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International Paper Co (IP) Q4 2018 Earnings Conference Call Transcript

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International Paper Co  (NYSE: IP)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter and Full Year 2018 International Paper Earnings Call. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. (Operator Instructions).

It is now my pleasure to turn the floor over to Guillermo Gutierrez, Vice President, Investor Relations.

Guillermo Gutierrez -- Vice President, Investor Relations

Thank you, Laurie. Good morning, and thank you for joining International Paper's fourth quarter and full year 2018 earnings conference call. Our speakers this morning are Mark Sutton, Chairman and Chief Executive Officer; and Tim Nicholls, Senior Vice President and Chief Financial Officer.

There is important information at the beginning of our presentation on Slide two, including certain legal disclaimers. For example, during this call we will make forward-looking statements that are subject to risks and uncertainties. We will also present certain non-US GAAP financial information. A reconciliation of those figures to US GAAP financial measures is available on our website. Our website also contains copies of the fourth quarter 2018 earnings press release and today's presentation slides. Relative to the Ilim joint venture and Graphic Packaging investments, Slide two also provides context around the financial information presented on those slides.

I will now turn the call over to Mark Sutton.

Mark S. Sutton -- Chairman and Chief Executive Officer

Thank you, Guillermo, and good morning, everyone. We'll begin our discussion on Slide three. International Paper delivered very strong earnings in 2018 with strong performance across our three businesses achieving a second consecutive year of 16% EBITDA growth. Our Ilim joint venture also delivered excellent results with operating EBITDA of more than $1 billion. All in, we continue to grow value for our shareholders with the return on invested capital of 13%, which is significantly above our cost of capital.

During the year, we invested strategically to further strengthen our Industrial Packaging business. Among these investments, we opened a new box plant in Toluca, Mexico, that will be fully integrated with container board provided from our US mill system. We also made targeted investments in our US box business to enhance our capabilities with a deliberate focus on serving the fastest-growing segments and being aligned with the best customers. These investments all have returned to more than 25%. We also took decisive measures to further derisk the company and strengthen our balance sheet. We paid down $500 million in debt, bringing our leverage ratio down to 2.8 times, and we returned $1.5 billion to shareholders through dividends and share repurchases, which reduced our diluted shares outstanding by 3%.

Turning to the full year results on Slide four, our revenue increased by more than 7%, and we expanded our margins by 150 basis points on strong commercial performance across our businesses. Our equity earnings were $336 million, including $290 million from our Ilim joint venture. All in, we delivered another strong solid year of free cash flow.

Turning to Slide five, International Paper delivered a very strong year of return on invested capital. We increased our five-year average to 11%. This performance reflects the strength of our portfolio, we are making the right investment choices and delivering on those commitments.

I'll now turn it over to Tim, who will cover the performance across our businesses and our first quarter outlook. Tim?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Thank you, Mark. Good morning, everyone. I'm on Slide six, which shows our year-over-year operating earnings bridge. Operating earnings improved by $1.83 driven primarily by price and mix improvement across our three businesses. Operations and costs were negatively impacted by weather events during the year and start-up cost associated with the Madrid mill. Ops and costs were also impacted by LIFO inventory revaluation charges related to price activity in 2018. Input costs were a headwind in 2018, driven by higher wood, chemicals and distribution, which were partially offset by lower OCC. Corporate expenses, interest and taxes were lower and equity earnings improved on strong performance in Ilim, and the benefit of Graphic Packaging. As Mark said, International Paper delivered very strong results in 2018.

Turning to Slide seven, our fourth quarter results; EBITDA improved by 8% year-over-year, as we expanded margins in our three businesses. Our equity earnings were $79 million, including $67 million from our Ilim joint venture and $10 million from Graphic Packaging. Free cash flow in the quarter was solid and we completed $200 million in share repurchases. All in, the company finished on a strong note.

Moving to the quarter-over-quarter earnings bridge on Slide eight, operating earnings improved by $0.09. Price and mix improved in all businesses and regions. Operations and costs improved due to lower Madrid mill start-up cost and favorable one-time items of about $20 million. The fourth quarter was the lowest maintenance outage quarter of the year representing less than 10% of our total maintenance outage expense in 2018. Input costs were a headwind particularly for energy and wood. We expect hardwood cost to remain elevated due to poor operating conditions from heavy rains.

Now let me turn to the segments starting with Industrial Packaging on Slide nine. The North American business performed very well delivering $641 million in earnings, and a 25% EBITDA margin. Box demand was strong, driven by e-commerce and produce. And we continue to see strong box demand as we enter 2019 with shipments in January we're estimating between 1. 5% and 2%. Export containerboard came under pressure in the fourth quarter with demand slowing in China and some regions in EMEA. We're also seeing the impact of higher tariffs in Turkey, which is a major importer of US containerboard. We expect volume and price pressure to continue in the first quarter as inventory destocking plays out.

Continuing with the fourth quarter performance, operations and costs benefited from onetime items, which were largely offset by higher distribution costs. Input costs were a significant headwind in the quarter due to higher natural gas and wood cost. Fourth quarter was another good example of the strength of our Industrial Packaging team and their ability to execute well.

On Slide 10, the Global Cellulose Fibers business delivered earnings of $93 million in the fourth quarter. Earnings were largely in line with our expectations with the exception of input costs, which were impacted by higher wood and energy again. We delivered a strong fourth quarter against a changing macro backdrop. Towards the end of the quarter, we saw softening in softwood and fluff demand in China, along with slowing demand in Turkey, largely due to foreign currency headwinds. These trends have continued into the seasonally slower first quarter as customer destocking plays out and we moved into the Chinese New Year.

Printing Papers on Slide 11, the business delivered excellent results, driven by strong commercial and operating performance. Price realization and volume were favorable across all geographies. Again input costs were a headwind due to the higher wood and energy cost. Overall, a very strong quarter and year. In North America, our uncoated free sheet volume outpaced industry shipments for the year. Our Europe and Russia Papers businesses delivered solid earnings of about $130 million, overcoming high wood cost and other operational challenges. And in Brazil, earnings for the year improved by 17% and our EBITDA margins continued to be very healthy in the low 30% range. All in, we have good momentum as we move into 2019.

Now I'll turn to Ilim. Ilim's results on Slide 12, the joint venture delivered solid performance in the fourth quarter with operating EBITDA of $310 million. Volume was higher with no planned maintenance outages in the fourth quarter. International Paper's equity earnings were $67 million and were impacted by a non-cash foreign exchange charge on Ilim's US dollar-denominated net debt, of which IP's portion was $19 million, or $0. 05 per share in the quarter. For the full year, Ilim operating EBITDA was $1.2 billion, which represents a 45% margin. IP's equity earnings were $290 million. Overall, the business performed very well and provided $128 million in cash dividends to IP in 2018.

Turning to Slide 13, and our first quarter outlook. I'll take you through all of the puts and takes by business. So starting with Industrial Packaging, we expect price and mix to be down $15 million driven by containerboard exports. Volume is expected to be down $40 million on seasonally lower volume in North America and lower export containerboard volume as customer destocking continues into the first quarter.

Operations and costs are expected to increase by $100 million largely due to unabsorbed fixed costs related to lower volume, higher seasonal energy consumption, as well as inflation and the non-repeat positives from the fourth quarter. Staying with Industrial Packaging, planned maintenance outages are expected to increase by $102 million and input costs are expected to be flat.

In Global Cellulose Fibers, we expect pricing mix to be down $5 million, and volume to be down $10 million. Operations and costs are expected to increase by $50 million, due to unabsorbed fixed costs related to lower volume, higher seasonal energy consumption, as well as inflation and the non-repeats from the fourth quarter. Planned maintenance outages are expected to increase by $20 million. So all in, this will be a significant reduction for the business in the quarter.

So let me add some color on Cellulose Fibers. Earlier I shared the macro environment in certain regions of the world. Complicating that for us, a poor commercial decision was made that is going to negatively impact our fluff pulp volume in the quarter. While I believe this is only a temporary setback, it is going to take us until sometime between the second and the third quarter of this year to fully resolve. However, it does not change our belief in the fundamentals of the business and our ability to create value over time.

Moving to Printing Papers. Price and mix are expected to be down $10 million, due to seasonal makes in Brazil. Volume is expected to be down $10 million from lower seasonality in Brazil. Operations and costs are expected to increase by $35 million driven by higher seasonal energy inflation and timing of spending. Staying with Printing Papers, planned maintenance outages are expected to increase by $3 million, and input costs are expected to increase by $5 million on continued pressure on hardwood in North America. Under equity earnings, you will see the outlook for our Ilim joint venture and Graphic Packaging. In other items, we include corporate and interest expense, as well as our estimated effective tax rate of 24% to 26%. We expect our full year corporate expense to be $70 million, and interest expense to be $500 million.

I'll move to the full year outlook on Slide 14. We are projecting full year EBITDA for the company of between $4.3 billion and $4.4 billion. Our North American Industrial Packaging business is performing well, and domestic box demand is strong. In Europe, the benefits of the Madrid mill will accelerate through the year. Volume recovery in our fluff pulp business is against the backdrop of 4% growth in the market, and our Papers business is performing very well. Putting all of these together, we expect strong free cash flow of $2 billion, among other positive factors that will impact our cash flow, CapEx is planned at $1.4 billion, and we expect to receive $200 million in dividends from Ilim. As we did in 2018, we will use our free cash flow for debt reduction and cash to shareholders. We were committed to a strong and sustainable dividend and we have a $2.2 billion share repurchase authorization.

On Slide 15, we made progress strengthening our balance sheet as Mark referenced in 2018. We reduced balance sheet debt by $500 million. Our pension plan is sufficiently funded and we took definitive actions to further derisk the plan. In 2018, we also reduced our cash balance by $400 million. Effectively we put this cash to better use by applying it toward debt reduction and share repurchases. Going forward, we expect our cash balance will remain in the $600 million range.

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

Mark S. Sutton -- Chairman and Chief Executive Officer

Thank you, Tim. I just want to take this opportunity to share my views on International Paper and the year we have ahead of us in 2019. Coming off of a strong record earnings in 2018 with really solid performance across the portfolio and more importantly we strengthened our businesses and we strengthened the company as we head into 2019. Our businesses are stronger. We're well positioned to drive through any challenge we may face. We have the people, the innovation, the best value chain to solve our customers' needs and a low-cost high-quality manufacturing system to succeed. We're investing in high-return projects to improve our businesses, all of which drives our strong cash generation. We've also improved overall International Paper. We're a stronger company. We're well positioned to grow free cash flow in 2019 meaningfully, and we're strengthening our balance sheet and returning cash to shareholders. To me, it's all about value creation. That's what drives our decisions. And we're looking forward to 2019.

And with that, we are ready to take your questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Anthony Pettinari of Citi.

Anthony Pettinari -- Citigroup -- Analyst

Good morning.

Mark S. Sutton -- Chairman and Chief Executive Officer

Good morning, Anthony.

Anthony Pettinari -- Citigroup -- Analyst

Just looking at Industrial Packaging, it seems like your January shipments are stronger than what you saw in 4Q, and that seems consistent with what some of your competitors are saying. Is it possible to say what kind of drove the weakness in 4Q, in terms of end markets or categories or regions?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Well, I think -- hi, Anthony, it's Tim.

Anthony Pettinari -- Citigroup -- Analyst

Hi.

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

I think there were some strong comps that we were up against. We did finish the year very strong. December was a very good month for us at 2.5%. And we see that continuing as we go into January. So part of it is timing and part of it is, the way the months layout, but on balance, the fourth quarter for us was a pretty strong quarter.

Anthony Pettinari -- Citigroup -- Analyst

Okay. That's helpful. And then just in your 1Q outlook and kind of prepared remarks you referenced export destocking. Any visibility in terms of how long that could take to run its course, or where our customer inventories are, maybe relative to history? And then just kind of related question, how do you feel about your own internal containerboard inventory levels. I think some of your competitors have talked about opportunities to take inventories down, but they have some projects and M&A situations that you don't. Just any kind of general thoughts you have on your own inventory levels?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yeah. I don't think the destocking is a long-term impact. Depending on the regional world some things that make it a little bit harder to see clearly like Chinese New Year, we always, every year we have this for pulp and to some extent containerboard where buying stops ahead of Chinese New Year and then you have to see how it picks up once everyone is back. We do know that in Europe there's customers' inventories especially given the tightness that existed through a lot of last year, there's probably safety stocks that we think are in place and it'll take a month or two for those to kind of flow-through. I don't see it as being longer than that, but we'll have to see how it plays out. As far as our inventories, I think we feel good. We're adequately supplied. We've got tremendous flexibility.

Anthony Pettinari -- Citigroup -- Analyst

Okay. That's very helpful. I'll turn it over.

Operator

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

Mark Wilde -- BMO Capital Markets -- Analyst

Good morning, Mark. Good morning, Tim.

Mark S. Sutton -- Chairman and Chief Executive Officer

Good morning.

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Good morning.

Mark Wilde -- BMO Capital Markets -- Analyst

I wonder, Mark just to kind of start off, if you could talk a little bit about how you see the impact of that GP announcements down at Port Hudson affecting your business. I'm particularly interested in kind of the timing -- whereas changes the timing around the summer conversion and also whether you've announced a price increase in uncoated paper?

Mark S. Sutton -- Chairman and Chief Executive Officer

That's a great question, Mark. Specifically to the impact of changing supply in the uncoated free sheet business and its impact on our summer conversion, the original reason and the reason we communicated about making that conversion was to go into high-quality bleached linerboard and that's something we need for the places we're growing the box business. So, it wasn't really a driver. The driver wasn't our white paper system, it was what we made for our packaging system, and it's a great asset to do it. So, we communicated a change into 2020, and right now we're sticking with that plan. We're going to need that product pretty quickly, as we get into 2020 for the box growth that we are targeting and experiencing. So, I don't see any change in that plan. What it does in terms of market obviously is, it just continuing evolving change in the supply base as that product line and market goes through its normal evolution. So for us our Printing Papers business is well positioned. We've got great products, a full range of products and great customers, and we -- that business is still playing an important position on the team.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. And then my follow-on question is really around capital allocation. And I'm just curious, it sounds like you guys pulled back pretty dramatically on capital projects in the fourth quarter and I wondered, if you could you just put a little color around the things that went into that decision? And then also in the fourth quarter, it seemed like your cadence thing on share repurchase was pretty much in line with what we had seen through the first three quarters of the year. And I'm just kind of curious about why you might not have accelerated that given the weakness in equities in the fourth quarter?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yeah I'll...

Mark S. Sutton -- Chairman and Chief Executive Officer

Do you want to...

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

I'll take the second part and then...

Mark S. Sutton -- Chairman and Chief Executive Officer

Take the second, I'll take the first, yeah.

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

So we got our hand signals mixed up there for a minute. So, yeah, I think Mark, what you saw on the fourth quarter was continuing to buy shares, but also making sure that we were applying cash to the balance sheet as well. And as I've mentioned a minute ago, or showed on the slide, we did get to the top end of our range, in terms of leverage for the balance sheet and there's opportunity to take that lower. But we expect we're going to have a lot of cash to apply to share repurchases as we go through this year as well. So, it was just a choice. We had bought shares in the second and in the third. We continue to buy in the fourth. And we paid down some debt at the same time.

Mark S. Sutton -- Chairman and Chief Executive Officer

Mark, on the capital projects. There was nothing that we did in the fourth quarter that's not somewhat normal as you look at finishing your year, some projects move faster than you expected, some moved slower, and it was just a matter of managing the spending that we had committed to. This happens from time to time. It's just a little bit more activity. So, we ended up where we thought we would end up, right in the zone that we are communicated to investors for total capital spending. And so, when you have as many projects and as large on asset base, you just got to sync this stuff up toward the end of the year. So, it's just a matter of changing the cadence of some of the final execution of these projects.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. Fair enough. Thanks, and good luck in 2019.

Mark S. Sutton -- Chairman and Chief Executive Officer

Thank you.

Operator

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

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thank you, operator. Hi, everyone. Good morning. Thanks for all the details guys. I wanted to spend the first question probing some of the hopefully one-off related issues in the quarter that have implications in for 2019. Can you comment a bit on what within the $20 million of one-off good guys I guess for 4Q? And can you comment on what the commercial decision in Cellulose Fibers is related to and why it will take until middle of the year to correct that? And then I have a follow on.

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yeah. Hey, George. This is Tim.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Good morning.

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

The $20 million, it's a bunch of things, honestly, it's all-in corporate and a lot of small items that added up to a bigger-than-usual number in the quarter, I think that's the best way to describe it.

Mark S. Sutton -- Chairman and Chief Executive Officer

So, George on the commercial decision, we make these types of decisions all the time running our business and this particular decision had to do with trying to shift some of our customer mix, for all the right reasons; to improve our margins, to actually improve customer service across the portfolio. We made some decisions and of course when you shift customer mix you need to replace what your shifting out of and shifting into. And what's happening is it's just taking us longer to the second part of that. So our execution isn't as good as it has been when we've made these kind of decisions, but it's not an abnormal type of decision, it's just our execution, it's not something that we've done as well as we normally do on. It'll be fine. It'll just take us a little longer. The market's growing. We're outperforming the market. We'll continue to do that based on our portfolio of products and customers. We just had a shift project that's taking longer than we originally intended.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Mark, just to fill in some white space there. But ultimately you expect to replace whatever volume was lost, I mean, that's my takeaway with fluff volume and fluff customers correct, in terms of the shift?

Mark S. Sutton -- Chairman and Chief Executive Officer

Yes, fluff volume, fluff customers, and we fully expect to continue to perform very well. And we should perform better than the market based on our footprint of capability, but also our product portfolio. So, absolutely it's absorbent for absorbent. It's just in different customers, in different regions at higher economic value.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thank you. My second question and I'll do it quickly here. If we think about the free cash flow guidance for 2019 at $2 billion, I recognized that's -- your guidance and so that's the number you want to stick to, but given that the markets are kind of in an interesting position in terms of supply demand some destocking perhaps not for you, but for others and some of your bigger markets. Where do you think the tensions are on that free cash flow? Are we more apt to see holding price constant free cash flow be in excess of $2 billion, or are you pulling every lever you can to get to that figure? Thank you, and good luck in the quarter.

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yeah. Well, we always try to pull all the levers for free cash flow, so that doesn't change. But I do think to your point George, the $2 billion is what we put out there, but I can see upside to it, as we go through the year.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thank you, Tim.

Operator

Your next question comes from the line of Mark Connelly of Stephens.

Mark Connelly -- Stephens Inc -- Analyst

Thank you. Two things. What has been happening and will happen now after GP to your white paper mix? And I'm curious whether you're seeing any meaningful difference in US versus other markets in terms of how the decline in demand is playing out in terms of your particular mix?

Mark S. Sutton -- Chairman and Chief Executive Officer

I think our mix Mark is staying pretty constant relative to the roll business for the printing industry, the cut size business and some of the specialties remained. I think it's a little early to tell. Obviously, we are major suppliers. So we are seeing customers interested in us becoming their supplier post the GP announcement. But it's a little early to see what we're going to take and what it's going to do to our mix. But actually with the system we have now with essentially four mills, three-and-a-half mills, our mix is kind of written down with the decline because not all parts of the mix are declining at the same rate, but our facilities are pretty flexible that we've continued to be able to optimize the mix for the best margin and best profitability. We should see pretty quickly here in the first quarter how any incremental business that comes our way starts to shift that.

Mark Connelly -- Stephens Inc -- Analyst

Okay. So you answered the flexibility question. Just one more. Can you give us a sense of how you're getting to your 1% to 2% growth estimate? Are you still thinking in terms of GDP plus and what would drive the plus?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yeah.

Mark S. Sutton -- Chairman and Chief Executive Officer

Sorry, I just have to... (Multiple Speakers)

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

May not be responding. So exactly what you're asking Mark, this is Tim. But I referenced the 1.5% to 2%, that's what we're seeing in January. And I think fundamentally with the way we see the economy performing, we expect it to be in that range. So that's how we're looking not only in January, but I think that probably holds up for the year.

Mark S. Sutton -- Chairman and Chief Executive Officer

So Mark, we've talked about this before. We acknowledged that sometime in the past box demand and GDP kind of decoupled a bit. We actually have a model that we've developed with some outside resources and some internal data analytics that GDP is obviously a major function in it, but there are other indicators about how we think about box demand, and it doesn't always track effectively with GDP. There were periods were box demand slightly outperform GDP, but we didn't conclude that it was now back on that track. So, it's a set of analytics we use. GDP is obviously a function and the input to GDP, but it's not just a GDP measure for us.

Mark Connelly -- Stephens Inc -- Analyst

That's helpful. Thank you.

Operator

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

Steve Chercover -- D.A. Davidson -- Analyst

Thanks. Two quick questions. First of all, IP makes about one in three boxes in North America, and I think it's more like one and two for the biggest e-commerce player. I'm wondering, if that's still the case? And how this alleged making the boxes more appropriate size-wise. Can you actually get paid for doing so?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

We think we can. And yeah, I'd say your figures are directionally correct. I think the good news is, we serviced a lot of customers in the e-commerce space and we work with all of them very closely. Our design teams, our commercial teams, and it's all -- it's not just optimizing box size, it's optimizing flow-through fulfillment centers to make sure that they're getting the most efficiency in their fulfillment centers, as well as getting into the customers. So it's not just is the box the absolute precisely the optimal box, it's what works in the broader system.

Steve Chercover -- D.A. Davidson -- Analyst

Yeah.

Mark S. Sutton -- Chairman and Chief Executive Officer

The interesting thing Steve is that every e-commerce major player has a slightly different value proposition to customers and this velocity through your supply chain is more important to some than others. And so for the ones that as not as important you might actually be able to get to the perfect box even if it slows you down, because that's their value proposition. But for others, there is a physics issue here that you've got to be able to move the product through the value chain. And so we're at the table with all the major people who sell direct and helping them to figure out not how to make a box smaller how to make their business model work better. And sometimes that changes the amount of packaging needed, sometimes it actually improves our economics because of the way we're able to help them meet their goals.

Steve Chercover -- D.A. Davidson -- Analyst

Perfect. Yeah, that's what I wanted to clarify that it's not necessarily a negative just because the volume is lower. And my other quick question was with respect to Consumer Packaging. I mean, you're not directly reporting it, but you still have a lot of skin in the game. So are you optimistic about the prognosis for the industry and are you happy with how your partner's behaving?

Mark S. Sutton -- Chairman and Chief Executive Officer

I would say the investment we made with our business into graphic is doing what we expected it to do. They're building out the business, integrating the SPS, we think that, that is working out as intended. And I think the market is got a lot of potential because you see every day question marks about types of packaging, single-use packaging sustainable versus non-sustainable. And I think it's going to be an interesting ride as we look at policy and when we look at consumer preferences, but those products are pretty good, pretty well positioned for where the buyer and the public sentiment is going.

Steve Chercover -- D.A. Davidson -- Analyst

Great. Thank you very much.

Operator

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

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Mark and Tim, good morning. Thank you so much for taking my questions.

Mark S. Sutton -- Chairman and Chief Executive Officer

Good morning.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Good morning. Tim, just one on the guidance. The one -- thanks for the bridge earlier. The EBITDA guidance seems like it's around $850 million, which seems to imply the year is going to be somewhat back-half weighted. I know maintenance costs are appreciably lower in the second half as they are every year, but -- and I know you called out seasonality a fair bit. Is there a way to help us just with what the seasonality impact is in 1Q, perhaps relative to the other three quarters, so we can get a figure out how you're getting to that full year guidance based on what you talked about for 1Q?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yeah, sure. I mean, directionally it's probably our lowest quarter from a demand standpoint seasonally. So it picks up in the second quarter. And it used to be that the fourth quarter was weaker quarter as well, but we've seen that change over the past three or four years. Your comment on maintenance outages is correct. In the first half of the year we'll have roughly 80% of our maintenance outages completed and then it drops off significantly the third and again significantly in the fourth quarter as well.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Okay. Thanks for that. And Mark on Europe, European containerboard prices are falling a fair bit and obviously you are interested in getting into that market earlier last year. I mean, what are your thoughts about that market at this point? Is it the overcapacity situation there at the demand and any implications of what's happening there for what may happen in the US at some point down the road? Thank you.

Mark S. Sutton -- Chairman and Chief Executive Officer

It's a good question, Adam. I think the European market is different than the US, and the price of containerboard and the price of boxes behave a little bit differently. I think I've made this comment before. With the recycled part of that industry which is 75%, 78% of it is really a series of regional markets. So lower containerboard prices on average in Europe don't mean a whole lot. It means something in a region, but not across Europe. And then there's always the spread between recycled linerboard and the virgin paper that's typically used because it's needed for some performance spec. And so that's how that market kind of frames up. And as far back as I can personally remember there's always been somewhere in the neighborhood of 10% to 15% overcapacity nameplate capacity of containerboard versus demand. But because of that regional nature, you had very good parts of the market, even if you got an average overcapacity. We tend to be targeted right now in the southern part of Europe with a certain end-use box mix and largely are going to be mostly integrated on our recycled grades with Madrid and we're integrated on our kraftliner from the US. So we like our position we have right now. I think over time it'll depend on how the European industry evolves. But you've really got to think about -- my premise is you have to think about it as multiple regional markets.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks a lot, Mark.

Operator

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

Scott Gaffner -- Barclays Capital -- Analyst

Thanks, good morning.

Mark S. Sutton -- Chairman and Chief Executive Officer

Good morning.

Scott Gaffner -- Barclays Capital -- Analyst

Good morning, Tim. Good morning, Mark. Just focusing on cash and the return of cash to shareholders. For a minute, I mean, if I look at the $1.65 billion of free cash flow in 2018, and you were pretty close to that 50% payout ratio on the dividend. But then on -- so one I guess just questioning whether you would increase the dividend further or maybe just some caution on doing that just as we get later into the current cycle? And then the second part is really on the share repurchase versus debt reduction. I mean, you're right at the -- sort of long-term target on the balance sheet as far as net debt. I mean, how should we think about debt reduction versus share repurchase at this point in the cycle?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yeah. So, two good questions. The first on the dividend. We typically look at that once a year and we tend to do it in the fourth quarter. That's been our practice over the past seven or eight years. And we'll continue to do that. The key is that we want it to be sustainable. And so we'll evaluate how we're thinking about things when we come to it later this year. In terms of debt reduction and share repurchases as you can imagine it would be somewhat situational. And based on what we think of as the outlook that we're heading into. So we are in the range, but we're at the top end of the range on the balance sheet. We believe the balance sheet strength is foundational to the company. So we'll look at that very seriously. And if there's opportunities to buy our shares below what we believe intrinsic value to be we're going to be very active on that as well. So what we're trying to do is saying there's a lot of cash and it's going to be applied to debt reduction and share repurchase and we will be as thoughtful as we can be as to how we divide the two.

Scott Gaffner -- Barclays Capital -- Analyst

Okay. And how should we think about sort of the annual share creep as we go forward?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

The annual share creep are you talking about from incentive compensations?

Scott Gaffner -- Barclays Capital -- Analyst

From compensation correct.

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yeah, I mean, I'm not going to forecast what hasn't been fully approved yet, because that comes later in the first quarter. But we said minimum share repurchases of dilution. We ended the year at 400 million shares and you saw what we did last year and you see the guidance that we've given this year around how much cash we have for debt reduction and share repurchase. So it will be well -- I would imagine it will be well in excess of any dilution that we see from incentive comp.

Scott Gaffner -- Barclays Capital -- Analyst

Okay.

Mark S. Sutton -- Chairman and Chief Executive Officer

Yes. Probably I think one way to think about what we're trying to do and it's a little bit different for International Paper over the prior period, but we're trying to figure out how to optimize for our shareholder base, the long-term returns through good investments and the short-term capital returns that happened through a dividend and share repurchases. And as we said last year, we have not been as systematic and understandable in that area. We think we made a lot of progress in 2018, and we plan on continuing that in 2019. But the balance sheet being in that zone that Tim described 2.5 times to 2.8 times is really important to us. We think it's the right way to run basic materials company and a company that is exposed to the kinds of economic cycles we are. But we do want to do and we're committed to do in a better job that shareholders understand on short-term capital returns and the longer-term returns that in many cases are the source of some of the cash flow that we actually have to allocate. The investments we made yesterday are producing this cash flow today.

Scott Gaffner -- Barclays Capital -- Analyst

Got it. Thanks for the extra thoughts, Mark. Just one last quick one on box shipments. Can you talk about the cadence throughout the fourth quarter how you saw that progressed? I appreciate it.

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yeah, it was fairly, even October, November and then we finished strong in December. So, on balance we had a strong quarter fourth quarter of 2018.

Scott Gaffner -- Barclays Capital -- Analyst

Right. Thanks guys.

Mark S. Sutton -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Mark Weintraub of Seaport Global.

Mark Weintraub -- Seaport Global -- Analyst

Thank you. One point that you've made in the past is fluff pulp tend to have much more stable pricing than commodity paper grade pulps and certainly that's what we've been seeing so far. Now that we've got -- are a lot of the contracts now in place recognizing some reference to the commercial activity you talked about before. But are most contracts in place now that you have good visibility for the great majority of what your fluff pulp pricing will be this year, or does that actually move with other indexes et cetera?

Mark S. Sutton -- Chairman and Chief Executive Officer

A portion, Mark of our mix is contracted for the year, and we know where that visibility is. There's a portion of the mix that is not on long-term contracts. And so we've got pretty good visibility, and it's a true statement that the absorbent pulp is much more resilient on a price -- from a perspective. Again there's always the question mark of how it compares to people who can make both softwood market pulp and fluff? What's happening in the other market, that's been under pressure. So you would typically see any available swing capacity that could make fluff that has a qualified quality product to move into fluff. And that happens from time to time based on the health of the softwood market. I think we've seen a little bit of that play out as we went through the -- especially the second half of the fourth quarter. But with the growth rate and the type of products that ultimately this pulp goes into we feel really good about the market itself and our position in the market. And we think pricing will continue to be much more resilient than a typical softwood pulp grade would be.

Mark Weintraub -- Seaport Global -- Analyst

Sure. It's going to make lot of sense. And just if -- given that you've got more of a global footprint than many of the other folks in the industry was hoping, that you might provide a view on what you're seeing outside of North America? And where there may be places of weakness or relative strength?

Mark S. Sutton -- Chairman and Chief Executive Officer

I think, we see what you see. I mean, you hear about Europe and some of the country-by-country distractions that are going on whether it's France, Germany or Brexit, that all results in a slightly lower economic rate of growth in Europe and we see that, that's what Tim was talking about on some of the containerboard comments on export both volume and price. We also see there's no secret the Chinese economy is slowing. We don't have a direct impact in some cases because of the types of products we sell there, but we see a demand change. And again it's hard to figure out right now because of the overlay with Chinese New Year. And then I think there's some disturbances on currency Turkey is a great example. A lot of times that ends up being temporary, but that is a bit of turmoil right now. Latin America is actually improving. I think our biggest exposure is what we make in Brazil and sell everywhere else in Latin American and mostly white paper. That's actually kind of looking up because the new government in Brazil and the stabilization other than what's happening of course in Venezuela, which we have no exposure to, we feel pretty good about the stability of Latin America. But I think it's really Europe and how they've managed through their political issues and what ends up happening. I'm hopeful that we figure out a solution between the US and China on trade and the things that might be weighing on that whole exchange of commerce and we'll benefit, our customers will benefit and that's how we benefit. So we're doing our part to try to influence policy and work on that as one of many voices.

Mark Weintraub -- Seaport Global -- Analyst

Okay. Thanks for the quick tour. Very helpful. Thanks.

Operator

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

Chip Dillon -- Vertical Research -- Analyst

Yes, good morning. And thanks for all the details. I had a question on the maintenance change from year-to-year. It looks like it's going down maybe $20 million, $25 million. And I recall a year or so ago, you talked about shifting from a 12-month to an 18-month rotation, if I have that right. And that would cause 2018 to be much higher or 2019 would be I thought down closer to $60 million or even more. I mean, it was $100 million. But could you just talk to us about what's going on with maintenance and may be why it didn't fall as far as maybe, if I heard you right a year ago, as you thought it would?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yeah. Hey, Chip, it's Tim. So, I think what we said a year ago at this time was that on a normalized level we saw maintenance outage pending in the $460 million to $470 million range and last year was an elevated year. And we expected some decrease in 2019. But you do this planning to varying degrees in terms of how far out in time you go. And so as we're into the second half of the year and later in the year finalizing some of that planning there's a little bit more for 2019, than we thought there could have been this time last year. But we constantly work that number two so, that's a target. And our goal is to try to bring it as low as possible. But I mean that's really the simplest explanation for how it rolls up.

Chip Dillon -- Vertical Research -- Analyst

Okay. So in other words it could be more room down in the future?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yeah.

Chip Dillon -- Vertical Research -- Analyst

Okay,. And then just back to the dividend. You guys have actually raised it at least once, but generally once a year for the last nine years. There are a lot of companies that tend to fall into different kind of screens when they start to get into double digits. And I know that it's very important that it remains sustainable, so you don't want to get ahead of your skews on that. But what is your thought in terms of having some increase every year versus holding back and making it more meaningful and not raising it every year? Have you ever thought about that?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yeah, and I think we go back to what we said about 40% to 50% of free cash flow. So we wanted to be sustainable. We have the target range, the free cash and we look at longer term not just the year we're in, but longer-term planning about how we feel about that cash flow stream. And we have a very good dividend today, but we also have as I mentioned earlier the option of returning more cash through share repurchases as well. So not making a call one way or the other, I'm just saying that's the framework that we look at and that's the same framework we'll go through later this year when we evaluate it.

Chip Dillon -- Vertical Research -- Analyst

Okay. And then last one quickly on the fluff pulp business. How much would you say the issue with the customer shift is likely to takeaway this year may be it's an EBITDA number that you can give us and I assume it's all on the first half. And if you make the replacement as you expect and let's say prices stay where they are would there be any reason you wouldn't see the results whether it's EBITDA or EBIT in the fourth quarter be comparable or better than what we saw in the fourth quarter of 2018?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Well, there's a lot of moving parts as you referenced some of them. But yes, we think it's going to take us a couple of quarters for this to be fully resolved. I would hesitate to get into forecasting specific items across the company. But you see the impact in the first quarter from volume and the extra cost related to unabsorbed fix. And as we referenced we see it correcting itself in the second to third quarter and then we also provided how EBITDA is shaking out we think for the year. So...

Mark S. Sutton -- Chairman and Chief Executive Officer

Yeah, I think that's the way to think about it. I mean, the guidance we gave on full company, full year EBITDA factors in the specific issue along with some others, but the specific issue we mentioned in Cellulose Fibers. And the way I think about it, we were on a very good trend. We're still on a good trend except for this one issue that we'll recover from. So I think about it as sort of quarter-and-a-half, two quarter pause in our integration of that business, outperforming the market, heading toward really being almost a year ahead of the investment plan. And we'll be on the second half of the year pulling back on the track. And we factored that into the full year outlook. Had none of this happened in a perfect world with hindsight, we would see that incremental improvement. So we left that incremental improvement on the table. We're going to do our best. It's only January 31st, so we're going to do our best to close that gap, but that's our best thinking right now, in terms of how that flows into the full year company outlook.

Chip Dillon -- Vertical Research -- Analyst

Great. Thanks for the details.

Operator

Your next question comes from the line of Brian Maguire of Goldman Sachs.

Brian Maguire -- Goldman Sachs -- Analyst

Hi, good morning guys.

Mark S. Sutton -- Chairman and Chief Executive Officer

Hi, Brian.

Brian Maguire -- Goldman Sachs -- Analyst

Mark, appreciate the color and the perspective you gave on the slide around value creation. One thing you didn't really mention on there was acquisitions. Just wondering how you're really thinking about that these days whether the mill assets globally or converting assets in different regions? Have that changed meaningfully in the last couple of months? And presumably multiples have come down a little bit with some of the public equity multiples have changed. Did that impact your thinking on uses of cash from here? So just general thoughts on M&A at this point?

Mark S. Sutton -- Chairman and Chief Executive Officer

Yes. On the small types of acquisitions where you could be talking about a box plant or something like that there's always an opportunity to compare the economics of acquiring a plant in a location with a certain book of business versus if you're already in that region like the US for us we're everywhere. So we could organically invest the same amount of money or less in four plants and get exactly what we need exactly where we need it. That typically ends up winning out for International Paper. It may not be the right decision for other companies because they may have a total lack of capacity in an area. But for us most of our investments that look and smell like acquisitions on the small end have been organic investments. But we'll always compare the options when we're looking into improve a part of the business what's the best economic way to do it. And it's not simply just the financials do you like the location? Do you like the customers? Is it actually part of your strategy, or is it just for sale? We don't like to buy things that are just for sale, if they're not part of the original strategic intent we have. And so I wouldn't say we'd ever never look at it, because it would be probably foolish to say that because you could miss a good opportunity that's better than an organic investment, but that's how we think about it. The reason you haven't seen us do much of it is, we've had better options organically with our internal asset base.

Brian Maguire -- Goldman Sachs -- Analyst

Okay. I appreciate the color. And then just one last one on the back to the Cellulose Fibers issue. Just thinking about operationally how this would work. Will you be continuing to run the volume that you would have otherwise sold? And can you put an inventory until such time when you think you can find a home for it, or operationally do you think you're just going to run those assets at the lower rate for the time being? And then assuming you do find some new customers for, should we -- there'll be a qualification period needed there or are we talking about the stuff that's pretty ubiquitous and pretty easy qualified in with -- the kind of customers you usually deal with?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Yeah, you're right. It does vary from customer to customer, so there'll be probably some of all of that. To your question on running, I think, we've been very straightforward about running our businesses to our customers' demand and making sure that we are optimizing our supply chain and hence you saw the reference in the commentary of the unabsorbed fixed charge that we'll have in the quarter because we won't be running and covering that fixed cost.

Mark S. Sutton -- Chairman and Chief Executive Officer

I think the other reality on the replacement is, in most cases, it is with existing customers. It's just a matter of capturing that growth. Some of those customers are in the macro backdrop that Tim described around the last part of the fourth quarter with some slowing demand heading into Chinese New Year. Some like in containerboard with a very tight fluff pulp market, some buying patterns that occurred when you could get it and then some destocking. If you think about interruptions, we -- just our company had and we're a large player. We had some operating issues earlier in the year we shared with you and then we had a hurricane and other things that I think for customers they say -- I better get what I can get now, if it's qualified. So that's part of what's happening it's just the ability for that to regain traction. The good news is, it's the kind of product in most cases that we're already qualified on with many existing accounts that are growing at rates higher than the average. So that's why I'm really confident. We'll be able to get all of this. It's just taking, it's going to take a little longer than our original plan, hence why we turn the decision -- a poor decision. We didn't just -- we just didn't have the execution of the recovery properly done.

Brian Maguire -- Goldman Sachs -- Analyst

Okay. I appreciate the color guys.

Operator

Your next question comes from the line of Gabe Hajde of Wells Fargo Securities.

GBE Hajde -- Wells Fargo Securities -- Analyst

Good morning, gentlemen. Thanks for taking the question. The first one centers around I guess mill outage or production. 2018 kind of struck me as a pretty heavy year. You guys had roughly 520,000 tons of lost production from maintenance. Is there any way to help us understand what 2019 could look like given what you know now and what you plan to do on the mills, or I guess may be another way, as their incremental production that you would have access to that you otherwise didn't in 2018 due to maintenance?

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Well, there's always a lot of puts and takes around capital projects that are completed during the current year and you get the benefit of it next year. Maybe the way to think about it is, just from a dollar standpoint in 2018, we spent $548 million on outages and we're guiding to $525 million this year. But as I referenced in an earlier comment we're always looking to do that more efficiently and evaluate whether certain things absolutely have to be done or not. So we're going to -- we have the target of $525 million, but we're obviously going to try to be lower than that in terms of our spending.

GBE Hajde -- Wells Fargo Securities -- Analyst

Okay. And then can you remind us any debottlenecking effort that you completed in 2017 or 2018 that would flow through into 2019 in terms of again incremental capacity? And I apologize if you said Mark, if you confirmed that you did or did not go out with a price increase in white paper?

Mark S. Sutton -- Chairman and Chief Executive Officer

Gabe, I didn't answer that question, so as we always say pricing especially forward-looking pricing is really between International Paper and our customers. So you didn't miss anything.

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

The only big material debottlenecking was our Mansfield containerboard mill, which is a non-integrated mill produces recycled -- sorry, lost my train, I thought from -- our recycled containerboard. So we had a major project that I think it started back in late July and it took us about 30-plus days to complete the project itself and it's running well. But other than that, it's just the normal small stuff that the benefits that you get from maintenance outages and things like that.

GBE Hajde -- Wells Fargo Securities -- Analyst

Thank you gentlemen. Good luck in the year.

Mark S. Sutton -- Chairman and Chief Executive Officer

Thank you.

Operator

Our final question will come from the line of Paul Quinn of RBC Capital.

Paul Quinn -- RBC Capital -- Analyst

Yeah, thanks for taking my question. Just following up on this line of question around cellulose pulp. Just I'm trying to get an idea that what you think that trying to slow down right now how much of that is a factor of the US, China trade issue? And then if you could outline sort of in broad strokes what your percentage of exposure to the Chinese market is on pulp fluff SBSK and I guess NBSK at Ilim?

Mark S. Sutton -- Chairman and Chief Executive Officer

I think the cause of the slowdown how much of it is related to the US, China trade discussion it is hard to predict. Hear all kinds of assessments of it. But clearly, if China with high-single digits in terms of growth and now they're in the mid-to-low, I think a reasonable expectation is that a catalyst for that is the kind of uncertainty that's been put in place with these trade negotiations. That's why I think underlying demand is not really changing all that much. But when you're not sure about the trade environment you -- and the Chinese are very good at inventory management you use -- just use your inventory for a while. So we are speaking with all of our customers trying to understand our consumers buying less of the product. It's the type of product that typically that doesn't happen unless you just can't afford it, or is it you have enough inventory and we don't need the input material which is the fluff pulp and its greater quantities. So for your second part of the question. For our absorbent product pulp, so the fluff pulp category about 33% of our product goes into China.

Operator

Thank you. I'll now return the call to Guillermo Gutierrez for any additional or closing remarks.

Guillermo Gutierrez -- Vice President, Investor Relations

Thank you again for joining International Paper's fourth quarter earnings call. As always Michele and I will be available for follow-up questions. Have a great day.

Operator

Thank you for participating in the fourth quarter and full year 2018 International Paper earnings conference call. You may now disconnect your lines, and have a wonderful day.

Duration: 60 minutes

Call participants:

Guillermo Gutierrez -- Vice President, Investor Relations

Mark S. Sutton -- Chairman and Chief Executive Officer

Tim S. Nicholls -- Senior Vice President and Chief Financial Officer

Anthony Pettinari -- Citigroup -- Analyst

Mark Wilde -- BMO Capital Markets -- Analyst

George Staphos -- Bank of America Merrill Lynch -- Analyst

Mark Connelly -- Stephens Inc -- Analyst

Steve Chercover -- D.A. Davidson -- Analyst

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Scott Gaffner -- Barclays Capital -- Analyst

Mark Weintraub -- Seaport Global -- Analyst

Chip Dillon -- Vertical Research -- Analyst

Brian Maguire -- Goldman Sachs -- Analyst

GBE Hajde -- Wells Fargo Securities -- Analyst

Paul Quinn -- RBC Capital -- Analyst

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