International Pape (IP)

Q3 2010 Earnings Call

October 27, 2010 9:00 am ET


John Faraci - Chairman, Chief Executive Officer and Chairman of Executive Committee

Thomas Kadien - Senior Vice President of Consumer Packaging and IP Asia

Carol Roberts - Senior Vice President of Industrial Packaging

Timothy Nicholls - Chief Financial Officer and Senior Vice President

Thomas Cleves - Vice President of Investor Relations


Peter Ruschmeier - Barclays Capital

Mark Connelly - Credit Agricole Securities (USA) Inc.

Mark Weintraub - Buckingham Research Group

Mark Wilde - Deutsche Bank AG

George Staphos

Richard Skidmore - Goldman Sachs Group Inc.

Steven Chercover - D.A. Davidson & Co.

Chip Dillon - Crédit Suisse AG

Gail Glazerman - UBS Investment Bank



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Good morning, my name is LaTrisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the International Paper 2010 Third Quarter Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Tom Cleves, Vice President, Investor Relations. Please go ahead, sir.

Thomas Cleves

Thanks, LaTrisha. Good morning, everyone, and thanks for joining our third quarter conference call. Our speakers this morning are John Faraci, Chairman and Chief Executive Officer; and Tim Nicholls, Senior Vice President and Chief Financial Officer.

During our call, we will make forward-looking statements that are subject to risks and uncertainties. These are outlined on Slide 2 of our presentation.

We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures is available on our website. The website also contains copies of our third quarter 2010 earnings press release and today's presentation slides.

And with that, I'll turn the call over to John.

John Faraci

Thanks, Tom, and good morning, everybody. Thanks for joining us. As we usually do, in these calls, over the next 20 to 30 minutes, Tim and I will review our third quarter results and the performance of our individual businesses. We'll also talk about how we see the fourth quarter shaping up, and then we'll open it up for your questions.

I'll just start by saying International Paper had a very good third quarter. We generated strong earnings per share, more than double second quarter levels and also generated very strong free cash flow, over $750 million. Our strong results in the third quarter were broad based, both in terms of business segments and geographic regions. Our results importantly were not just about price, volume was also up in North America and outside North America. And we continue to realize the benefits of our restructuring efforts and operated our mills and converting plants very efficiently. All which led to very solid and meaningful margin expansion.

We consider our third quarter results just one more step in our journey to generating sustainable cost-of-capital returns for International Paper over the business cycle. Also during the quarter, we used our strong free cash flow to contribute nearly $1.2 billion to our pension plan and to repay $200 million of balance sheet debt.

So third quarter earnings were $0.91 a share compared to $0.42 in the second quarter and $0.37 in the third quarter of 2009. Earnings in all three of our U.S. mill businesses were excellent. In fact, our North American Industrial Packaging business and Coated Paperboard businesses posted record earnings. Our EMEA Paper and Packaging businesses continue to generate strong earnings, and we also received a strong contribution in terms of EPS from our Ilim joint venture.

Our earnings also benefited from reduced fixed costs driven by our milling converting plant and Distribution restructuring programs, which were initiated in 2009 and continue to deliver results in 2010. We continue to realize announced price increases. And our mills and converting plants, as I said, operated very well. Volume increases were broad based. 5% up in North America versus third quarter of 2009, and 5% up outside North America versus the third quarter 2009.

So third quarter sales were $6.7 billion, up 10% from the second quarter and 14% from the third quarter of last year. EBITDA increased by 33% to $1.1 billion while EBITDA margins improved 16%. Third quarter free cash flow improved to more than $750 million, and this figure includes about $150 million in cash from land sales but also includes about $150 million increase in cash consumed by working capital. So basically, the two offset each other.

We ended the quarter with $1.4 billion in cash on hand as we used some of our cash to reduce long-term debt by $200 million and negative $1.2 billion pension plan contribution. Said another way, had we not made that $1.4 billion contribution to pension plan and debt reduction, our cash balance at the end of the quarter would have been close to $2.8 billion. And I just mentioned that to emphasize our cash flow is strong.

As International Paper and the industry and all industries continue to recover from the global recession, we continue to improve our return on investment, which is the key metric for International Paper. In the slide you're looking at here, shows that prior to our transformation plan, our return on investment averaged about 4%, and I'll remind you that includes land sales. Since we began to implement our transformation plan, the returns improved steadily until late in 2008. Just before the global recession, we were approaching cost-of-capital returns, then we hit the last part of 2008 and 2009. As we come out of the recession, our returns have recovered and recovered quickly, and we've achieved cost-of-capital returns in the third quarter. As we look ahead, our efforts are focused on maintaining cost-of-capital returns for International Paper over the business cycle.

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