International Paper Company · NYSE:IP
International Paper — International Paper Co /New/ — Morgan Stanley Basic Materials Conference 2005
49 slides from International Paper's conference presentation, Feb 24, 2005
Slide 1: Morgan Stanley Basic Materials Conference
Morgan Stanley Basic Materials Conference February 24, 2005 Christopher P. Liddell Senior VP & CFO
Slide 2: Forward Looking Statements
Forward Looking Statements S tatements on these slides or in this presentation that are not historical are forward-looking. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including but not limited to, the strength of demand for the compa
Slide 3: Statements Relating to Non-GAAP Financial Measures
Statements Relating to Non-GAAP Financial Measures D uring the course of this presentation, certain non- U.S. GAAP financial information will be presented. A reconciliation of those numbers to U.S. GAAP financial measures is available on the company’s website at www.internationalpaper.com under Inve
Slide 4: Agenda
Agenda International Paper Profile Financial Performance Driving Shareowner Value Improving Our Business Profitability Making Portfolio Choices Maintaining Financial Discipline
Slide 5: International Paper Profile
Global paper and forest products company International Paper Profile 80,000 employees worldwide Operations in over 40 countries and selling products in more than 120 nations Focused on three core businesses $26 billion in revenues
Slide 6: Focus on Three Core Businesses: Paper
Focus on Three Core Businesses Paper Number one uncoated papers position globally Largest coated paper producer in North America xpedx is the largest merchant distributor in the U.S. 51% of 2004 Revenue Paper
Slide 7: Focus on Three Core Businesses: Packaging
Focus on Three Core Businesses Packaging Largest bleached board producer globally Number three containerboard position globally Strong corrugated box businesses in U.S. and Europe 28% of 2004 Revenue Packaging
Slide 8: Focus on Three Core Businesses: Forest Products
Focus on Three Core Businesses Forest Products Number two largest private landowner in U.S. Significant lumber and plywood producer in U.S. 17% of 2004 Revenue Forest Products
Slide 9: U.S. forestlands
U.S. forestlands Forest Products Union Camp & Champion acquisitions Acres (million) 6.1 6.1 6.4 6.3 5.9 7.1 12.1 10.4 9.0 8.3 6.8
Slide 10: U.S. forestlands ownership by region
Forest Products U.S. forestlands ownership by region Northeast Great Lakes South Total Acreage 0.3 MM 0.5 MM 6.0 MM 6.8 MM Note: As of December 31, 2004
Slide 11: Facilities fiber sourcing
Forest Products Facilities fiber sourcing Fiber drain basins surrounding IP’s paper mills in Louisiana, Mississippi, Texas and Arkansas
Slide 12: U.S. fiber self-sufficiency
Forest Products U.S. fiber self-sufficiency 40% Softwood Fiber 30% 3 rd Party Fiber Purchases Fiber Self-Sufficiency 9% Hardwood Fiber Total Fiber IP supplied 30% of the 64 million tons of fiber it consumed in 2004
Slide 13: Financial Performance
Financial Performance
Slide 14: Revenues and EPS
Financial Performance Revenues and EPS 0.5 1.5 Revenues ($B) Earnings Per Share* ($) 26.4 25.0 24.0 25.5 0.36 1.05 0.76 1.31 *Basic EPS from continuing operations and before special items
Slide 15: 2004 EPS from cont. ops before special items
Financial Performance 2004 EPS from cont. ops before special items $0.00 $0.30 $0.60 $0.90 $1.20 $1.50 $1.80 Price Volume Cost/Mix Raw Material Land Sales Tax Rate Other ($.14) EPS $ / Share $.76 $.40 ($.29) $.31 $1.31 ($.07) $.32 $.02 Wood Costs ($0.10) Energy ($0.10) Other ($0.09) Paper ($0.06) Pa
Slide 16: 2004 EPS from cont. ops before special items
Financial Performance 2004 EPS from cont. ops before special items ($.14) EPS $ / Share $.76 $.40 ($.29) $.31 $1.31 ($.07) $.32 $.02 $0.00 $0.30 $0.60 $0.90 $1.20 $1.50 $1.80 Price Volume Cost/Mix Raw Material Land Sales Tax Rate Other Wood Costs ($0.10) Energy ($0.10) Other ($0.09) Paper ($0.06) Pa
Slide 17: Price impact by grade
Price impact by grade Financial Performance -150 -100 -50 Industrial Packagin Uncoated Paper Coated Paper Consumer Packaging Pulp European Papers Wood Products EBIT ($MM) At December run rate, EBIT generated from these key grades for a full year would be $335 million higher than 2004 total (5) (20)
Slide 18: 2005 Demand environment
Financial Performance 2005 Demand environment Demand environment is positive Uncoated papers Product White collar employment Demand drivers Y Outlook Coated papers Corrugated boxes Lumber & plywood Advertising pages GDP (mfg. growth) Catalog mailings Non-durables production Housing starts Interest r
Slide 19: 2004 EPS from cont. ops before special items
Financial Performance 2004 EPS from cont. ops before special items ($.14) EPS $ / Share $.76 $.40 ($.29) $.31 $1.31 ($.07) $.32 $.02 $0.00 $0.30 $0.60 $0.90 $1.20 $1.50 $1.80 Price Volume Cost/Mix Raw Material Land Sales Tax Rate Other Wood Costs ($0.10) Energy ($0.10) Other ($0.09) Paper ($0.06) Pa
Slide 20: 2005 Cost environment
Financial Performance 2005 Cost environment Cost environment remains challenging Wood Cost Component Chemicals Y R Y R R Corporate Wet weather Cost drivers Low inventory Caustic soda Natural gas, oil Polyethylene Pension expense Supply chain spending R R Outlook Energy
Slide 21: Driving Shareowner Value
Driving Shareowner Value
Slide 22: Senior Management Compensation Aligned with shareowners
Senior Management Compensation 20% 65% Aligned with shareowners Driven by results and aligned with shareowners 15% Base Pay Long Term Compensation 100% external benchmark based 50% TSR vs. industrial peer group 50% ROI vs. global industry peer group Short Term Incentive Plan 50% ROI vs. global indus
Slide 23: Improving Our Businesses: Non-price improvement
Lower Costs & Create Efficiencies Improve Mix Grow Volumes Improving Our Businesses Non-price improvement Manufacturing Excellence Supply Chain Lower S&A/Other Segmenting Solutions New Products Targeted Segments Market Recovery $1.6B $0.7 ($0.8) Higher Costs/Inflation $1.5B Non-Price Improvement Aft
Slide 24: Manufacturing excellence
Manufacturing excellence Non-Price Improvement 75% 80% 85% OME U.S. mills overall machine efficiency up three percentage points since 2001 81% 82% 83% 84%
Slide 25: Manufacturing excellence
Manufacturing excellence Non-Price Improvement 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 MSF/Man hour U.S. corrugated box plant productivity improved 10% in 2004
Slide 26: Supply Chain Objectives
Supply Chain Objectives Supply chain Non-Price Improvement Redefine how IP does business Improve customer service/win new business/grow revenue Reduce transportation, warehousing and procurement costs Implement common, standard “best practice” business processes
Slide 27: Supply chain project timeline
Supply chain project timeline Non-Price Improvement IPG Mills Build / Test Deploy CPG Mills Deploy Design / Build / Test IPG Converting Deploy Phase 2 Design / Build / Test / Phase 1 C&SC Deploy Design / Build / Test P&CP Deploy Design / Build / Test Fiber Supply Design / Build / Test Deploy CPG Con
Slide 28: Supply chain benefits by category
Non-Price Improvement Supply chain benefits by category Total annual gross benefit = $500 million Order Management 5% Transportation & Warehousing 35% Scheduling 10% Demand & Supply Planning 10% Procurement 40%
Slide 29: Supply Chain Objectives
Supply Chain Objectives Supply chain Non-Price Improvement Redefine how IP does business Improve customer service/win new business/grow revenue Reduce transportation, warehousing and procurement costs Implement common, standard “best practice” business processes
Slide 30: Supply chain improves customer service
Non-Price Improvement Supply chain improves customer service Actual product shipments 2002-2003 with present warehouse network
Slide 31: Supply chain improves customer service
Non-Price Improvement Supply chain improves customer service Projected product shipments in 2006 following warehouse network optimization
Slide 32: Improve mix
Non-Price Improvement Improve mix Value-added and mill branded cut-size have a significantly higher growth rate and better margin than private label cut-size Growth Rate Margin Value-added Mill branded Private label Private label cut-size = 1.0 Volume Growth % Margin Index 1.0 2.0 0.0 1.5 0.5 2.5
Slide 33: Grow volume
Non-Price Improvement Grow volume Paper* Packaging Forest Products Uncoated Papers Coated Papers Pulp Containerboard U.S. Container Bleached Board Lumber Plywood 3% 5% 6% 7% 21% 11% 5% (1%) Segments Grades ‘04 vs. ‘03 * U.S. operations only Annual Volume Change
Slide 34: U.S. corrugated box business
Grow Volume U.S. corrugated box business 0.0 1.0 2.0 3.0 IP Legacy Operations Former Box USA Operations Million tons Box shipments grew 9% in 2004 due to customer and segment targeting +21% +9% +7%
Slide 35: Higher cost/inflation
Non-Price Improvement Higher cost/inflation (100) (75) (50) (25) EBIT ($) (35) (35) (30) (70) (20) Raw material costs negatively impact EBIT by $190 million 2004 versus 2003 Wood Chemicals/ Other Oil/Coal/ Electricity Natural Gas Polyethylene
Slide 36: Actual results versus target through 2004
Non-Price Improvement Actual results versus target through 2004 -1.5 -1 -0.5 0.5 1.5 NPI Target Actual Results 2003/2004 1.1 0.8 0.5 0.3 1.5 1.1 (0.9) (0.5) 1.0 0.2 $B Cost Reduction Improve Mix/ Grow Volume Gross Improvement Higher Costs/ Inflation Net Improvement Higher costs/inflation higher than
Slide 37: Making Portfolio Choices
Making Portfolio Choices Sold CHH Tissue (Cash to IP $150MM) Sold minor W. European assets Sold Weldwood of Canada Sold 1.1 million acres in Maine/NH Exploring sale of Specialty Papers Selling Fine Papers (Project 1Q’05 close) CHH exploring options for Forestlands Proceeds ($MM) 1,100 TBD TBD TBD
Slide 38: Optimize capital allocation
Maintaining Financial Discipline Optimize capital allocation Maintain capex within range of 75-85% of depreciation over a cycle Allocate capital to those businesses with best returns in North America & globally
Slide 39: Capital spending as % of D&A
Maintaining Financial Discipline Capital spending as % of D&A 2005B % of D&A: Maintain capital spending in the target range of 75 - 85% of D&A over a cycle 127% 92% 88% 75% 81% 58% 64% 71% 82% 85%
Slide 40: 2005 Capital spending by category
Maintaining Financial Discipline 2005 Capital spending by category 2005 capex target - $1.4 billion Productivity/ Cost Reduction 45% Regulatory 10% Growth 15% Maintenance 30%
Slide 41: 2005 Capex by business
Maintaining Financial Discipline 2005 Capex by business % of D&A: 295% 385% 80% 85% 65% 90% 70% Brazil Eastern Europe Forest Products Total IP Industrial Packaging Uncoated Papers Consumer Packaging Capital allocated in excess of D&A to Brazil and E. Europe
Slide 42: 2004 Results by geographic region
Financial Performance 2004 Results by geographic region Sales Revenue Capital Employed EBIT North America Non-North America % of Total 25% 20% 40%
Slide 43: Reducing debt
Maintaining Financial Discipline Reducing debt Committed to maintaining investment grade ratings Targeted $3 billion reduction to $12 billion debt gross level by 2006
Slide 44: Reduced debt with asset sale proceeds
Maintaining Financial Discipline Reduced debt with asset sale proceeds Cash received (on 12/31/04) Weldwood sale Maine/NH land sale Total Debt Paydown Short-term debt/Other (pre 12/31/04) Trust Preferred (post 12/31/04) Open Market/Other (post 12/31/04) Total (0.3) $1.3 $1.1 0.2 $(0.5) (0.5) $(1.3)
Slide 45: Options for free cash flow
Maintaining Financial Discipline Options for free cash flow Further debt reduction Return to shareowners Increase dividend Share repurchase Reinvest in high return businesses
Slide 46: IP into the Future
IP into the Future Improving Our Business Profitability Making Portfolio Choices Maintaining Financial Discipline Committed to Increasing Shareowner Value
Slide 47: International Paper
INTERNATIONAL (AA) PAPER
Slide 48: Appendix
Appendix
Slide 49: U.S. pension plans
Financial Performance U.S. pension plans -20 -10 -300 -200 -100 2005E Actual Rates of Return Income (Expense)* Percent *Pension income (expense) reflects discount rate, service cost, amortization of previous periods and anticipated return $ Millions (1.4) (2.4) (6.7) 26.0 14.1 (60) (110) (210)
International Paper Co /New/ — Morgan Stanley Basic Materials Conference 2005 on 6ix