International Paper's CEO Discusses Q4 2011 Results - Earnings Call Transcript

International Paper (IP)

Q4 2011 Earnings Call

February 02, 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 of Industrial Packaging

Mary Laschinger - Senior Vice President and President of Xpedx

Mark Stephan Sutton - Senior Vice President of Industrial Packaging

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

Analysts

George L. Staphos - BofA Merrill Lynch, Research Division

Mark Wilde - Deutsche Bank AG, Research Division

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

Gail S. Glazerman - UBS Investment Bank, Research Division

Chip A. Dillon - Vertical Research Partners Inc.

Albert T. Kabili - Crédit Suisse AG, Research Division

Anthony Pettinari - Citigroup Inc, Research Division

Mark A. Weintraub - Buckingham Research Group, Inc.

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 Fourth Quarter and Full Year 2011 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Glenn Landau, Vice President, Investor Relations. Please go ahead, sir.

Glenn Landau

Thanks, Christy, and good morning. And thank you all for joining International Paper's Fourth Quarter and Full Year 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.

During the call, we will make forward-looking statements that are subject to risks and uncertainties, which 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 are available on our website. As always, our website will also contain copies of our fourth quarter 2011 earnings press release and today's presentation slides. I will now turn the call over to John Faraci.

John V. Faraci

Thanks, Glenn, and good morning, everybody or good afternoon depending where you're calling in from. Over the next 20 to 30 minutes, Carol Roberts and I will review our full year and fourth quarter 2011 results and the performance of our individual businesses. We've also got Mary Laschinger, Senior Vice President and President of xpedx, here to give you all an update on the progress we're making in transforming our distribution business.

And I'm going to start just by talking about the full year and set that up for Carol to go into the quarter. We had stronger full year results for International Paper. Actually, it was the best financial results in almost 2 decades. Margin expansion where we needed it; price realization stayed with us throughout the year; great operations and cost management, outstanding results for mill [ph], which we'll talk about; and excellent cash generation.

Looking at International Paper in North America and around the world. This is now on Slide 2, volumes in North America were down slightly, but sales revenue was up slightly, reflecting the fact we've got price flow through and strong margin expansion in our North American businesses of 200 basis points.

Outside the U.S., we improved earnings, but it was in a different way. Margins, which were high, stayed high, but we've got good, strong volume growth up 6%, and as a result of that a plus in sales price improvement. Sales were up 17% outside North America, including the Ilim Joint Venture.

So we're going to the next slide, looking at all for 2011. Sales moved up from $25 billion to $26 billion, strong improvement in EBIT from $1.8 to $2.3. EPS up by close to 50%. Cash from operations, again, very strong, solid free cash flow even though capital spending was up year-over-year. Year-end debt up some because of the pre-funding or pre-borrowing for the Temple acquisition, and very strong cash balance, even when you take out the debt that we put on the balance sheet for Temple, and we funded the pension plan as well.

Yes, this next slide, I think, just shows the journey that International Paper has been. The transformation plan is over. It was all aimed at putting International Paper in a position. From a portfolio standpoint, we've incurred [ph] returns and the cost to capital zone. And with the exception of 2009, which is now in the rearview mirror, the worst recession we had in 80 years, we've steadily been on that margin in 2011, which is still a challenging economic environment, we got 8% [ph] returns. So we feel very good about the year, feel we had a strong quarter to end a very strong year.

I'll come back at the end and talk about how we're looking in 2012. So Carol?

Carol L. Roberts

Thanks, John, and good morning, everybody. Let's take a look at the financial bridge from 2010 to 2011, where IP earned an incremental $1.20 per share from continuing operations and before special items.

While volume in our consolidated businesses was down slightly, I think it's worth noting that our Ilim JV provided $0.21 of additional contribution, mainly driven by year-over-year revenue growth of 26%.

I think the other main story that John mentioned in 2011 was the significant margin expansion driven by year-over-year price realization and mixed improvements, as well as excellent operations and cost management, and both of these more than offset the higher input cost of $0.61 a share. In summary, as John stated earlier, this result marks the best year that IP's had financially in almost 2 decades.

SO moving to the next slide to the fourth quarter. Earnings per share were $0.66. These results were in line with our expectations for the quarter as we experienced what we would see as the normal seasonal weakness in North America, and we did see some downward price pressure in market hold and exports from North America in both paper and packaging. Additionally, we had significant negative currency impact at our Ilim JV in this period, which did reduce their earnings in the quarter. These headwinds were somewhat offset by our global balance. We saw seasonally stronger demand in paper sales in Brazil, Russia and Eastern Europe, as well as stronger box volumes and improved margins in Europe. And we did see some input costs relief in fiber and energy. I think it's worth noting that as we exited the quarter, our inventory did remain in balance as we continued to balance our supply with our customers' demands.

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