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Article Excerpt
PARTICIPANTS
. Thomas Gestrich, International Paper Co. Asia, VP of IR . John Faraci, International Paper Co., Chairman, CEO . Tim Nicholls, International Paper Co., SVP, CFO . Claudia Hueston, JP Morgan, Analyst . George Staphos, Bank of America, Analyst . Richard Skidmore, Goldman Sachs, Analyst . Bill Holt, International Paper Co. . Christopher Chun, Deutsche Bank, Analyst . Gail Glazerman, UBS, Analyst . Peter Ruschmeier, Barclays Capital, Analyst . Mark Weintraub, Buckingham Research, Analyst . Joseph Reiger, John Tumazos, Analyst
OVERVIEW
IP announced 2008 sales of almost $25b and EPS of $2.01. 4Q08 EPS was $0.21.
FINANCIAL DATA
A. Key Data From Call 1. 2008 sales = almost $25b. 2. 2008 EPS = $2.01. 3. 4Q08 EPS = $0.21. 4. 2008 cash and committed backup facility = $3.6b.
PRESENTATION SUMMARY
S1. Overview (J.F.) 1. 2008 Highlights: 1. During 1Q08-3Q08, conditions soft but steady. 1. Containerboard and box volumes down slightly from prior-year levels, as were uncoated free sheet shipments. 2. Market downtime minimal, prices increasing for key grades. 3. Input costs also were going up, however. 2. Co. offset a portion of cost increases with selling prices and solid operations. 3. At end October, everything changed. 1. US economic activity contracted significantly. 2. Dramatic declines in demand for market pulp, uncoated free sheet and corrugated boxes. 4. Global pulp demand declined as inventories built. 5. Paper and containerboard prices continued to rise, but demand fell off sharply. 6. Co. took 1m tons of lack-of-order downtime during 4Q, more than ever taken. 1. Most in containerboard system. 7. Input costs peaked in 4Q, and began to decline. 1. Prices for energy, OCC, transportation, and wood fell at year-end, some faster than others. 8. Co. posted solid 2008 earnings and record free cash flow. 1. Strong cash flow continuing into 4Q. 9. 2008 sales up 13% to almost $25b. 10. EBITDA increased 8% to $3b. 11. Free cash flow increased by $1b or 160%. 12. 4Q08 earnings were $0.21 per share, down 70% from 4Q07. 13. 2008 earnings were a little over $2.00, down 9% from 2007. 1. Second-best year since 2000. 14. Co. has made progress improving quality of earnings since 2005. 1. In 2005, over half earnings from forest resources sales, including land sales. 2. Since then, percentage of earnings from forest resources has decreased steadily, less than 25% of operating profits in 2008. 1. Included large gas sale in 4Q. 2. Input Costs: 1. Up over $800m, $1.38 per share higher than 2007. 2. Chemical and energy prices up over $0.25b. 3. Record increases in fiber and freight costs. 4. Costs for nearly all inputs began to decrease during 4Q, some substantially. 3. Response to Economic Contraction: 1. Co. was meeting in April, putting actions into place. 2. Accelerated efforts to reduce operating and overhead costs to generate cash and enhance liquidity. 3. In each mfg. business co. reduced production to meet lower customer demands by taking lack-of-order downtime or making permanent capacity curtailments. 1. Culminated in taking 1m tons of downtime in 4Q. 4. Accelerated efforts to reduce overhead expenses, resulting in $100m reduction YoverY. 5. Since June of 2008, eliminated 4,400 positions in co., or 5% of total headcount. 1. Anticipate eliminating another 3,000 positions for total headcount reduction of over 10% by end 2009. 6. Early in the year, co. implemented hiring freeze and salary freeze to save about $50m in costs. 7. Changed executive compensation plans for 2009, resulting in up to 50% reduction in total compensation to senior executives. 8. In 2008, generated over $300m in cash from sale of non-strategic assets. 1. In addition to ongoing land sales. 9. Reduced capex by $300m in 2008. 10. Will reduce 2009 spending by another $300m, for about $700m capex for 2009. 1. Still able to maintain facilities in the shape they need to be to run well. 11. Will preserve another $50m in 2009 cash by matching employee 401(k) contributions with company stock rather than cash. 12. Extended AR securitization program, now undrawn, through January 2010. 1. Co. intends to broaden program in US and Europe. 4. Initiative Progress: 1. In 2000 had 113,000 employees. 1. 37,000 left through dispositions net of acquisitions other than Weyerhaeuser. 2. 25,000 came out through ongoing headcount reductions. 2. In June 2008, had 66,000 employees worldwide, excluding Ilim JV, including Weyerhaeuser. 1. Since then reduced headcount by about 4,400, ending year with 62,000 employees with another 3,000 to go. 3. Revenue per employee has gone up 60% during that period, and co. will continue to find ways to get more done with less.
S2. Financial Details (T.N.) 1. 2008 Results: 1. 2007 earnings were $2.22 per share. 2. 2008 earnings were $2.01 per share. 1. Higher selling prices and improvements in cost mix increased earnings by $1.51. 2. Largely offset by $1.38 impact of increased input costs. 3. Improvements in cost of mix added $0.59 to earnings. 4. Impact of volume declines partially offset by CBPR volume. 5. Interest expense increased $0.31 per share. 6. Forest earnings decreased $0.08 per share. 3. 4Q08 EPS was $0.21 vs. $0.69 in 4Q07. 1. Forest products earnings were $0.07 vs. $0.28 in 4Q07. 2. By end 3Q, clear that economic conditions in North America had changed dramatically. 1. Demand for linerboard, boxes, uncoated free sheet saw significant declines. 3. Co. cut production to lower demand levels in order to avoid building excess inventories. 4. Accelerated cost-reduction programs. 4. Cash flow remains top priority. 5. Price and cost mix improvements increased in 4Q earnings by $0.44 combined. 1. More than offset by lower shipment volumes reducing earnings $0.27. 2. Higher input costs decreased earnings by $0.30. 3. Higher interest expense decreased earnings by $0.17. 6. Downtime: 1. Co. committed to matching production to customers needs. 2. Lack-of-order downtime in 2008 was about 5% of total global mfg. capacity. 3. In 4Q approached 20%. 7. In 4Q, co. took 700,000 tons of lack-of-order downtime in North American containerboard. 8. Shut down #3 machine at Valiant, OK mill indefinitely. 9. Shut down #2 machine at Albany, OR mill for extended period. 10. Closed five corrugated packaging plants in 4Q. 1. Have announced closure of another four. 11. Took 120,000 tons of market down-time in North American market pulp business. 1. Implemented permanent shutdown of Louisiana mill. 12. Recorded 130,000 tons of downtime in North American uncoated free sheet business. 1. Implemented permanent shutdown of #3 machine at Franklin, VA mill. 2. Announced strategic review of non-integrated mill in Scotland. 2. Industrial Packaging: 1. Earnings up from $109m to $145m. 1. Improvements in price and cost mix. 2. Vicksburg mill business interruption and property insurance proceeds. 3. Additional earnings from CBPR assets. 4. For 2008, including insurance recoveries and disruption to production, impact of Vicksburg on earnings was essentially neutral. 2. In 2008, achieved $70m in synergies, ahead of $50m goal. 1. Shut...
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