By Jan Stoddard April 29, 2003 - International Paper (NYSE: IP) Stamford, CT, today reported first-quarter 2003 net earnings of $44 million ($0.09 per share), compared with a net loss of $1,110 million ($2.31 per share) in the first quarter of 2002 and a net loss of $130 million ($0.27 per share) in the fourth quarter of 2002. Editor's Note: International Paper appears to be turning the corner, reporting a swing to profit after last quarter's loss. In contrast, Weyerhaeuser Co., the No. 3 U.S. maker of paper and building products, last week posted a quarterly net loss as it also struggled with higher energy costs, low wood prices, along with several one-time charges. However, the outlook for commercial printing still remains bleak, waiting for more demand to appear from any marked economic recovery. Before the cumulative effects of accounting changes and special items, earnings for the first quarter of 2003 were $68 million ($0.14 per share), compared with $58 million ($0.12 per share) in the 2002 first quarter and $160 million ($0.33 per share) in the fourth quarter of 2002. First-quarter 2003 net sales totaled $6.1 billion, compared with $6.0 billion in the first quarter of 2002 and $6.3 billion in the fourth quarter of 2002. Mr. John Faraci, President, and Mr. Christopher Liddell, SR VP and CFO, conducted the quarterly investor analyst call. Topics: * Business Overview * Financial Highlights * Business Segments * Next Quarter Outlook * Questions and Answers Overview Mr. Faraci summarized the quarter as 'pretty solid' with demand and volume as expected. While seasonally slow, IP is in line with expectations and there have not been any negative surprises. While prices were slightly positive, costs were higher than expected due to energy, wood and weather; all having a big negative influence. IP is aggressively managing wood costs back to where they need to be, but does not expect a big drop in energy prices. The operating issues earlier in this quarter have been resolved within March. Financial Highlights Mr. Liddell noted that there are two offsetting trends; Volume is down $0.02 slightly (share price impact) seasonally (i.e. Xpedx and Shorewood Packaging), offset by a positive $0.03 per share price impact due to lack of order downtime. Basically, there was a net zero effect between price and mix as slight positives in pricing for pulp, coated, bleached board, and lumber were offset by slight negatives in board and boxes. Non-price improvements were not enough to offset net impact of winter and increased energy costs, citing: * A $0.05 negative attributable to winter disruptions such as minor incidents including higher energy usage, freezes, breakages, wood shortages, and subsequent downtime. With winter behind, IP said these impacts would not repeat in the coming quarter. * A $0.07 negative attributed to energy and raw materials ($0.04 due to energy; $0.02 due to fiber costs, $0.01 due to other raw materials). Going forward energy will still be a negative, but anticipate an improvement of $0.02 - $0.03. * Also noted was a headcount 170 reduction from the Natchez mill, which will close mid-year, and additional 250 headcount from other divisions. Business Segments: Mr. Faraci briefly reviewed each of the four business segments including the following highlights: Paper businesses (includes large NA uncoated white paper, coated papers, pulp, European papers, and Brazil): * Sales revenues down slightly within the four main businesses. * Volume is up slightly in uncoated business in the U.S. * Business is "healthy" in Europe, although pricing was about 5% off. * Pricing is firm in the U.S. paper business. Prices are up in pulp and IP is anticipating more of that in next quarter as most of the increase occurred in mid-March and impact was late in the quarter. * First-quarter operating profits for Printing Papers were $122 million compared with fourth-quarter 2002 operating profits of $157 million. Packaging Segment: * Sales revenues were relatively flat. Industrial and Consumer Packaging operating profits were $89 million in the first quarter, compared with $116 million in the 2002 fourth quarter. * Brown (unbleached board) business volume was up (mostly export containerboard) and IP is starting to see an improvement in currency. * Box demand was not great, but still was up 4% against Q1 2002. (The price point is still down on industrial packaging, noting manufacturing sector recession in U.S.) * Bleached board, which is seasonally slow in Q1 (even more than brown business) picked up activity at the end of the quarter. IP has recently announced price increases as backlogs have stretched out a bit. * Bleached board realization was up even though pricing was flat due to the completion of a large mill project. Started in late Q3 2002, the project start-up costs and initial product costs are over and now the mill is ramped up and running as planned. * Consumer packaging was also hit with input costs (energy). Forest Products (U.S. wood products, Canada, and Forest Research) * First-quarter Forest Products operating profits of $161 million were up slightly from $156 million in the fourth quarter of 2002. * Wood products in U.S. are still in red although less than 2002 Q4. Prices have moved up, although only up from five year lows. * Lower land and real estate sales and lower harvest problems associated to winter conditions in the South were found on the Forest side. Xpedx: Special mention was made of the Xpedx results with sales down $100 million versus Q4. The company's distribution business, xpedx, reported operating profits of $15 million for the first quarter of 2003 compared with operating profits in the fourth quarter of 2002 of $28 million. Mr. Faraci noted: "that is one of the best characterizations of what is going on in the advertising and commercial printing side of the economy…it is very, very weak." While first 3 months of year are always weak for Xpedx, it was not expected to be that weak. Next Quarter Outlook Regarding second quarter 2003 outlook, "We would like to look at this and say the glass is half full, not half empty," stated Mr. Faraci. "I would think that the economy should pick up, but every time we open the newspaper there is another event out there that creates some uncertainty." Prices are improving in some grades but not all (e.g., pulp is moving up). IP anticipates second quarter price increases in bleached board and containerboard. Q & A: 1. Uncoated free sheet price increases will be predicated by what happens in advertising, which affects both coated and uncoated business. Lack of commercial printing has severely impacted Xpedx. (For example, one customer pulled 60 pages out of ad titles before the Academy awards.) 2. The impact of the January/February mill performance issues in the U.S. mills was $35-40 million (approximately $0.05 per share). 3. In summarizing the offshore markets: a. In Europe, volumes are up slightly and IP is in a great sales position in both Eastern and Western markets. IP has two, low-cost facilities and can move product to either market. The total European economy is weak, with more weakness in the Western regions, noting that Germany is as slow or slower than the U.S. b. Australia and New Zealand are extremely strong and in building cycles (i.e. having stronger GDP performance). The major impact has been positive currency exchange offsetting some pricing increases. c. When asked about Latin America and Asian expansion strategy (the analyst cited Champion's Brazil expansion), Mr. Faraci stated that with only one to two minor exceptions, there would not be any volume-related expansions. He noted that paper demand grows with GDP growth around the world, and GDP growth, with exception of China, is weak. In fact, over the last couple of years, "it is cheaper to buy than build. A buy versus build strategy depends on business strategy issues and if there is a growth or cost opportunity." 4. Energy projects are being reprioritized to the top of the capital spending budget. 5. IP sees increased pulp prices as benefiting the U.S, but not Europe, resulting in a net-net benefit with IP as a pulp seller around the world. 6. The uncoated white system is fairly full with less down time (60,000 tons versus 200,00 quarter-over-quarter). IP also moved maintenance downtime into Q1 2003 to prevent inventory build-up. Containerboard inventories are fine. 7. When asked about any SARS impact on shipment patterns, Mr. Liddell noted that a strike was having a bigger impact at this stage than SARS. 8. The box board business continues to focus on selling opportunities and overall value proposition. IP will focus on self-integration such as selling more of liner board it produces in another group. 9. Forest products profits were up despite timberland sales being down. The Converting operations had more of an improvement than timber sales, which are still losing money, but did improve quarter-over-quarter. 10. The corporate expense of $ 88 million was due to increased pension and supply chain cost, but somewhat offset by lower benefit costs. 11. Maintenance expense is spread as cost over the year including 1-2 regular, planned outages for maintenance at each mill every year. The goal is to manage production to orders. Maintenance downtime is a big cost that is managed aggressively, but still offers a lot of opportunity for improvement. 12. Regarding substitution, IP just finished a survey of a lot of people who spend advertising dollars, and "ink on paper" isn't going away. People, who are looking for more targeted and valuable ways to reach consumers, vote to go with coated papers. The electronic substitution that IP is seeing, and has verified is occurring, is having more impact on the uncoated than coated market. 13. IP is going to spend more money as it scales up its supply chain initiatives and has reallocated people to focus on SCM (supply chain management). In the total IP "cost bucket," of $24 billion, one-half of the costs go to 'make things.' In 2002, IP focused on improving this segment. Of the remaining $24 billion in costs, $3 billion goes to the 'cost to buy and resell (citing Xpedx)' and $3 billion go to the 'cost to serve.' In this 'cost to serve' bucket, lies a lot of opportunity to make real step changes in both cost structure and service levels. Current initiatives are focused on "quick hits. The re-piping and re-wiring of IP's ability to take in an order and get it to a customer cost effectively is still a couple of years out. Mr. Faraci noted that this is not a system investment, but an investment in business processes, driven by business people and supported by technology. 14. Regarding the revenue side of the business, Mr. Faraci stated that, based on the past several months that he has spent with Sales and customers, IP is doing better with key (target) customers, gaining market share and listening to customer needs. The sales incentive structure is aimed at gross profit and not margin, however it is hard to create more revenue when your customers have less business. He listed several examples of selling at a higher value mix (e.g., the business in Europe doing better last year because IP sold more value added products in little pieces, not big chunks). IP has invested a lot of time in people and teaching the organization (including leaders) how to be customer focused. Customers are talking about IP as much different organization than it was 4-5 years ago.