International Paper Shows Highest Net Sales Revenue Since Q1 2001, and “Earnings Are the Best They’ve Been Since 2000.”: Summary of Q3 Earnings Call By Pat Veverica of Raine Consulting November 5, 2003 -- International Paper (NYSE: IP) today reported third-quarter earnings operations of $208 million ($0.43 per share) compared with $113 million ($0.23 per share) in the third quarter of 2003 and $62 million ($0.13 per share) in the second quarter of 2004. Third-quarter net sales were $6.6 billion, compared with third- quarter 2003 net sales of $6.1 billion and 2004 second-quarter sales of $6.2 billion. Topic of this summary: Third Quarter Overview Business Segment Performance Developments Outlook Q & A Third Quarter Overview “ Our volumes remained strong during the quarter, and price increases continued to be implemented across most grades of paper and packaging," said John Faraci, International Paper chairman and chief executive officer. "However this was somewhat offset by lower wood products pricing, rising raw material costs and the effect of the hurricanes that hit Florida and the gulf coast region impacting sixteen of our facilities." While there was small damage to the Florida facilities, the temporary shutdowns and logistics issues created by the storms cost the Company $18M or $.03 per share. The Company continues to implement the price increases announced earlier this year. Business Segment Performance Printing Papers Printing Paper sales were $1.9 billion. Third-quarter operating profits for Printing Papers were $160 million compared with second-quarter operating profits of $141 million as a result of higher average pricing for uncoated free sheet and coated paper. Pulp prices were up on average for the quarter but started to trend down as the quarter ended. Coated paper sales volumes were seasonally higher. These improving business conditions were somewhat offset by seasonally lower sales volumes for European papers as well as by the impact of the hurricanes. Packaging Industrial and Consumer Packaging sales were $2.0 billion. Operating profits were $183 million in the third quarter, compared with $111 million in the second quarter, as a result of higher average pricing and volumes across containerboard, corrugated boxes and bleached board. Wood Products Third-quarter Forest Products sales were 600 Million. Operating profits were $191 million, compared with earnings of $222 million in the second quarter primarily as a result of lower average pricing for lumber and plywood. Gains from land sales were flat with second quarter. Developments The Company completed its sales of its Canadian Pulp operation, Weldwood of Canada. A net discontinued operation charge of $757 million was recorded in the 2004 third quarter to reflect a $795 million write-down of the net assets of the Weldwood of Canada, Ltd. subsidiary to their expected net realizable value, net of Weldwood's operating earnings of $38 million for the quarter. The write down is due to the previously announced sale of the Weldwood subsidiary, which is expected to be completed in the fourth quarter. This charge resulted in a net loss of $549 million ($1.13 per share) for the 2004 third quarter, compared with net earnings of $122 million ($0.25 per share) in the third quarter of 2003 and $193 million ($0.40 per share) in the second quarter of 2004. Outlook In the fourth quarter, the company expects demand and pricing will continue to be solid in packaging and paper, but expects that will be offset by lower average pricing. IP declined to give specific guidance on Q4, but stated that demand is solid in paper and packaging, backlogs and inventories are good with continued price flow-through. Q & A The bleachboard business has seen lots of restructuring and consolidation in the industry. This business has had more stable earnings than other products, but it is difficult to get price recovery down to the converting business. Pulp prices are expected to firm up in Asia. In general, pulp prices are trending up. Land sales were flat quarter-to-quarter. Q4 is a high capital spending quarter. Capital spending in the $1.3 billion range is expected for the full year. The cash flow position will change considerably in Q4 with proceeds from the sale of Weldwood coming in. The Weldwood sale is expected to generate $900M in proceeds, which will be used primarily to pay down debt. Xpedx surprised analysts on the upside, while IP officials said they have been waiting for this “surprise” for awhile! The business showed a 7% ROI. Officials stated that “growing sales revenues combined with keeping cost structures under control contributed to these very decent returns.” They are “not betting on pricing to solve European earnings.” Q3 is typically weak, and Q1 is usually stronger in Europe. Commenting on the impact of higher wood and energy costs: Wood prices were coming down as expected in the South, the company had a good inventory position but lost momentum due to the storms in Florida. This caused them to lose the ability to reduce wood costs. The Company expects wood to be up slightly in Q4, then coming down early in the year. Reduction in headcounts amounted to 351 people in the quarter. While the numbers were lackluster, commercial printing is doing better than retail. But it was the exact opposite 4 months ago. Pulp markets are moving differently in Europe, North America and Asia. What they’re hearing out of Asia is that there is more buying activity in the marketplace. The Company stated productivity improvements and headcount management to improve their SG&A expenses year over year. In closing, Company officials stated that “earnings are the best they’ve been since early 2000. The improvements are coming gradually, and business conditions next year will be solid. Even if they aren’t, we’re expecting our business to improve.” Pat Veverica is an Associate of Raine Consulting and can be reached at [email protected]