International Paper (IP)

Q3 2011 Earnings Call

October 27, 2011 9:00 am ET

Executives

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

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

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

Glenn Landau - Vice President of Investor Relations

Mark Stephan Sutton - Senior Vice President of Industrial Packaging

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

Analysts

Chip Dillon - Citigroup

George L. Staphos - BofA Merrill Lynch, Research Division

Anthony Pettinari - Citigroup Inc, Research Division

Mark A. Weintraub - Buckingham Research Group, Inc.

Stephen Atkinson - BMO Capital Markets Canada

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Mark Wilde - Deutsche Bank AG, Research Division

Gail S. Glazerman - UBS Investment Bank, Research Division

Presentation

Operator

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

Glenn Landau

Thanks, Laurie, and good morning, and thank you for joining International Paper's third 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, as always, 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-US GAAP financial information and a reconciliation of those figures to U.S. GAAP financial measures will be available on our website. Our website also contains copies of the third quarter 2011 earnings press release and today's presentation slides to follow. I will now turn the call over to John Faraci.

John V. Faraci

Thanks, Glenn, and good morning, everybody. Yes, let me just start by saying we're pretty pleased, very pleased with our third quarter results. I think the $0.92 a share reflects the global balance of International Paper. Our focus businesses continue to produce strong earnings and free cash flow. Basically, it was steady volumes and a weak economic environment, stable pricing, outstanding operations, very strong contributions from our joint venture in Russia. We also set input cost escalation and achieved costs of capital returns. And if you think about our earnings, they're substantially up from the second quarter. And adjusting the third quarter 2010 for a land sale, they were up 11% relative to the third quarter of last year. This next chart here just shows what I mean about balance in the global portfolio. We had strong contributions from both our Paper and Packaging businesses. And as you can see, 30% of our operating earnings are coming from the platforms we have outside North America that have a lot of volume revenue and earnings growth in them.

EBITDA margins improved across all our global manufacturing businesses, up strongly 300 basis points from where they were in 2010. And again, that just sets the stage for -- I think underscores International Paper's ability to perform in a challenging economic environment. So with that, it's just a brief introduction. I'll turn it over to Tim to go through the business

Timothy S. Nicholls

Okay. Thanks, John, and good morning, everyone. I'm on Slide 7, and I wanted to start out by saying that we had, as John said, really strong results in the quarter and what's been a difficult environment. The third quarter of last year has been adjusted for the land sale. You can see revenue is up nearly 2% versus same time last year. Margins continue to remain very solid and cash has been strong, up from the second quarter and very close to the third quarter last year, even with $130 million more in capital investment in the third quarter of this year than last year. Cash balance grew from the end of last quarter this quarter by another $300 million. If you look at the second quarter versus third quarter earnings performance, a strong quarter in a tough environment, price and volume basically flat despite the weak backdrop. Volume was weaker earlier in the quarter and then showed some improvement as we moved toward the end of the quarter. Operations continued to improve after a very strong performance in the second quarter, so the facilities are running extremely well at the moment. We did have a lighter maintenance outage schedule but we executed it extremely well. And the tax rate was slightly lower because of a couple of discrete items in the quarter that won't repeat in the fourth quarter.

Just turning to our year-over-year performance, and I think this is a real story of improvement. If you take out the land sales from last year, $0.83 versus the $0.92 that John mentioned, price offset softer volume. And really, as I mentioned on the operations, operations and cost management have completely offset the higher input costs that we faced year-over-year. Lower interest and taxes, along with another quarter of really strong results from Ilim added headroom.

If you look at the next slide, I think what's even more impressive are the year-to-date results from continuing operations: Top line growth of 7%, EBIT growth up 56%, a doubling of EPS and a 50% improvement in cash provided by operations. And if you look at the cash balancing, again, these numbers from last year have been adjusted for land sales, about $1.2 billion in cash last year and up to $2.7 billion this year, 125% improvement. Of course, the building of cash, in part, because we're looking to bring cash to the Temple close.

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