International Paper Company · NYSE:IP
International Paper — International Paper Co /New/ — Q4 2007 Earnings Presentation
55 slides from International Paper's earnings presentation, Feb 7, 2008
Slide 1: Fourth Quarter 2007 Review
Fourth Quarter 2007 Review February 7, 2008 Fourth Quarter 2007 Review February 7, 2008 Tim S. Nicholls Senior Vice President & Chief Financial Officer John V. Faraci Chairman & Chief Executive Officer
Slide 2: Statements Relating to Non-GAAP Financial Measures
During 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 internationalpaper.com under Investors. Statements Relating to Non-GAAP Financial Measures
Slide 3: IP Fourth-Quarter Profits up 21%
2007 annual profits up 52% 2007 EPS up 67% Transformation plan on track Continuing trend of margin expansion Steady & balanced NA paper & packaging demand Record earnings growth outside North America IP Fourth-Quarter Profits up 21% From continuing operations and before special items
Slide 4: Operating Profit Expansion
2007 vs. 2006 ($MM) Operating Profit Expansion Improvement in all Operating Businesses (31%) Forest Products 11% Operating Profits 15% Consumer Packaging 14% Distribution 30% Industrial Packaging 44% Printing Papers From continuing operations before special items
Slide 5: Diluted EPS from Continuing Operations before Special Items
Diluted EPS from Continuing Operations before Special Items Diluted EPS from Continuing Operations before Special Items A reconciliation to GAAP EPS is available at www.internationalpaper.com under the Investors tab at presentations $0.41 $0.82 $0.70 $1.33 $2.22 FY .15 .11 .03 .02 .16 .30 .34 .27 .2
Slide 6: EBIT Margins Expansion in Operating Businesses
1.1% 5.8% 3.4% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% EBIT Margins Expansion in Operating Businesses EBIT Margins Expansion in Operating Businesses Includes unallocated expenses Excludes special items, Forest Products and divested businesses +230 BP +470 BP
Slide 7: 4Q07 vs. 3Q07 EPS
.69 .57 .13 .02 .04 .11 (.02) (.03) (.04) (.07) (.02) $0.25 $0.35 $0.45 $0.55 $0.65 $0.75 $0.85 3Q '07 Price Volume Cost/Mix Pensacola Land Sales Input & Distrib.Costs Unallocated Expenses Labor Agreements Tax 4Q '07 $ / Share $ / Share Packaging .02 Papers .02 Containerboard .06 P&C .03 Europe .02
Slide 8: 2007 vs. 2006 EPS
2.22 1.33 .05 .69 .37 .02 .66 (.02) (.35) (.15) (.30) (.08) $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 12M '06 Price Volume Cost/Mix Pensacola Input & Distrib.Costs Land Sales Cash Redeployment DivestituresUnallocated Expenses / Other Tax 12M '07 $ / Share $ / Share IPG .12 Coated Paperboard .07 P&C
Slide 9: Increasing Input & Distribution Costs
$205 million, or $0.30/share, negative purchase price variance in 2007 vs. 2006 (10) (77) (85) (33) ($90) ($80) ($70) ($60) ($50) ($40) ($30) ($20) ($10) $0 Wood Chemicals Freight Energy $205 million, or $0.30/share, negative purchase price variance in 2007 vs. 2006 Increasing Input & Distribution C
Slide 10: U.S Mills Wood Cost
U.S Mills Wood Cost Significant Increases in the West Region U.S Mills Wood Cost Significant Increases in the West Region (7) (63) (65) ($70) ($60) ($50) ($40) ($30) ($20) ($10) $0 $10 East Central West Total IP West Region Mills: Mansfield & Pineville (containerboard), Texarkana (coated paperboard)
Slide 11: U.S. Total Purchased Energy Consumption
The annual savings from the reduction in consumption and change in fuel mix is $285 million U.S. Total Purchased Energy Consumption Reduced 27% per/ton since 2001 U.S. Total Purchased Energy Consumption Reduced 27% per/ton since 2001 Mills only “Other” includes purchased electricity and steam, coal,
Slide 12: Improved Overall Equipment Efficiency
The cumulative savings from OEE improvements is $270 million Improved Overall Equipment Efficiency Reducing Manufacturing Costs Improved Overall Equipment Efficiency Reducing Manufacturing Costs 75% 79% 80% 81% 82% 83% 84% 75% 76% 77% 78% 79% 80% 81% 82% 83% 84% 85% The cumulative savings from OEE i
Slide 13: Non-Price Improvement Update
2007 2006 $ Millions Non-Price Improvement Update $400 Million Target Non-Price Improvement Update $400 Million Target $270* $130 $125 $15 $330 Total Non-Price Improvement $145 Cost Reduction $45 Mix $140 Volume * Excludes Pensacola start-up costs
Slide 14: Recovering Input Cost Increases via Price Increases
($200) $0 $200 $400 $600 $800 $1,000 $1,200 2003 vs. 2004 vs. 2005 vs. 2006 vs. 2007 vs. 2002 - 2007 Price Increases / Decreases Input Cost Increases Recovering Input Cost Increases Recovered via Price Increases Recovering Input Cost Increases Recovered via Price Increases North American Papers & Pa
Slide 15: Quarterly Operating Profit Growth
4Q07 vs. 3Q07 $ Million Quarterly Operating Profit Growth from Continuing Operations before Special Items Quarterly Operating Profit Growth from Continuing Operations before Special Items $10 European Industrial Packaging $75 Forest Products $20 European Paper $9 Brazilian Paper $9 Pulp ($31) North
Slide 16: Printing Papers
Price Realization per Ton Volume Business 4Q07 vs. 3Q07 4Q07 3Q07 4Q06 $ Million Printing Papers * Excludes a $128 million special charge Average IP price realization (includes the impact of mix across all grades) $4 1% Brazilian Uncoated Papers €7 5% European Uncoated Papers $16 11% U.S. Pulp $13 (
Slide 17: Printing Papers Earnings 4Q07 vs. 3Q07
Printing Papers Earnings 4Q07 vs. 3Q07 Printing Papers Earnings 4Q07 vs. 3Q07 (21) (6) (10) $250 $270 $290 $310 $330 $350 $370 3Q07 Price Volume Cost / Mix Materials & Freight Labor Agreements FX 4Q07 Cost (18) Mix 3 Outages 19
Slide 18: Industrial Packaging
Price Realization per Ton Volume Business 4Q07 vs. 3Q07 4Q07 3Q07 4Q06 $ Million Industrial Packaging Average IP price realization (includes the impact of mix across all grades) * Total 3Q07 and 4Q07 domestic containerboard price realization was $35/ton; DEC exit rate reflected full realization of t
Slide 19: Industrial Packaging Earnings 4Q07 vs. 3Q07
(5) (4) (15) $70 $80 $90 $100 $110 $120 $130 $140 $150 $160 $170 3Q '07 Price Volume Cost / Mix Materials & Freight Labor Agreements Others 4Q '07 Industrial Packaging Earnings 4Q07 vs. 3Q07 Industrial Packaging Earnings 4Q07 vs. 3Q07
Slide 20: Consumer Packaging
Price Realization Volume Business 4Q07 vs. 3Q07 4Q07 3Q07 4Q06 $ Million Consumer Packaging Average IP price realization (includes the impact of mix across all grades) (1%) Converting Businesses $11/ton (1%) U.S. Coated Paperboard $40 $780 $49 $775 $27 $735 Earnings Sales
Slide 21: Distribution: Continued Strong xpedx Performance
4Q07 3Q07 4Q06 $ Million Distribution Continued Strong xpedx Performance $39 $2,045 $40 $1,880 $31 $1,715 Earnings Sales • Record 4Q07 earnings • Record full-year sales and earnings • 2007 full-year earnings up 14% vs. 2006
Slide 22: xpedx Margin Improvement
• 400 BP improvement since 2002 • Each 100 BP improvement increases profits by $13 million • 34% increase in productivity since 2002 • 12% decrease in total warehouse space xpedx Margin Improvement xpedx Margin Improvement Operating Expenses % of Gross Profit 80% 81% 82% 83% 84% 85% 86% 87% 88% 89%
Slide 23: Forest Products
2006 2007 4Q07 3Q07 4Q06 $ Million Forest Products $2,130 207,000 $2,655 Price / Acre 165,000 Acres Sold $174 $190 $99 $120 $162 $190 Earnings Sales
Slide 24: Replacing Land Sales Earnings
‘02 – ‘06 Average 2008 Budget 2007 ($ Million) Replacing Land Sales Earnings Confident in our Ability Replacing Land Sales Earnings Confident in our Ability $1,734 $639 $2,423 Total International Paper Operating Profit $185-$275 $471 Forest Products Operating Profit Excludes special items and discon
Slide 25: Strategic Projects
Strategic Projects Good Progress on all Projects Strategic Projects Good Progress on all Projects Pensacola Lightweight Linerboard Riegelwood Fluff Pulp Svetogorsk BCTMP Sun Coated Paperboard Machine Tres Lagoas Paper Machine Tres Lagoas PM Pensacola No. 5 PM Sun Coated Paperboard PM
Slide 26: Ilim Joint Venture
Ilim Joint Venture Proceeding According to Plan Ilim Joint Venture Proceeding According to Plan Reporting IP’s 50% share of Ilim Holding SA earnings with a 90-day lag using the equity method of accounting Continuing healthy economic conditions in Russia & China Strong demand growth Operations perfor
Slide 27: Geographic Operating Profit Growth
2007 vs. 2006 $ Million % Geographic Operating Profit Growth from Continuing Operations before Special Items Geographic Operating Profit Growth from Continuing Operations before Special Items 380% $19 Asia 20% $223 Total North America 11% $55 Printing Papers $273 $130 $124 $18 $56 $14 $80 102% Brazi
Slide 28: Operating Profit Growth Outside North America
70% 80% $1.9B 30% $1.5B 20% Operating Profit Growth Outside North America Diversifying our Earnings Capacity Operating Profit Growth Outside North America Diversifying our Earnings Capacity Operating profits excluding special items, Forest Products and other businesses North America Non-North Americ
Slide 29: Free Cash Flow Improvement
2007 2006 2007 Free Cash Flow ($ Billion) Free Cash Flow Improvement Up $700 million in 2007 Free Cash Flow Improvement Up $700 million in 2007 $0.6 ($0.1) Free Cash Flow ($1.3) $1.9 ($1.1) Less Capital Investment $1.0 Cash Provided by Continuing Operations
Slide 30: Working Capital Management
Working Capital Management 200 Basis Point Improvement since 1Q05 Working Capital Management 200 Basis Point Improvement since 1Q05 13.5% 14.0% 14.5% 15.0% 15.5% 16.0% 16.5% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07
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Slide 32: Transformation Plan Yielding Results
1.33 2.22 .86 .33 .22 (.15) (.35) (.02) $0.75 $0.95 $1.15 $1.35 $1.55 $1.75 $1.95 $2.15 $2.35 12M '06 Core Business EBIT Land Sales Divestitures* Interest Shares Tax 12M '07 Transformation Plan Yielding Results Transformation Plan Yielding Results EPS from continuing operations before special items
Slide 33: Outlook: Current IP Business Conditions
Outlook Current IP Business Conditions Outlook Current IP Business Conditions North America Steady demand Inventories in good shape Realizing announced paper & packaging price increases Increasing input costs Europe Some inventory building Increasing input costs Brazil Economy is strong Paper demand
Slide 34: Looking Forward to 1Q08
Accretive Slight Increase Steady 1Q08 Earnings Outlook Increase Decrease Slight Increase Slight Increase Steady Looking Forward to 1Q08 Looking Forward to 1Q08 Ilim Group 4Q07 Earnings IP Pricing Volume Packaging Paper Input & Distribution Costs Land Sales Earnings Planned Maintenance Outages Paper
Slide 35: INTERNATION
INTERNATION
Slide 36: Diluted Earnings per Share: Special Items & Discontinued Operations
4Q07 2007 Diluted Earnings per Share Special Items & Discontinued Operations $0.78 ($0.02) $0.80 $0.11 $0.69 $2.70 Net Earnings ($0.11) Discontinued Operations $2.81 Earnings from Continuing Operations $0.59 Special Items $2.22 Earnings from Continuing Operations & Before Special Items
Slide 37: Special Items & Discontinued Operations
2007 4Q07 $/Share ($MM) $/Share ($MM) Special Items & Discontinued Operations - ($3) Weldwood ($0.02) $0.11 ($47) $4 $4 ($16) ($39) $252 ($58) $38 $113 $159 ($0.11) $0.59 ($2) Wood Products - Kraft Papers $41 Tax Adjustments ($6) Restructuring & Corporate ($11) Total Discontinued Operations - Other
Slide 38: Key Financial Statistics
2007 1 2008 Estimate 2006 1 2005 1 30% $732 $297 $1.1 $1.3 32 - 33% $650 - $675 $340 - $360 $1.1 $1.1 29% $746 $521 $1.2 $1.1 Effective Tax Rate Unallocated Expenses ($ Million) Net Interest Expense ($ Million) Depreciation & Amortization ($ Billion) Capital Spending ($ Billion) 20% $607 $595 $1.2 $
Slide 39: Lack of Order Downtime
59 90 236 173 5 10 5 35 95 274* 270* 180* 25 25 28 70 35 4 7 7 Includes indefinitely closed uncoated papers capacity at Pensacola, FL, Bastrop, LA and Jay, ME in 2Q05 (72,000 tons), 3Q05 (108,000 tons) and 4Q05 (108,000 tons) which we permanently closed at end of 4Q05. Lack of Order Downtime Lack of
Slide 40: Incremental Maintenance Outages
Impact ($ Million) 1Q08 Forecast vs. 4Q07 in Maintenance Outages (Tons) ($11) $9 ($16) ($4) Total Impact Consumer Packaging Industrial Packaging Printing Papers (20,000) 13,000 (26,000) (7,000) Maintenance outages and dollar impacts are estimated and are subject to change Incremental Maintenance Out
Slide 41: Operating Profits by Industry Segment
4Q06 4Q07 3Q07 ($ Million) Operating Profits by Industry Segment from Continuing Operations before Special Items Operating Profits by Industry Segment from Continuing Operations before Special Items $924 ($746) $8 ($527) $2,189 $61 $678 $128 $172 $386 $764* $304 ($166) $3 ($86) $553 $12 $162 $31 $27
Slide 42: Geographic Business Segment Operating Results: Sales
4Q07 3Q07 4Q06 Sales $ Million Geographic Business Segment Operating Results from Continuing Operations before Special Items Geographic Business Segment Operating Results from Continuing Operations before Special Items $6,785 $50 $230 $2,405 $180 $1,020 $3,725 $10 $510 $495 $1,250 $4,430* $330 $85 $
Slide 43: Geographic Business Segment Operating Results: Operating Profit
4Q07 3Q07 4Q06 Operating Profit $ Million Geographic Business Segment Operating Results From Continuing Operations before Special Items Geographic Business Segment Operating Results From Continuing Operations before Special Items $128 $2 $41 $129 $3 $56 $327 $48 $122 $112 $482* $18 $6 $5 $2 Asian $1
Slide 44: 2007 Earnings from Continuing Operations
Diluted EPS 2 Earnings from Continuing Operations Net Income $MM Estimated Tax Rate Minority Interest $MM Special Items Pre-Tax $MM Before Special Items Average Shares 1 MM Tax $MM 2007 Earnings from Continuing Operations 2007 Earnings from Continuing Operations Assuming dilution A reconciliation to
Slide 45: 2006 Earnings from Continuing Operations
Diluted EPS 2 Earnings from Continuing Operations Net Income $MM Estimated Tax Rate Minority Interest $MM Special Items Pre-Tax $MM Before Special Items Average Shares 1 MM Tax $MM 2006 Earnings from Continuing Operations 2006 Earnings from Continuing Operations Assuming dilution A reconciliation to
Slide 46: Business Segment Price Realization
Full Year 4Q07 4Q07 3Q07 3Q07 4Q06 4Q06 Quarterly Average Selling Price Realizations Industrial Packaging ($/ton) Printing Papers ($/ton) Business Segment Price Realization Business Segment Price Realization $763 $483 $533 $862 $802 $521 $598 $907 $825 $536 $621 $925 $792 $521 $605 $912 $787 $509 $5
Slide 47: Pension Returns
Portfolio Asset Allocation at 12/31/07 Average Annualized Returns Pension Returns Pension Returns 10% Real Estate & Other 31% Bonds 59% Equity 9.3% Past Ten Years 15.1% Past Five Years 9.6%
Slide 48: Annual Pension Expense
Key Variables 2008E 2007 2006 Annual Pension Expense* $0 $50 $100 $150 $200 $250 $300 $350 $400 $450 2008E 6.2% 5.75% 5.5% Discount Rate 8.5% 8.5% 8.5% Rate of Return Pension Expense * U.S. plans only. Pension expense reflects service cost, interest cost, amortization of actuarial losses and expecte
Slide 49: Increasing Input & Distribution Costs: 4Q07 vs. 3Q07
$41 million, or $0.07 per share, negative purchase price variance in 4Q07 versus 3Q07 (5) (11) (18) (7) ($20) ($15) ($10) ($5) $0 Wood Energy Freight Chemicals $41 million, or $0.07 per share, negative purchase price variance in 4Q07 versus 3Q07 Increasing Input & Distribution Costs Global EBIT Impa
Slide 50: Natural Gas Costs
Jan Apr July Oct Jan Apr July Oct Jan Apr July Oct Jan Apr Jul Oct Jan Natural Gas Costs NYMEX Natural Gas closing prices Index: Jan 2004 Natural Gas Costs = 100
Slide 51: U.S. Mill Wood Costs
Jan Apr July Oct Jan Apr July Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan U.S. Mill Wood Costs U.S. Mill Wood Costs Index: Jan 2004 Wood Costs = 100 Delivered cost to U.S. pulp & paper ongoing mills
Slide 52: U.S. Caustic Soda Costs
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan U.S. Caustic Soda Costs Index: Jan 2004 Caustic Soda Costs = 100 Delivered cost to U.S. facilities
Slide 53: U.S. Corn Starch Costs
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan U.S. Corn Starch Costs Index: Jan 2006 Corn Starch Costs = 100 Delivered cost to U.S. facilities
Slide 54: Annual Purchase Estimates for Key Inputs
Commodity Non – U. S. U. S. Chemicals Fiber Energy 50,000 215,000 Sodium Chlorate (Ton) - 40,000 LD Polyethylene (Ton) 4,000 24,000 Latex (Ton) 230,000 1,300,000 Coal (Ton) 8,200,000 40,000,000 Wood (Ton) 60,000 340,000 Caustic Soda (Ton) 310,000 600,000 Old Corrugated Containers (Ton) 500,000 15,00
Slide 55: INTERNATION
INTERNATION
International Paper Co /New/ — Q4 2007 Earnings Presentation on 6ix