February 3, 2003 -- International Paper Co., on Thursday, January 30, reported a fourth-quarter loss of $130 million or 27 cents per share, but narrower than the $572 million and $1.19 it lost in the same period a year ago. Net quarterly sales came in flat versus 2001 at $6.3 billion, but dipped sequentially from $6.4 billion in the third quarter of 2002. For the year, revenue was $25 billion, down from $26.4 million in 2001. For the year, the company reported a net loss of $880 million, or $1.83 per share, compared to a 2001 loss of $1.2 billion, or $2.50 per share. Excluding special items, fourth-quarter 2002 earnings were $160 million, or 33 cents per share, compared with profits of $58 million, or 12 cents per share, in the same quarter of 2001. Both the quarterly and full-year results beat the consensus estimate of analysts 6 cents per share. Wall Street analysts had expected earnings of between 24 cents and 28 cents per share with an average view of 27 cents per share. The special items include charges for plant closings, additions to legal reserves and early debt retirement. Over the last two years, IP has sold over $3 billion in assets to streamline its business and help offset the impact of a weak U.S. economy. Earlier this month, the company warned of a $450 million fourth-quarter charge to shore up legal reserves for liabilities involving siding and roofing products. (The claims pertain to three class-action lawsuits, settled in 1998 and 1999, alleging the hardboard wood used to make exterior siding and roofing products was prone to rotting, warping and paint peeling. Although International Paper has sold the companies responsible for producing the products, it has retained the legal liability.) Looking forward, IP expects first-quarter results to be hurt by seasonal weaker demand for its products during the winter months, but anticipates improvement in the spring. Analysts project IP's first-quarter earnings to be better than last year's based on leveraging price improvements and continuing cost reductions. Conference Call Highlights: Conducting a January 30th, 2003 conference call, John T. Dillon, Chairman & CEO and John V. Faraci, EVP & CFO, discussed these results followed by a question-and-answer session. This discussion is summarized in the following topic review: - Performance review and adherence to business fundamentals - Impact of Supply Chain Management initiatives - Natchez, MS Mill impact - Captial spending projects - Xepdx - Capacity - Competitive ranking - European outlook - Spring 2003 projections - Performance review: With 2002 earnings up sharply, it was a great year with important trends developing in spite of a lackluster and weak economy. While demand did improve in Q3, it fell off in Q4 with the end result that demand for paper is flat, packaging is up a little, while coated free sheets in the U.S. is very solid. Coated had tough year in pricing, moderated in Q4 and coated groundwood stopped going down. Other critical points: tax rate lower in Q4; more downtime in Q4 versus 3Q which ran full; seeing a price increase for the first time quarter-by-quarter in four years, energy & wood costs were up; uncoated paper production is operating at capacity level; positive impact from weaker dollar is seeing less lumber imported from Europe. The Q4 strength in commercial printing suggests printing may be coming back a little. Performance improvement came from adherence to “managing what we can control” focused on lower operating rates, lower customer/mill inventories and a weaker dollar positively effecting exports. - Supply chain initiatives: These initiatives are moving from the study to implementation phase. In 2002 (and going forward for 2003) the focus was on “quick hits” pay-as-you-go basis that matched costs for savings. Projected to take $500million in cost out with $700-$800 million from full implementation in 2004. Most significant improvement was in customer satisfaction. - Natchez MS mill impact: IP has already taken charge for all assets written to zero. Remaining is severance for approximately 600 people at $20-30 million. Environmental/closure costs will be some, but not huge. - Capital spending: Although IP did not undertake many new projects in 2002 to take advantage of cost reductions and improvements, there is a 2003 $300 million incremental capital spending potential. IP has a huge number of attractive projects with high return that they have been sitting on. Projects include cost reduction initiatives in France; ability to run different grades in Poland, a new saw mill in Brazil, selected modernization of saw mills in U.S. Still taking advantage of cost reduction/improvement and not working on projects. - Xepdx: Xpedx made a strong contribution. The growth in distribution prepared for reduced sales and changed the cost structure to now operate at respectable returns. Expect continued improvement with a 6-7% run rate ROI. - Capacity: Over the course of 2002, IP brought working capital down. Downtime has largely been in containerboard. Brazil is close to effective capacity and there is upside in Europe with the Russian mill. Even though uncoated free is full, there is ability to add capacity based on increasing machine efficiency and mix. Capacity shut down in U.S. is down permanently. - Competitive ranking: IP points to its dramatic improvement in competitive ranking against peers from a #6 position in 2001 up to the #3 position. After Q4 earnings for all companies are in, IP believes it will move to the #2 position. This change is due to a great operating performance – building stronger businesses, remaining strategic, and improving competitive position. - European outlook: Europe is the weakest part of the company from a demand perspective. European producers have a weak 2003 outlook with uncoated free sheets starting at weak levels and expectation for falloff for the second half in Europe. It is a reflection of what going on in European economy - low growth and a difficult time wrestling fiscal policies. IP saw price pressure at the tail end of year, and does not expect that 2003 results as strong will be as strong as last year. While IP took some downtime in Europe during Q4, did not know if there will be more for Q1 2003. - 2003 Forecast: IP sees a good chance of a turnaround in coming year based on public policy and incentives, but will continue to drive results based on non-price improvements. Anticipate that wood costs will be back in line in Q1 2003 - costs had crept up in Q4 due to severe weather and impending shortages. IP improvements will be less in the way of non-recurring expenses anticipating only modest changes in physical assets and staffing changes. Q1 is seasonally a weak quarter due to weakening in demand, seasonal difficulties, and continuing political uncertainty. Dillion expects business will get better as the company comes out of 1st quarter.