International Paper (IP)

Q1 2011 Earnings Call

April 28, 2011 9:00 am ET

Executives

Mary Laschinger - Senior Vice President and President of Xpedx

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

Carol Roberts - Senior Vice President of Industrial Packaging

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

Timothy Nicholls - Chief Financial Officer and Senior Vice President

Thomas Cleves - Vice President of Investor Relations

Analysts

Mark Connelly - Credit Agricole Securities (USA) Inc.

Mark Wilde - Deutsche Bank AG

George Staphos

Richard Skidmore - Goldman Sachs Group Inc.

Gail Glazerman - UBS Investment Bank

Mark Weintraub - Buckingham Research Group, Inc.

Presentation

Operator

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Good morning. My name is Lori, and I'll be your conference operator. At this time, I would like to welcome everyone to the International Paper First Quarter 2011 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Tom Cleves, Vice President, Investor Relations. Please go ahead, sir.

Thomas Cleves

Thank you, Lori. Good morning, everyone, and thanks for joining International Paper's First Quarter Earnings Conference Call. Our key speakers this morning are John Faraci, Chairman and Chief Executive Officer; and Tim Nicholls, Senior Vice President and Chief Financial Officer. Mary Laschinger, Senior Vice President and President of xpedx will also participate in today's call.

During the call, we will make forward-looking statements that are subject to risks and uncertainties. These are outlined on Slide 2 of the 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. Our website also contains copies of the first quarter 2011 earnings press release and today's presentation slides.

I'll now turn the call over to John Faraci.

John Faraci

Okay. Thanks, Tom. And just before I get started, you're moving off to another assignment shortly, thank you for your work with investors over the last 3-plus years.

Thomas Cleves

Thank you, John.

John Faraci

Okay. For the first quarter, we characterize this a good solid quarter for International Paper. The momentum that we talked about with you last year that started to build in the second quarter of 2010 continues. One of the things that really made a difference for International Paper, it has made a difference, and continues to make a difference is our global balance. And as we talk about our performance during, as Tim will, you'll see that global balance really starting to pay off in our results.

First quarter were solid returns, again, in the cost of capital range. Operating EPS of $0.74 versus $0.04 a year ago and up 18% sequentially quarter-to-quarter. During the quarter, as you know, we also increased our dividend for the third time and increase it to slightly above prerecession levels. And during the quarter, we announced a strategic entry into the India paper and packaging markets.

So just turning to that slide here, a brief financial snapshot before I turn it over to Tim. Sales were up 10%; we improved EBITDA margins up 400 basis points over the first quarter, 60 points -- 60 basis points over the fourth quarter; we continued very strong free cash flow; and a first quarter that always is and was seasonally weak. And this time is impacted by quite a bit of bad weather in the January-February timeframe; continued debt reduction; and continue to have a strong cash balance on the balance sheet.

So with that, I'll turn it over to Tim to take you through the first quarter in somewhat more details.

Timothy Nicholls

Okay. Thanks, John. Good morning, everybody. As John said, we did have a very strong quarter in the first quarter, but not without some headwinds. Volume was seasonally weak. We are typically slower in Russia, slower in Brazil, slower in North America. But we did have the weather-related impact in North America that hit us as well, and I'll speak more about that when I come to the Industrial Packaging business. We also had higher input cost, and I'll speak more about those in details. But we were really carried by the strength of our operations, and it wasn't just here in North America, it was really around the world. The other notable item on this page was the really strong results from Ilim, and I'll share some more details with you in just a few minutes about their fourth quarter, our first quarter reported.

If you turn to the next page, we've got our normal input costs breakout, and we had close to $50 million in the first quarter. It was really in line with our expectations weighted towards North America. We had about 80% of the increase in North America and then 20% in Europe. The Packaging businesses were able to cover the input costs increases with operational improvements. Printing Papers was hit disproportionately in the quarter by energy, chemicals and wood, and I'll talk a little bit more about that when we get to the Printing Papers segment.

So let me turn to each of the segments now, and I'll start with Industrial Packaging. We had a really solid first quarter even with the weather impacts and the rising costs. We had purposely pull back a little bit on export shipments towards the end of last year for the first quarter anticipating higher box demand in the U.S., and then the weather got in the way. But I think it was a real strength of the business, it was able to react quickly, take the market-related downtime that they needed to. And so if you look at the volume bucket there, 10 million of that 14 million was really related to market-related downtime around North American box. Had very solid operations, really across all the mills and converting facilities, not just here in the U.S. but globally.

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