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Article Excerpt
OPERATOR: Good morning, my name is Laurie and I will be your conference Operator. At this time I would like to welcome everyone to the International Paper third quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)
Thank you, I will now turn the call over to Tom Cleves, VIce President of Investor Relations. Please go ahead.
THOMAS CLEVES, VP OF IR, INTERNATIONAL PAPER CO.: Thanks, Laurie. Good morning, everyone, and thank you for joining our third quarter earnings conference call. This call is also being webcast.
John Faraci, our Chairman and Chief Executive Officer, and I will conduct today's call. Tim Nicholls will not be with us today. Tim was injured in a bicycle accident and currently is in outpatient surgery to repair his shoulder.
During this call, we will make forward-looking statements that are subject to risks and uncertainties which are outlined on slide two of our earnings presentation. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP measures is available on our website. Our website also contains copies of the third quarter earnings press release and today's presentation slides.
I will now turn the call over to John Faraci.
JOHN FARACI, CHAIRMAN AND CEO, INTERNATIONAL PAPER CO.: Thanks, Tom. And good morning, everybody, and thanks for joining us.
Today Tom and I, with Tom standing in for Tim, will cover our third quarter results, the performance of individual businesses, and we will also talk about business conditions and our outlook going ahead.
Turning to the third quarter, I am now on page 4. Despite continuing input cost escalation and tough market conditions, we delivered solid results. Third quarter earnings from continuing operations before special items are $0.84 a share, which is 47% higher than the third quarter of 2007. Revenues in the third quarter compared to the second quarter are up $1 billion. That's mostly the result of having Weyerhaeuser as part of our revenue base for the quarter. And we achieved these strong results despite input costs that increased $0.47 a share since the third quarter of 2007. That's the quarter-to-quarter comparison. The sale of our Haynesville shale mineral rights increased our earnings substantially, which we told you about on the second quarter conference call. Earnings from our operating businesses, that is businesses excluding Forest Products, were $0.36 per share.
Our solid third quarter results reflect increased selling prices, some weakening in volumes and the addition of Weyerhaeuser's packaging earnings, as well as reduced operating costs. Finally, and I think very important, we generated nearly $700 million of cash free flow during the quarter, more than twice that we delivered in the second quarter.
Slide five compares our third quarter results with the third quarter 2007. We achieved $0.56 of improvement in price, volume, cost of mix, but these improvements were largely offset by the $0.47 of increased input cost which I talked about a minute ago. So in essence, despite the price increases we continue to have a lot of cost inflation flowing through. Interest cost increased as well, reflecting the additional debt from the acquisition of Weyerhaeuser's packaging business. But there is good news there, we paid off more debt faster than we thought during the quarter.
Let me just give you a couple of details about factors that impacted our earnings before I turn it over to Tom. In the third quarter, global input cost increased by $286 million, that's the $0.47 per share I was talking about, with energy and chemicals continuing to account for the largest increases. The appendix of the material that you all have has addition detail on input cost by element, if you want to look at that.
Slide seven here shows the North American price increase and input cost comparison. We see, in the green, price increases; in the red, input cost increases. During the first six months of 2008, our selling prices only equaled 78% of our input cost; we have a lot of pricing but we have more cost inflation. We lost a bit of ground in the third quarter, during which our selling price is running 60% of our input cost inflation. Now we have price improvement coming out of the quarter, but during the quarter we weren't even.
Now, I will turn it over to Tom to review the business segment results, and then I will come back and talk about - sum up and talk about the outlook at the end.
THOMAS CLEVES: Thanks, John. Slide eight, please. Third quarter printing paper earnings declined to $210 million, reflecting input cost inflation that exceeded selling price increases by $50 million. North American paper earnings were flat, but North American market pulp earnings declined by $27 million. Higher pulp selling prices were offset by higher manufacturing costs, escalating input and trade costs, and the cost for the two-week market-related shutdown of our Louisiana mill. Brazilian earnings increased $4 million, benefiting from higher prices and $16 million in foreign exchange gain, but hurt by input cost, lower export demand, and a nine-day maintenance outage at our Luiz Antonio mill. European earnings declined slightly, as higher priced were offset by lower volumes, higher raw material costs, and foreign exchange losses of $26 million.
I would like to mention that in October, we announced that we will begin a consultative process with our employees to conduct a review of the strategic alternatives for our uncoated free-sheet mill in Scotland. Inverurie is a high-cost, unprofitable mill, competing in over-supplied markets. We will study the options for this mill, and we will be prepared to discuss our plans for this facility late in the first quarter of 2009.
Slide nine, please. Year-over-year, North American Printing Papers volume declined due to the conversion of the Louisiana mill from uncoated free-sheet to market pulp conversion. This conversion led to the 22% increase in North American market pulp volume. By the way, on Monday we announced that we will take at least seven weeks of market-related down time at the Louisiana mill in November and December. This down time is necessary to continue to match our production with our customers' pulp needs.
Brazilian paper shipments declined due to lower demand in export markets. Selling prices were higher in all regions, with the exception of a slight decline in Western Europe. The 5 Euro decline in European Papers reflects Western European paper pricing only. Year-over-year industrial packaging earnings increased by $69 million, despite the negative impact of $80 million in increased input cost. Higher selling prices increased earnings by $37 million. Higher volumes, including the Weyerhaeuser packaging volume, added $64 million. And improvements in cost and mix increased earnings by $47 million. We achieved these strong results even after absorbing the cost of 35,000 tons of market-related down time in September, which we took to continue to match our containerboard production to our customer's needs, and to avoid an inventory build.
In early October, we began an extended shutdown of the 250,000-ton machine at our Albany, Oregon mill. This machine will remain idle for at least 90 days. Also, we will shut down the 430,000-ton machine at our Valiant, Oklahoma mill. We intend to restart our Vicksburg mill in early November, about the same time that we will shut down the Valiant machine. Most importantly, we will continue to match our production to our customers' needs.
Slide 11, please. Year-over-year, North American containerboard volume was flat, while North American box shipments declined by 1%, although shipments dropped significantly at the end of the third quarter. European box shipments declined by 5%. Board and box prices increased in North America and Europe. In the legacy IP system, September containerboard prices were $55 per ton higher than July average prices, and September box prices were $45 per ton higher than July average prices. We expect higher average box prices during the fourth quarter.
I would also like to comment on the progress of our Weyerhaeuser packaging integration project. After the transaction closed on August 4th, we successfully separated the packaging assets from Weyerhaeuser. The new leadership team was in place on day one, and they hit the ground running. We are utilizing transitional services provided by Weyerhaeuser for certain finance, human resources and IT functions. The sales team and the supply chain systems for both businesses have been merged into single entities. We are on track to achieve the forecasted synergies, and are very pleased with the progress of the integration.
Slide 12 shows that consumer packaging earnings declined to $6 million. Input cost inflation was 65% greater than the cumulative improvements in selling prices and cost mix. Year-over-year North American coated paperboard shipments increased by 2%, and selling prices increased by $67 per ton. Food service volume is holding up well, as consumers trade down to quick-service dining, and as ecotainer cups continue to gain share. Revenue in our converting businesses increased by 4%.
Slide 14, please. Xpedx posted strong operating profits of...
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