International Paper Co. Earnings Call Nuggets: All-In Project Improvement and Supply Chain Disruptions

International Paper Co. (NYSE:IP) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

All-In Project Improvement

C. A. ‘Chip’ Dillon – Vertical Research: First question is you mentioned on the improvement that we – on Slide 33 from all the projects and that 350 to 450 on a mid-cycled basis would be just 40% of the improvement. Could you just clarify that is the amount you would expect and hope to see in 2013 and the all-in improvement from these projects would actually be north of $1 billion plus whatever LM gives you, is that the right way to read that?

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John V. Faraci – Chairman and CEO: Yeah.

C. A. ‘Chip’ Dillon – Vertical Research: Then next question is. You mentioned, Carol, that the downtime in the fourth quarter in containerboard or in particularly not the downtime, the lack of downtime was to build inventories ahead of the seasonal downtime you’re about to take. I was just wondering if you could give us a gauge as to what the inventory increase was for your system in the fourth quarter and even if you have a look at January?

Carol L. Roberts – SVP and CFO: I’ll let Mark answer that question, Chip.

Mark S. Sutton – SVP, Industrial Packaging: Great question on inventory. We had entered the quarter with very lean inventories as Carol mentioned and we had a couple of operating problems that made it difficult for us to build the inventory we needed. So, we ended the fourth quarter trying to build inventory to prepare for our outages actually in the first two quarters and we didn’t quite reach our target. We did build some finally through December, but not enough. So, we’re working toward getting our inventories in shape in January, so we can execute the outages that we have in the first half.

John V. Faraci – Chairman and CEO: I’d just add there, Chip, on a $13 million a ton system when you had a supply chain problems, the numbers get big pretty quickly, so we want to rectify that and so we don’t have those supply chain issues internally with customers going forward.

C. A. ‘Chip’ Dillon – Vertical Research: Could we have seen like 100,000 tons, I mean given the size of your system increase since the low point in September?

Mark S. Sutton – SVP, Industrial Packaging: We would have loved it and have seen that to prepare for like I said, it’s really the first half of the year upwards of 60% of our outage, but we didn’t have anywhere near that number.

C. A. ‘Chip’ Dillon – Vertical Research: Then just the last question is, when we look at the goal of getting the total debt including pension below three times and you sort of mentioned that you can sort of see getting there at the end of the year. I guess a couple of things. One is, I mean, (here) is only a month old, but it’s fascinating to see that probably 25 basis points, I’m guessing, or 20 basis points of that 100 basis point hit you took that created that $1.3 billion or $1.4 billion, I guess, increase in the pension underfunded position, part of that’s reversed and your assets have gone up. I mean if you kind of looked at this in real time, I guess is that you’re already seeing that reverse, and do you feel you need to get below that 3 point before you would, say, consider buying back shares?

Carol L. Roberts – SVP and CFO: Chip, I think what’s important is using the cash in the most effective and prudent way that we can. We’ll continue to evaluate debt pay-down as well as other uses as you’ve mentioned. Dividend is a priority and share buybacks certainly are something that we would consider.

John V. Faraci – Chairman and CEO: Chip, what we’ve said consistently is, our objective is not to fund the fully funded pension plan with the discount rate at 50-year lows. That’s not our…

C. A. ‘Chip’ Dillon – Vertical Research: Yeah.

John V. Faraci – Chairman and CEO: Certainly, we want to get the balance sheet debt down to less than 3. We’re conscious of the pension obligation. We’ve got in our cash flow planning – we’ve got plenty of cash to put in the pension plan as we need to. As Carol said, we don’t need to put. It’s a modest amount for 2014. So, interest rates, you’re right, I think we’ll go a long way into helping us fund the pension plan and we’re not going to do it all with cash.

Supply Chain Disruptions

Steve Chercover – D.A. Davidson: It’s great to see that (your market) really the downtime and containerboard was down by basically one-sixth of what it was, but why even take downtime if you had the supply chain disruptions, or you just didn’t realize that you were that lean?

Mark S. Sutton – SVP, Industrial Packaging: This is Mark. That’s part of the issue. All of the lack of order or market downtime was taken very early in the quarter. Usually, we expect a little more seasonal decline in the fourth quarter and it wasn’t really happening. So, we unwound the planned lack of order downtime early in the quarter and everything looked good until we had a couple of reliability issues and that resulted in us having some additional costs, mainly in freight and in waste in the box plants because we were sourcing boards from less than optimal mills. But we really got the lack of order downtime out of the way early in the quarter really in October.

Steve Chercover – D.A. Davidson: We know you’ve taken some maintenance in Q1. Can you discuss, I guess, just your orders trends in the first few weeks of January?

Mark S. Sutton – SVP, Industrial Packaging: For the box business in North America or in the U.S., the order trends look about like we expected. So, for us we’ve been tracking probably a little lower than the overall market and in the box market in the U.S. and that’s kind of what we are seeing. But I’ll remind you that the way we run the business is to try to maximize our potential through all three channels, North American box business, but also the open market and the export market for containerboard and we’ll constantly move between those three segments to optimize the business.

Steve Chercover – D.A. Davidson: Why do you think you’re running a little below the North American trend, is it just that you’re turning away bad business?

Mark S. Sutton – SVP, Industrial Packaging: I think if you think about what we’ve been doing in the last year, obviously, we took on a lot of new business with the former Temple business. There’s a lot of integration activities on the commercial side. Not all of that business met our objectives in terms of capability or economics and so, in order to make improvements in the business we have to make choices and we’ve been doing that and probably continue to do that for a period of time until we have the best mix for international paper and the best service for our customers. So, it’s not anything that we are alarmed by, it’s part of the process of optimizing the new Company that we built.

John V. Faraci – Chairman and CEO: Another point Steve is we’re underweighted in durables relative to maybe the overall market and over weighted in non-durables, so, as you get the slowing impact to housing which is going to significant on the durable side, we’re under represented there and we’re probably going to grow that durable segment over time, selectively.

A Closer Look: International Paper Earnings Cheat Sheet>>