ubs global paper and john v. faraci forest products conference...
TRANSCRIPT
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John V. Faraci
Chairman &
Chief Executive Officer
UBS Global Paper and Forest Products Conference
A Stronger, Better-Positioned International Paper Company
September 2010
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2
Forward-Looking Statements
These slides and statements made during this presentation contain forward-looking
statements. These statements reflect management's current views and are subject to risks
and uncertainties that could cause actual results to differ materially from those expressed
or implied in these statements. Factors which could cause actual results to differ relate to:
(i) increases in interest rates; (ii) industry conditions, including but not limited to changes in
the cost or availability of raw materials, energy and transportation costs, competition we
face, cyclicality and changes in consumer preferences, demand and pricing for our
products; (iii) global economic conditions and political changes, including but not limited to
the impairment of financial institutions, changes in currency exchange rates, credit ratings
issued by recognized credit rating organizations, the amount of our future pension funding
obligation and changes in pension and health care costs; (iv) unanticipated expenditures
related to the cost of compliance with environmental and other governmental regulations
and to actual or potential litigation; and (v) whether we experience a material disruption at
one of our manufacturing facilities and risks inherent in conducting business through a joint
venture. We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. These and other factors
that could cause or contribute to actual results differing materially from such forward
looking statements are discussed in greater detail in the company's Securities and
Exchange Commission filings.
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3
Statements Relating to Non-GAAP Financial Measures
During the course of this presentation, certainnon-U.S. GAAP financial information will bepresented.
A reconciliation of those numbers to U.S.GAAP financial measures is available on thecompany’s website at internationalpaper.comunder Investors.
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4
Repositioned and Well-PositionedFor Value Creation & Earnings Growth
Focused our business portfolio
Replaced divested businesses’ earnings with
higher, more-sustainable earnings
Reduced costs– Operating costs & productivity gains
– Overhead costs
– Fixed costs
Reduced debt
Reduced capex
Investments in strategic businesses &
emerging economies
Increased earnings, free cash flow & returns
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5
Free Cash Flow2000 – 2010 First Call
$0
$500
$1,000
$1,500
$2,000
$2,500
2000 – 2004 Average
$910 Million
2008 – 2010 First Call Average
$1.85 Billion
Transformation
FCF
Yield2000 – 2004 Average = 5% 2008 – 2010 First Call Average = 23%
Free cash flow before dividends, based on data in the 10-K for each year at the time of filing.2006 represents free cash flow before $1 billion pension contribution.
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6
Achieving Cost-of-Capital Returns
All Leading to Cost of Capital Returns in Current Environment
4%
5%
6%
7%
4%
8%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
2000 -2005 Avg
2006 2007 3Q08 Run Rate
2009 JUN-AUG 2010
Run Rate
RO
I
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7
2010 Not a Mid-Cycle YearDemand Recovering
Source: Fibre Box Association
373378
390396
405 401
380 379 380
391 391 395390
381374
344
356
250
275
300
325
350
375
400
425
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Jan
-Au
g2
00
8 R
ate
2008
2009
20
10
YT
DA
nn
ua
lize
d
U.S. Box Shipments (BSF)
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8
Improving Earnings Quality & SustainabilityReplaced Land Sales Earnings
54%
71%
47%
56%
72%76%
98%92%
46%29%
53%44%
28% 24%8%
0%
20%
40%
60%
80%
100%
2003 2004 2005 2006 2007 2008 2009 2Q10YTD
% of EBIT from Operating Businesses
EBIT before special items including discontinued operations; Forest Products EBIT excludes Wood Products
Earnings based on data reported in the 10-K for each year at time of filing
Forest Products
EBIT ($B) $0.6 $0.5 $0.7 $0.7 $0.5 $0.4 < $0.1 < $0.1
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9
Streamlined Business PortfolioImproved Positions in More-Profitable Segments
Segment Position
Market Segment 2004 2010
U.S. Linerboard #3 #1
U.S. Uncoated Papers #1 #2
U.S. Coated Paperboard #1 #1
Global Market Pulp Secondary #4
U.S. Coated Papers Secondary Exited
U.S. Wood Products Secondary Exited
U.S. Forestland #2 Exited
U.S. Kraft Paper Secondary Exited
U.S. Chemicals Secondary Exited
U.S. Beverage Packaging Secondary Exited
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10
2005 capital employed represents January 1, 2005
Packaging includes Consumer Packaging & Industrial Packaging
2005Capital Employed
$30B
June 2010Capital Employed
$21B
Printing Papers
28% Packaging25%
ForestProducts
11%Distribution4%
Corporate & Other
17%
CHH6%
Printing Papers
32%
Corporate & Other
11%
Packaging50%
ForestProducts
1%
Distribution6%
Streamlined Business PortfolioSmaller, Higher-Returning Capital Base
Coated Papers9%
Outside N.A.
N.A.
Outside N.A.
N.A.
Outside N.A.
N.A.
Outside N.A.
N.A.
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11
Increasing Free Cash Flow25% Headcount Reduction
8066
60WYPKG
(11)5
(24)
(4)
2005 Headcount*
Divestments & Acquisitions
Headcount Reduction
June 2008
Headcount Reduction
SCA AsianPackagingAcquisition
June 2010
Th
ou
san
ds o
f E
mp
loyees
* At January 1, 2005Excludes Ilim joint venture employees
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12
$3.2
$2.8
$3.4
$2.9 $2.9
$0.6 ($0.5)
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
2005 2007 WY PKGAcquisition
2008Pro Forma
WY PKGReductions& Synergies
2009 2010P
Overh
ead
Co
st
$ B
illio
n
% of Sales 12% 12% 13% 12% 11%
Increasing Free Cash FlowSystematic Overhead Cost Reductions
Includes discontinued operations
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13
Increasing Free Cash FlowLower, More-Focused Capex
25%
50%
75%
100%
125%
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
2005 2006 2007 2008 2009 2010P
Maintenance Regulatory Strategic Cost Reduction
$ Million Normalized Target 60-70% of Depreciation% of
Depreciation
Reflects continuing operations
Cycle Capex Target: ~$1B
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14
Progress on WY PKG Acquisition
Metric Performance
Cash FlowWill have recovered one-third of our $6B
investment by the end of 2010
EarningsProject acquisition to be earnings accretive
cumulatively by the end of 2010
Return on
Investment
Expect cost-of-capital returns for the
acquisition for 2010
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15
Prices Returning to Pre-Recession Levels
1.00
0.84
1.00
0.50
0.60
0.70
0.80
0.90
1.00
1.10
Year End 2008
Year End 2009
August2010
42# Linerboard Corrugated Boxes
1.00
0.93
1.03
0.50
0.60
0.70
0.80
0.90
1.00
1.10
Year End 2008
Year End 2009
August2010
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16
2010 Not a Mid-Cycle YearDemand Recovering
Source: Fibre Box Association
373378
390396
405 401
380 379 380
391 391 395390
381374
344
356
250
275
300
325
350
375
400
425
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Jan
-Au
g2
00
8 R
ate
2008
2009
20
10
YT
DA
nn
ua
lize
d
U.S. Box Shipments (BSF)
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17
Accelerating Industrial Packaging Progress
$0.5
$0.8
$1.3
$1.0
$1.7
2007 2008 2009 1H10Run Rate
JUN - AUG2010
Run Rate
NA
In
du
str
ial P
ac
ka
gin
g
Earnings before special items
June - August EBITDA Run Rate of $1.7 Billion and 9% ROI
ROI 7% 5% 5% 3% 9%
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18
IP Increasing Free Cash Flow
$0.8
$1.6
$2.4
$1.8
2004 - 2007Average
2008 2009 JUN - JUL2010
Annualized
FC
F $
Billi
on
Free cash flow before dividends
2009 and 2Q10 YTD exclude $1.7 B and $0.1 B, respectively, in alternative fuel mixture tax credits
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19
Targeting Higher Levels of PerformanceEBITDA & ROI
2005
~$4.5
Cost of Capital8% - 9%
> $4.0
~$3.0
CurrentRun Rate
Mid-Cycle Peak Trough
$2.8
EBITDA$ Billion
$3.8
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20
Debt ReductionTargeting < 3X Adjusted Debt-to-EBITDA
$12.7
$8.9
$3.81 $2.82
PensionGap
$8 - $10
$0
$2
$4
$6
$8
$10
$12
$14
August 2008 Pro Forma
with Acquisition
Debt Reduction
2Q10Balance
Target < 3X Adjusted Debt
to EBITDA
Billi
on
1 Excludes debt repayments totaling $2.75 B from the proceeds of bond issuances2 Pension gap as of 12/31/09
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21
Portfolio UpgradesEmerging Market Investments
Attractive, low-cost assets
Growing markets
Geographic & currency balance
Good earnings, cash flow & return potential
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22
Strategic Investments Sun Joint Venture
2009: 4 MM tons of coated paperboard demand in China
Projected 2010 – 2013 Demand CAGR: 8% - 9%
3 existing board machines
915,000 tons of capacity
Sold out since March 2009
1H10 EBITDA of $53MM
1H10 ROI of 13%
New 4th board machine approved by Sun & IP boards
550,000-ton annual capacity
~$300 MM investment
Yanzhou, China
Start up in 1Q12
5th board machine in planning stage
IP-Sun JV,
Yanzhou
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23
Ilim
$ Million
2007 IP Investment $650
EBITDA – Three-Year Average $275*
EBITDA Multiple 6X
IP has received a total of $152 million of cash dividends from Ilim
* Represents 100% of Ilim’s EBITDA
4.8X
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IlimRecovering from Economic Crisis
($0.12)
($0.08)
($0.04)
$0.00
$0.04
$0.08
$0.12
2008 2009 2010Projected
Cumulative
EP
S
IP Share of Operating Earnings
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Strategic InvestmentsIlim JV - Resuming Capital Investment Plan
1. Expand Siberian pulp business
790,000-ton NBSK pulp line at Bratsk
550,000-ton net increase in capacity
$700 MM in capital
Recovery boiler start-up in 3Q11
Pulp line start-up in 2Q12
Projected return >20%
2. Integrate Koryazhma pulp into domestic market
Install paper machine at Koryazhma
165,000 tons of UFS; 55,000 tons of coating base
$270 MM in capital
Shift from export pulp to uncoated freesheet
Evaluating 75,000-ton off-line coater
Paper machine start-up in 2012
Projected return > 20%
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26
Balanced Capital AllocationIncreasing Shareowner Value
Free Cash Flow
Return Cash to Shareowners
Increased dividend to $0.50
Debt Reduction
$500 MM Pension Contribution
$100 MM Debt Reduction
Selective Reinvestment
SCA Packaging Acquisition
Sun JV Coated Paperboard Machine
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27
Increasing Shareowner ValueCapital Allocation Progress
During
Economic Crisis
Post
Economic Crisis
Reduce Debt Primary Focus Still a Priority
Build Cash Balance Primary FocusNeed Less
Cash on Hand
Return Cash
to ShareownersReduced to Strengthen
Balance SheetIncreasing Emphasis
Capital InvestmentPrimarily Maintenance &
Regulatory
High-Return
Cost Reduction &
Maintenance & Regulatory
Strategic Reinvestment NoneAcquisitions to Strengthen
Core Businesses
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28
Looking ForwardIncreasing Shareowner Value
1. Strong free cash flow
2. Cost-of-capital returns over the cycle
3. Manage our supply to meet customer demand
4. Balanced free cash flow allocation