see as a run rate and how this has impacted imports say versus 2014. And we're somewhere in the range of say 300,000 tons to 400,000 tons of the imports that have kind of come out of the market with respect to the duties. But we'll wait and see how the ITC rules in February.

Mark William Wilde - BMO Capital Markets (United States)

And, Mike, is there any sense of sort of where inventory stands because there's been a lot of talk that there was a lot of inventory that got built in the country by some of the offshore producers?

W. Michael Amick Jr. - Senior Vice President, North American Papers, Pulp & Consumer Packaging

Mark, I mean, the inventories that we see right now and what we track is a lot of the industry numbers that you see as well. We see those as being kind of in the normal range. We saw some slight pickup in the fourth quarter, but nothing that we would characterize is being unusually abnormal.

Mark William Wilde - BMO Capital Markets (United States)

Okay. Great. I'll turn it over.

Operator

Your next question comes from the line of Mark Connelly with CLSA.

Mark Connelly - CLSA Americas LLC

Two questions. IP and others have said that you need more inventory to deal with the logistics issues that we're having. But as we look at overall inventories, do you think that there's a chance that the industry maybe overshooting in aggregate? I'm just trying to recalibrate. I look at 2.5 million tons, which is a lot more than we've seen in the past and especially with all the supply chain work, maybe that's a little high?

Timothy S. Nicholls - Senior Vice President, Industrial Packaging

Mark, it's Tim. I can only comment on what we do and how we run our system. We did feel as we went through last year that we needed more because of some of the difficulties we were facing in terms of just car, railcar and truck availability. As I mentioned a minute ago, that changed in December. I don't know that that's a trend. I don't think it is necessarily because nothing stands still, people react. But we had better velocity through the system in the fourth quarter. It continued into the first part of January, and we'll see how it plays out over balance of the year.

Mark Connelly - CLSA Americas LLC

Okay. And just one other question. You've now taken several substantial asset write downs in the last couple of quarters. I'm wondering if that's part of a concerted effort on your part to get these assets on the books at the right numbers or if you think that there are more of these coming?

Carol Louise Roberts - Chief Financial Officer & Senior Vice President

Mark, this is Carol. It's just part of the normal process of running the company properly. We do goodwill impairment testing with our strategic plans every year in the fourth quarter as we did that testing. Clearly, we had the issue with Orsa, so we wrote that goodwill off. So that's just part of normal running of the company.

Mark Connelly - CLSA Americas LLC

Okay. Thank you.

Operator

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

Chris D. Manuel - Wells Fargo Securities LLC

Good morning, and congratulations on a strong cash year in 2015. I wanted to kind of come back to and you gave some – Tim, you gave some color around what you thought industry and yourselves might look like in 1Q and I kind of wanted to spend a minute and talk a little bit about all of 2016. In particular, we have an extra day this year, a few other elements, hopefully, a little bit of the normal stuff population growth, increasing e-commerce, et cetera. How do you feel about full year 2016? Could we see another point, a-point-and-a-half, two points of corrugated consumption box growth in full year 2016, part one. And then part two, IP has lagged a little bit the industry and could you maybe give us a little color on what you were talking about with some of the mix and issues and things there and could that begin to kind of revert back to averages?

Timothy S. Nicholls - Senior Vice President, Industrial Packaging

Well, just on the last part, we're making choices and we're in segments that we've been in for a long time. We – those customers in those segment shift, some year's segments perform better than other years and so it'll ebb and flow. But we're trying to make commercial decisions, choices that we think sustain margins and build value over time. On your question on growth for the year, yeah, I do think that it could be in that point to point-and-a-half range. That's what our model says. Having said that, box consumption's not totally disconnected from the economy. So it'll depend on economic performance as we go through the year. But right now, what we see in terms of how the economy is performing, there's no reason to believe that it would be less than that 1% to 1.5% that we saw last year.

Chris D. Manuel - Wells Fargo Securities LLC

Okay. That's helpful. And then, Mark, a quick question on kind of the portfolio as you sit today. Look, I mean prices, obviously, equity markets have been hit pretty hard, yourselves included. But as you look at a cash-on-cash return and opportunity, how you think about M&A, done a lot of work on the portfolio kind of getting out of some parts, pieces globally that you've wanted to, from where you sit today, what's the temperature or the appetite to look at opportunity to add to the portfolio?

Mark S. Sutton - Chairman & Chief Executive Officer

Chris, that's a great question. I mean I think it's a constant process of looking at ways to create more value for our shareholders and to make the company better and a longer-term value creator. So we got a lot of parts of our portfolio or as I described really excellent positions, great fiber baskets, super customer list, wonderful operations, assets and people, but there's other areas where we're still working and we'll continue to do that to improve the company. But our focus area is really creating value and growing the value of the company. And if M&A can play a role as we've said before, then it'll be on the table. But it'll be targeted in our areas of creating value, advantage positions and serving, growing solid end markets, not just about growth rates of unit volume or anything, but really going after where we can find profit pools that we can be a competitive right to win kind of company.

Chris D. Manuel - Wells Fargo Securities LLC

Okay. Thank you.

Operator

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

John Dunigan - Barclays Capital

Hi. This is actually John Dunigan sitting in for Scott. Good morning. Just one question or a couple questions on couple of segments. Within corrugated packaging, the global cost curve appears to be flattening out due to FX with lower cost produced in Brazil and in Russia. How is this affecting the global trade flow and the ability for North American producers to export?

Timothy S. Nicholls - Senior Vice President, Industrial Packaging

Well, again, I can only speak to how we're looking at it. Yeah, they've gotten more cost competitive on currency. And we do see them in all of the markets that we operate in and so they're there. We're competing against them. It may cost us some margin to do that, but it's also not an unlimited amount of capacities that they have in the moment to penetrate the markets that we operate in.

John Dunigan - Barclays Capital

Okay. And then in the printing papers segment, have there been any impact from the anti-dumping duties yet and any firming up in the demand or pricing post duties?

W. Michael Amick Jr. - Senior Vice President, North American Papers, Pulp & Consumer Packaging

Hey, John. This is Mike Amick. As discussed a little bit earlier, there has been some pullback in imports that we've experienced, say over the last 18 months or so. We think that that's – we may see a little bit more of that, but it's primarily probably pretty well leveled out and we'll see how that plays out in 2016.

John Dunigan - Barclays Capital

Okay. Thank you. And then finally, with OCC forecast that were down about 15%, 20% in 2015 and some forecast showing increase into 2016, where do you think they could be for the year or do you have any further color on that?

Timothy S. Nicholls - Senior Vice President, Industrial Packaging

On OCC, no, I mean commodity market, global markets, a lot of puts and takes, very hard to forecast.

Mark S. Sutton - Chairman & Chief Executive Officer

John, this is Mark. In addition to Tim's comment, one of the things that we've seen in OCC is they're just a practical issue with the cost curve, is that when you get in the area where prices are now, you get to a point where collecting the final marginal tons becomes uneconomic. So what ends up happening is there's some kind of self regulating supply disruption that occurs. And so – and there's not a lot of inventory in this system normally, so that's why it kind of springs around. But we think people are collecting more, which long-term is a good thing. But we do think that there's still a practical issue of what it costs to collect that highest cost marginal ton, which is probably curbside and the kind of things that municipalities are doing and then people just stopped doing it.

John Dunigan - Barclays Capital

Okay. Thank you.

Operator

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

George Leon Staphos - Bank of America Merrill Lynch

Hi, everyone. Good morning. Thanks for all the details and congratulations on the year. I guess first question I had, Mark, I want to piggyback a little bit on one of the earlier questions. So you've been in the seat now for a while and you've had the opportunity to review the portfolio and the strategy of the company. Recognizing that things are going to be fluid going forward, right, it's not a static market, have you in your view determined which businesses you'd like to be in, which markets you want to continue to grow into or would you say you still have some further study to do in terms of the markets and your positioning there?

Mark S. Sutton - Chairman & Chief Executive Officer

I think we've pretty much determined where we want to take the company going forward. And it's in the areas that we've been working on. We want to grow our packaging business and we want to have businesses that – it's not so much the product focus but the competitive advantage. Where we have advantaged assets and advantaged fiber basins, making products for growing markets, fiber-based products, we win. When we don't have that, we struggle and so that's really the strategic focus of the company is improving the company. We've got a really great company right now, and it can be improved. But that's – we know where we want to go and we know where we don't want to go. And we'll continue to evolve. And as we have something to talk about, when we can, we will.

George Leon Staphos - Bank of America Merrill Lynch

Okay. I appreciate that, Mark. Is it possible, and maybe the answer is no, but could you put a geographic tilt on what you just said? I mean do you see more opportunity in the Americas versus rest of the world or however you would frame it?

Mark S. Sutton - Chairman & Chief Executive Officer

I would say, if you look at some of our actions over the last year, both things we've done and then things we haven't done...

George Leon Staphos - Bank of America Merrill Lynch

Right.

Mark S. Sutton - Chairman & Chief Executive Officer

...I would say that our view of the Americas is strong. We like our business, again, where we have advantaged positions in the value add to the renewable natural resource of wood fiber. So the markets we serve – even China, when we talked about exiting our businesses, the market is still important. That is what the Ilim joint venture is mostly about, and we export 25% of what we make in the U.S. is exported because it's globally competitive. It's containerboard, it's fluff pulp and it goes to those markets. But we don't necessarily need to have manufacturing assets in every geography in the world.

George Leon Staphos - Bank of America Merrill Lynch

Understood. Two questions on rest of the world; Ilim had a real nice performance. Is there a way you could comment to or maybe remind us on what you think the longer-term dividend opportunity is in Ilim, so that you get maybe more cash flow and more attention paid for what's a very good asset relative to its carrying value on the books. And then within Brazil, recognizing there were differences in terms of your business versus maybe your peers, is it possible to quantify maybe what your level of underperformance is relative to what your opportunity would be, your opportunity set, given your mix of business?

Carol Louise Roberts - Chief Financial Officer & Senior Vice President

George, this is Carol. On the Ilim dividend, a real simple way to think about that is, as the business performs better, clearly, there's cash generation. And of course, we're respectful of our joint venture partners and we have a board – very good governance of that company of which we're half the board. So what that company does is, generally, the decision around that dividend is in the timeframe of the summer time, where they look kind of backwards at the prior year and see the performance and the cash is there.

So, as you could read into that, you could expect as we evaluate the dividend for 2016, we'll be looking back at the performance of 2015 and it was very strong. And on a real simple way, is you could think about it as simply as our equity earnings could in theory match the dividend of the company. And then that would be excluding the FX non-cash because that is non-cash.

George Leon Staphos - Bank of America Merrill Lynch

Thanks for that Carol. And on Orsa?

Mark S. Sutton - Chairman & Chief Executive Officer

Yeah, George, on Orsa, with the earlier answer to the question, I think that Mark asked on Brazil, with the current economic environment, it's – and being totally focused on the Brazilian market, it's hard to guess on the time. But we should be able to get that business under normal market conditions to reasonably good margins. We will probably always have some gap if an export position of Kraftliner improves the business at any given moment in time because that's not what we do there. We got that business to begin to develop a packaging presence in Brazil, which we think long-term is a good idea. We did it in a way that's 100% committed to the local market. And it is different than others do it. It's – so it's always going to have a different business model for the foreseeable future. We need a better economy and we need to be able to get some inflation recovery, which we're working very, very hard on.

George Leon Staphos - Bank of America Merrill Lynch

Okay. Appreciate the thoughts. I will turn it over. Have a good quarter.

Mark S. Sutton - Chairman & Chief Executive Officer

Thank you, George.

Operator

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

Debbie A. Jones - Deutsche Bank Securities, Inc.

Hi, good morning. I know you guys have touched on the paper business a number of times on volumes, but in 2016 obviously some dynamics impacting the year – sorry, 2015. But what is your thought process on volumes going forward? Are we kind of – is the decline in paper not 3% to 5% on a go-forward basis or do you think you've hit a tipping point here where maybe it's a little bit less? Could you just comment on that?

W. Michael Amick Jr. - Senior Vice President, North American Papers, Pulp & Consumer Packaging

Hey, Debbie. This is Mike Amick. Just commenting on the demand environment that we have. The data that you see out there for 2015, the overall uncoated free sheet market and paper market was down in the 1% range. And – but if you look at it over the course of the last couple of years, it's basically been down around 3% to 3.5%, which is kind of what it's been tracking at and what we see happening kind of going forward. In our business in particular, we had a very strong year last year going with some very good clients and very good customers in the right segments. We expect to do well in 2016 as well.

Debbie A. Jones - Deutsche Bank Securities, Inc.

Okay. And then if I could just ask one more about box shipments. Tim, is the implication that, yeah, you might be a little below the industry in Q1, but as you work on your mix of business, that we could see a shift in that as the quarters progress or is that something that it may be more of a 2017 event?

W. Michael Amick Jr. - Senior Vice President, North American Papers, Pulp & Consumer Packaging

We'll see how it plays, Debbi. I mean our view on our own business is that we'll be flat in the first quarter. We have a view that the market will grow, but we'll see how the economy plays out. We have exposure to certain segments, protein being one of them that, underperformed last year, given the some of the difficulties that they were – the protein customers were facing. And that's still yet to start really recovering. So we'll see how that plays out over 2016.

Debbie A. Jones - Deutsche Bank Securities, Inc.

Okay. And then just one last one on exports. Just given your commentary on pricing volatility and you made a reference to weakness in Turkey, should we expect your export shipments to continue to decline from the current levels that you're currently sending out?

Timothy S. Nicholls - Senior Vice President, Industrial Packaging

We don't see that in the first quarter. We actually expect exports to rebound. January looks like it's coming in about where we expected it, February looks solid, pricing could drift down. We think it's not a huge drift, but I don't know if markets are beginning to stabilize just yet. But from a volume standpoint, first quarter looks better than fourth.

Debbie A. Jones - Deutsche Bank Securities, Inc.

Okay. Great. Thank you.

Operator

Your next question comes from the line of Danny Moran with Macquarie.

Danny Moran - Macquarie Capital (USA), Inc.

Good morning. Thanks for taking my questions. On – in our heat map you showed some improvement from North American packaging operations sequentially, but it doesn't sound like this is going to be up too much. Just wanted to get your thoughts, you took a significant amount of economic downtime in 4Q, so I would think as you lap this into 1Q, there'll be a pretty nice sequential improvement. Any – can you give any color here?

Timothy S. Nicholls - Senior Vice President, Industrial Packaging

I think, it's – Danny, it's Tim. I think it's somewhat a different quarter. We've got more outages. Seasonally, it's different. So I think it's going to depend. It's always a difficult quarter for us to gauge on operations. Last two years, we were impacted by weather. So far, we've kind of gotten the pass on weather. So I think the best thing is just to let us tell you about how it went when we get to the end of the first quarter.

Danny Moran - Macquarie Capital (USA), Inc.

Got it. Thanks. And then can you just provide any thoughts on inflation this year? I know you hit on OCC, but we've seen cost deflation help out quite a bit, should we expect this to continue through the year or do you think fixed cost inflation could be more than an offset this year?

Carol Louise Roberts - Chief Financial Officer & Senior Vice President

This is Carol. I would say on the input side, our overall view of input is fairly muted this year, wouldn't call it stable, I just call it muted because we got some things that are very low levels like energy. And then we've got wood costs that have more to do with some other nature and that seem a little stubbornly high and I think Tim already mentioned OCC.

On the other side, general inflation, our goal is, as I mentioned on our bridge on 2015, our goal is to offset all the other inflations that we see each year with our initiatives in manufacturing. And that inflation number is probably in the range of a $200 million to $225 million and that's on people and services and what not. And our goal on that as it is every year for International Paper is to offset that with just running better and improvement, which we've been doing.

Danny Moran - Macquarie Capital (USA), Inc.

Okay. Great. That's helpful and all for me. Good luck in the year.

Operator

Your final question comes from the line of Paul Quinn with RBC Capital Markets.

Paul Quinn - RBC Capital Markets

Hey. Thanks very much for taking my questions, solid Q4. Just you signaled pulp pressure, and I just wanted to get some comments with respect to Ilim in your North American business. And then just on North America, just Riegelwood conversion, I understand that qualification for fluff by the end of the year, but how do you expect the absorption of that extra 400,000 tons into the market, i.e., when will it be done?

W. Michael Amick Jr. - Senior Vice President, North American Papers, Pulp & Consumer Packaging

Hey, Paul, this is Mike Amick. In terms of the pulp, as Carol mentioned in her opening slide, we expect to be up and running in the May timeframe and kind of fully ramped up in terms of the production of that machine in the last, latter part of this year. In terms of the pressure that, that we're seeing out there, overall, last year, as we look at strategically where we're focused and where we're growing, we had a good year in our fluff growth, delivering at about 4%, 4.5% on our growth, so felt really good about that which is, hence, the need for the incremental capacity and the growth that we got planned for this year and going forward.

On Ilim?

Mark S. Sutton - Chairman & Chief Executive Officer

Yeah. I'll take the Ilim question, Mike. Thank you. Paul, on Ilim, we've seen some trail off in pricing as we finished the year. We still see that spilling a little bit into the first quarter. But it seems like the softwood pulp things are beginning to stabilize, and so that's kind of how our view is right now. Ilim is interesting because even with pricing pressures, we also have an (1:00:42) ever improving cost position. So our margins and the financial aspects of the business are still very strong.

Paul Quinn - RBC Capital Markets

Great. Thanks very much.

Operator

We have reached our allotted time for questions today. I would now like to turn the call back to Jay Royalty for final thoughts and closing remarks.

Jay Royalty - Vice President-Investor Relations

Yeah, I'll let Mark make a couple of comments before I wrap it up.

Mark S. Sutton - Chairman & Chief Executive Officer

Thanks, Jay. And I just wanted to kind of wrap up. We had a very robust discussion about 2015 and also about our first quarter. I think we're well positioned to execute well. We've been outlining (1:01:17) some issues we got to manage through the first quarter. And I think what we talked about in the full year, we feel very good about.

International Paper is well positioned to generate very strong cash flow and generate very strong returns for full year 2016, and we look forward to tracking that along the way as we report out the quarter. So we really are excited about the opportunities in front of us for this year.

Jay Royalty - Vice President-Investor Relations

Well, thanks, Mark, and thanks everyone for taking the time to join us this morning. As always, Michele and I will be available after the call and our numbers are on slide 22 of the presentation. Have a great day.

Operator

This does conclude today's presentation. You may now disconnect your lines and have a great day.

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