International Paper (IP)

Q2 2011 Earnings Call

July 28, 2011 9:00 am ET

Executives

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

Glenn Landau - Vice President of Investor Relations

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

Analysts

Peter Ruschmeier - Barclays Capital

Chip Dillon - Citigroup

Mark Connelly - Credit Agricole Securities (USA) Inc.

Stephen Atkinson - BMO Capital Markets Canada

Mark Wilde - Deutsche Bank AG

George Staphos

Steven Chercover - D.A. Davidson & Co.

Mark Weintraub - Buckingham Research Group, Inc.

Gail Glazerman - UBS Investment Bank

Anthony Pettinari - Citigroup Inc

Presentation

Operator

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Good morning. My name is Misty, and I'll be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2011 earnings conference call. [Operator Instructions] Mr. Glenn Landau, Vice President of Investor Relations, you may begin your conference.

Glenn Landau

Thank you, Misty. 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 Tim Nicholls, 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 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. Our website also contains copies of the second quarter 2011 earnings press release and today's presentation slides.

I will now turn the call over to Mr. John Faraci.

John Faraci

Thanks, Glenn, and good morning, everybody. Thanks for calling in. What we're going to do from here is as we typically do, Tim and I will summarize the quarter and then we'll take questions on the quarter. Then, I'll make a couple of comments on the Temple acquisition proposal, and if we have time, we'll take a couple of questions on that. So we'll do it in that order.

So let me just start off talking about the second quarter. International Paper had a very strong second quarter in a recovering but obviously not fully-recovered economic environment here in North America. Our results were driven by a couple of things: a balanced segment and global portfolio of businesses around the world; very strong contributions from Printing Papers in North America, Coated Paperboard in North America and the Ilim Joint Venture; really outstanding operations and cost management that's continuing; good maintenance outage execution during the quarter; some seasonal improvement in demand and we offset significant input costs escalation that Tim will talk about.

This next chart here just shows you the segment and global portfolio balance. It's part of International Paper's business platform today. As you can see on the left, the good balance in terms of where the earnings came from by segment and on the right, good balance in terms of where the earnings came from by geography.

Turning to the financial snapshot page, strong revenue growth of revenues, up 8%. EBITDA, over $900 million in the quarter, up 16% from the second quarter of last year, a run rate of $3.6 billion. Our free cash flow, amazingly, exactly equal to the first quarter but I would say that, that also has $40 million of additional capital spending in the second quarter. So our free cash flow is actually up around 10%, if you normalize for capital spending during the quarter.

Really, if you look at this next slide here, which is the EPS over the last, really, 10 years, you can see there's a step change in our EPS performance. That is the result of the transformation plan. The 2009 period you're looking at there is the global recession, that is now in the rearview mirror. But importantly, our earnings over the last 4 or 5 quarters are not from land sales as they were in the prior years. So they were really operating earnings from our businesses and as you can see, we've achieved some of the step change in terms of the capability of International Paper to generate earnings and free cash flow. We think there's more left on the runway as we go forward. In terms of return on capital, 8% return -- over an 8% return on capital over the last 4 quarters into the cost of capital zone, which is important in terms of one of our key metrics.

So with that, let me turn it over to Tim to summarize the quarter.

Timothy Nicholls

Okay. Thanks, John. Good morning, everyone. As John said, we did have very strong performance in the second quarter. Volume contributed $0.08 to the change in results from the first quarter. And I would say that while volume here in North America is really moving sideways, and we'll talk about that a little bit in more detail as we go through the slide deck. In other parts of the world, we're continuing to see growth, whether it's Russia or various parts of Asia. So volume, price, strong operations and a great results from Ilim, more than offset the heavy maintenance outage schedule, the heaviest for the year in the second quarter and the impact of the Vicksburg's flood, which cost us about $20 million. Input costs were up in the quarter, $31 million, in line with expectations, about 75% of that in North America and 25% in Europe, which has been kind of a theme to this year and it's really fiber and energy costs in Europe. All of the businesses, industrial and consumer packaging and printing papers, also higher costs.

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