Restructuring Expenses and Rising Input Costs Drive Loss: At International Paper: Summary of Fourth Quarter 2005 Earnings Call By Trevor Shackelford February 16, 2006 -- International Paper (NYSE: IP) recently announced their fourth quarter and fiscal 2005 results today. Net sales for the fourth quarter were $6.1 billion, compared to $6.0 billion reported in the fourth quarter of fiscal 2004. Net loss, including the effect of special items, was $77 million, or $0.16 per share, compared with earnings of $169 million, or $0.35 per share, reported in the same period last year. Earnings from continuing operations and before special items for the fourth quarter were $0.12 per share, compared to $0.42 per share reported in the fourth quarter of fiscal 2004. Full year net sales were $24.1 billion, compared to $23.4 billion reported last year. Net earnings, including the effect of special items, for the fiscal 2005 were $1.1 billion, or $2.21 per share, compared to a net loss of $35 million, or $0.07 per share reported in the fiscal 2004. Earnings from continuing operations before special items for the full fiscal 2005 were $1.08 per share, compared to $1.26 per share reported in the fiscal 2004. Contents of this Summary * Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A Quarter Highlights • For 2005, high costs for energy, wood and other raw materials had a $585 million, or $0.87 per share, negative impact on earnings, compared to earnings reported in fiscal 2004. • In the fourth quarter, EBITDA reduced approximately $100 million, or $0.15 per share, due to high raw material costs. • The company took a significant amount of downtime during the quarter and the year, including the closure of the Ft. Madison, IA, and the permanent shutdown of three uncoated freesheet machines in the fourth quarter. • During the fourth quarter, land and realty sales lowered the earnings by $0.02 per share. • The effective tax rate, excluding special items and discontinued operations, was 22% for the fourth quarter of 2005, compared with 26% reported last year. • Net corporate expenses of $167 million in the fourth quarter of 2005 were up from $142 million in the third quarter of 2005, reflecting increases in benefit-related accruals and environmental reserves. • Total debt at the end of fourth quarter was $12.2 billion, compared to $2.4 billion reported at the end of fiscal 2004. Segment Performance Printing Papers Segment Operating profits for the fourth quarter of 2005 were $88 million, compared to $132 million reported in the prior quarter. The decline in earnings was predominantly because of high input costs. Price realizations were flat in North America, down in pulp, but trending up slightly in Europe. Uncoated paper volumes increased in the quarter, while coated paper volumes experienced some seasonal slowdown. Industrial Packaging Business Segment The segment reported operating profits for the fourth quarter of $11 million compared to $33 million in the third quarter of fiscal 2005. Containerboard volumes increased and pricing was flat overall, with some improved price realizations late in the quarter. However, the gains were more than offset by higher input costs, lower box prices and higher container business operating costs. Consumer Packaging Segment This segment reported operating profits for the fourth quarter of $21 million, compared to $37 million reported in the third quarter of fiscal 2005. Downtime from a lack of orders and high input costs negatively impacted bleached board, which more than offset strong performance in the Shorewood Packaging Corp. business, and higher earnings in food service. Distribution Business Segment The company’s distribution business, xpedx, showed operating profits of $25 million, up from $23 million reported in the third quarter on the strength of improved margins. Volumes were flat. Forest Products Segment This segment’s operating profits for the fourth quarter of 2005 were decreased slightly to $257 million from $272 million reported in the third quarter. Prices for lumber fell over the quarter, reflecting seasonal slowness in the market. Earnings from land sales were $179 million, slightly lower than the third quarter’s $190 million. Guidance The company expects results in first quarter of fiscal 2006 to be flat with fourth quarter, with somewhat lower earnings from land sales. While natural gas prices are trending down, costs for chemicals and fuel oil are trending up from already high levels in the fourth quarter, so the company expects overall input costs to be about flat. On this continued cost pressure, operational improvement remains a priority. The company expects that volumes to be seasonally slow early in the quarter, with some pickup in March. The company gained some price momentum late in the fourth quarter and expects that it will carry into first quarter, particularly in printing papers and packaging businesses. The other financial expectations for 2006 are: • Capital spending of approximately $1.2 billion. • Depreciation and amortization expenses of $1.4 billion. • Net interest expense of $600 million. • Corporate items in the range of $750 to $800 million. • Effective tax rate of 30%. Raine Radar Excluding the special charges, the company showed a profit of $0.12 per share, beating analyst expectations. Unfortunately for the company, the cost of inputs and special charges kept any profit from materializing. The company stated that it saw some traction in printing paper pricing in the fourth quarter, and thinks it may see that trend continue. Many commercial printers have to be wondering how that will affect them. At least one major printer believes that paper prices are more likely to decrease, by as much as 5%, rather than rise. If International Paper can’t make any price increases stick and is still getting hit by rising chemical and energy costs, it may take the company longer than expected to return to solid footing, even with its aggressive restructuring plans. Q & A 1. The company stated that it is carefully considering its reinvestment options on a global basis. 2. The company did not expecting any cash contributions to pension plan in 2006. 3. The company said that the corporate items estimates for the fiscal 2005 were revised from $740 million to $595 million. 4. The company said that the biggest increase in corporate items for 2006 is in the pension expense. 5. In terms of transformation plan time frame, the company said that it is intended to maximize the value in the shortest period of time and that the company is pleased with the way things are going right now. 6. IP said that 5% of wood comes from the company’s lands and 95% of wood was purchased in the open market. 7. In terms of print papers demand, the company has been adjusting its capacity to meet the market demand by taking some machinery offline. 8. The company was fully operational in its containerboard business in North America and was pleased with the benefits. The company reduced its demurrage by 50% or $3 million. 9. The company said that their soft- and hardwood inventories were in much better shape. 10. In terms of backlogs, IP said they are currently sizing its capacity in North America to meet the demand. Trevor Shackelford is an Associate at Raine Media, Inc. and can be reached at [email protected] -- Click here to tell us what you think about this premium feature -- Click here to read recent comments from our readers