International Paper (IP)

Q2 2012 Earnings Call

July 26, 2012 9:00 am ET

Executives

Glenn Landau - Vice President of Investor Relations

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

Carol L. Roberts - Chief Financial Officer and Senior Vice President

Mark Stephan Sutton - Senior Vice President of Industrial Packaging

Thomas Gustave Kadien - Senior Vice President - Consumer Packaging and Ip Asia

Timothy S. Nicholls - Senior Vice President of Printing & Communications Papers

Analysts

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Gail S. Glazerman - UBS Investment Bank, Research Division

Chip A. Dillon - Vertical Research Partners Inc.

Mark Wilde - Deutsche Bank AG, Research Division

Mark A. Weintraub - The Buckingham Research Group Incorporated

George L. Staphos - BofA Merrill Lynch, Research Division

Albert T. Kabili - Crédit Suisse AG, Research Division

Kurt Schoen - Credit Agricole Securities (USA) Inc., Research Division

Anthony Pettinari - Citigroup Inc, Research Division

Steven Chercover - D.A. Davidson & Co., Research Division

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Presentation

Operator

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Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the International Paper Second Quarter 2012 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Landau, you may begin your conference.

Glenn Landau

Thank you, Christy, and good morning. And thank you for joining International Paper's Second Quarter Earnings Conference Call. Our key speakers this morning are John Faraci, Chairman and Chief Executive Officer; and Carol Roberts, Senior Vice President and Chief Financial Officer.

On Page 2, during this call, we will make forward-looking statements that are subject to risks and uncertainties, which are outlined on Slide 2 of our presentation. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures are available on our website. Our website also contains copies of the second quarter 2012 earnings press release and today's presentation slides.

Lastly, given our expanded disclosure around our Ilim JV, Slide 4 provides some context around the joint venture's financial information and statistical measures.

So with that, I will now turn the call over to John Faraci.

John V. Faraci

Thanks, Glenn, and good morning, everybody. And thanks for calling in. So let me just start up by saying the second quarter was a solid result for International Paper. Temple is -- the integration is going very, very well. The acquisition was meaningfully accretive in the second quarter. That's only 3.5 months -- 4.5 months into the acquisition. So the world is going sideways in terms of the environment we're operating in. I think kind of everybody understands that. But the good thing is, International Paper isn't done. We've got a lot of headroom, a lot of levers we're pulling. We're running our business and executing well, but we're letting the platform and the groundwork. And we'll talk about the during the call or things that are going to meaningfully improve International Paper and move out of 2012 and into 2013.

Just looking at our results for the quarter, we increased our EBITDA in the second quarter to close to $880 million. We continue to generate strong free cash flow from operations. The biggest single lever during the quarter was the impact of the Temple integration. And as Carol will outline shortly, we're well ahead of plan and exceeding our targets on most all metrics. In the 5 months since closing, we can say the acquisition is meaningfully accretive. We've got all of our peak outages behind us. I think the quarter was a peak quarter. We executed just about flawlessly during the quarter on those outages and operated our assets well, so some modest price recovery that was in line with our expectations. Didn't see much change in the demand environment you all netted out. The Franklin fluff pulp mill came up as we expect it would late in the second quarter, and we continue to make a lot of progress on a number of strategically important projects, which will meaningfully impact earnings as we move out of 2012 and in 2013. And we'll cover those later as well.

So given a largely balanced input cost environment in a number of changes there, other than seasonal outages, the only other headwind we had during the quarter was a very large unfavorable noncash foreign exchange swing associated with the Ilim joint venture, and that's really what happens when the ruble weakens. It impacts our joint venture earnings, but as Carol will show you on an operating basis, Ilim results were about the same as they were in the first quarter, and we're off to lighten out.

So with that, let me just turn to Slide 6, which is the financial snapshot. Revenues were up 6% in the quarter, mainly due to the Temple acquisition. We saw a slight bit of EBITDA compression year-over-year. More than half of that was explained by the higher outages, second quarter this year versus second quarter last year, the onetime startup costs that we incurred in Franklin during the quarter, which were meaningful, and lower pulp prices, which were largely offset by the Temple accretion. But as I said earlier, cash from operations before special items continue to grow, both on a quarter-over-quarter basis and a year-over-year basis, and that's what's really important.

So Carol, let me turn it over to you to talk about the businesses.

Carol L. Roberts

Thanks, John, and good morning, everyone. Let me move you to Slide 7. And taking a look at the second quarter financial bridge from the first quarter, we earned $0.46 per share from continuing operations before special items. While volume in our consolidated businesses was flat, we did see modest price improvement of about $0.05 per share across our global Paper and Packaging business. This was largely driven by the partial pass-through of our announced North American Printing Papers increases, as well as successful paper increases that we implemented in Brazil and Russia. And on the positive, we also saw the pass-through of our announced export containerboard price increase, which was very much in line with our expectations.

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