International Pape (IP)

Q2 2010 Earnings Call

July 28, 2010 9:00 am ET


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

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



Ladies and gentlemen, thank you for standing by, and welcome to the International Paper 2010 Second Quarter Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Tom Cleves, Vice President of Investor Relations. Sir, you may begin your conference.

Thomas Cleves

Thanks, Paula. Good morning, everyone, and thanks for joining our second quarter earnings 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 this call, we will make forward-looking statements that are subject to risks and uncertainties. These are outlined on Slide 2 of the presentation. We'll also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP measures is available on our website, and our website also contains copies of the second quarter 2010 press release and today's presentation slides.

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

John Faraci

Thanks, Tom, and good morning, everybody. Thanks for joining us for the second quarter results call. As we typically do over the next 20 to 30 minutes, Tim Nicholls and I are going to review our second quarter results with you and the performance of the individual businesses. We'll also share our third quarter outlook, and then we'll open it up to your questions with a Q&A session.

I start out by saying we're very pleased with the results we achieved in the second quarter. Coming out of the deep recession in 2009 and operating in an overall economic environment, it's improving but certainly not robust. We significantly improved our earnings in the second quarter. Before special items, earnings more than doubled versus the second quarter of 2009, and they were far better than the earnings in Q1, which is the low point for International Paper.

So quickly, the headlines. Revenues increased by 6%. This is the first quarter of revenue growth since late 2008. It was both volume and price. Margins expanded in all businesses. We had strong free cash flow generation, and importantly, all businesses both in North America and around the world, turned in strong second quarter profits. EPS in the second quarter was $0.42, up from $0.04 in the first quarter and $0.20 in the second quarter of 2009.

Our second quarter results benefited from our global balance with all of our businesses outside the U.S. recording strong operating results. Our European Paper and Packaging business, which includes our Russian operations in Svetogorsk, also generated record earnings in the second quarter as did our Asian operations. Our milling-converting operations performed very well in the quarter, which made a contribution to earnings, and profits continue to come from our ongoing cost-reduction efforts.

Fiber costs declined during the quarter, but they remain high compared to historical levels. And I also like to point out that we generated our strong second quarter results despite a $120 million in maintenance outage expenses, about $38 million more than the first quarter or about $0.05 a share, and the second quarter was our high watermark for maintenance outages during the year.

So quickly, on the numbers. On second quarter sales were $6.1 billion. It's at the highest level since the fourth quarter of 2008. EBITDA increased 40% to close to $800 million, $782 million to be exact. Free cash flow improved over $350 million, and importantly, we continue to reduce our long-term debt. In the quarter, we reduced it by $100 million and increased our cash balance on hand by $200 million from $1.7 billion to $1.9 billion.

So we're on Slide 7 now and that's comparing the second quarter of 2010 to the first quarter of 2010, and this slide shows our sequential operating improvement. As you can see, realized price increases added the most to second quarter earnings at $0.29 a share, improved volumes in Paper and Packaging added $0.05, strong mill operations and cost-reduction activities, and what you're seeing here is a flow-through of the facility decisions in May, both in the Containerboard business and box plants. And in Europe, we're starting to flow-through, adding to our earnings. We continue to monetize our Forest Resource assets. In this case, in the second quarter. We sold some mineral rights, which added $0.05 to our earnings.

A bit of a headwinds here, our largest envelope customer filed for bankruptcy during the quarter, which led to a $0.05 charge. And in our North American Premium Papers business, we hope to recover some of this amount in the future, and if we do, we'll recognize it in future periods. And finally, the Ilim joint venture continue to improve. And remember, that's on a one quarter lag, and they added $0.02 to our earnings compared to the first quarter.

I think it's also instructive to look at kind of the first half of this year versus first half of last year, and they are of somewhat different story. Again, a lot of improvement, $0.46 year-to-date this year versus $0.28 for the first six months of 2009, but you see the impact of volume here. As the global economies have recovered, we've been able to sell more volume in almost all of our Global businesses, and that increased earnings by almost $0.40 a share, $0.37.

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