International Paper Co (IP) 2004 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q2 2004 Temple-Inland Earnings Conference Call. My name is Carlo and I will be your coordinator for today. At this time, all participants are in a listen only mode and we'll be facilitating a question and answer session towards the end of this presentation. If at any time during this call you require assistance, feel free to press star followed by a zero and the coordinator will be happy to assist you. I would now like to turn this presentation over to your host for today's call Mr. Chris Nines, Director Of Investor Relations. Please proceed sir.

Good morning. My name is Chris Nines, Director Of Investor Relations for Temple-Inland. I would like to welcome each of you for having joined us by conference call or Webcast this morning to discuss the results for Second Quarter 2004.

Joining me this morning are Kenny Jastrow, Chairman and CEO of Temple-Inland and Richard Warner, President. Please read the warning statements in our press release and our slides concerning forward-looking statements, as we will make forward-looking statements during this presentation this morning. The format this morning is for Kenny Jastrow to give a 15 to 20 minute presentation on the results for the second quarter. At the completion of his presentation, we will be happy to take your questions. Thanks again for your interest in Temple-Inland and I would now like to turn the call over to Kenny Jastrow. Kenny?

Chris, thank you and thanks to all of you for joining us this morning. Net income in the second quarter was $56 million compared to $156 million in the second quarter of 2003 and $13 million in the first quarter of 2004. On earnings per share basis, second quarter 2004 was 99 cents. Second quarter of 2003 was $2.87 and the first quarter of 2004, 24 cents.

On the second quarter of 2004, special items totaled a loss of 6 cents per share. Our first box plant exposures in debt repayment fees of $4 million or 7 cents per share were included as special items. And also an income item from discontinued operations of $1 million was included, which equated to 1 cent per share. So for the quarter a loss of 6 cents per share on special items. In terms of the second quarter of 2003, special items totaled a positive $2.77 per share. There was a one-time tax benefit of $165 million, which equated to a positive $3.05 per share. And I might remind you that had to do with the exposure of IRS on the tax years through 1996. Also in the second quarter of 2003, special items relating to project TIP totaled $15 million negative or 28 cents per share.

During the quarter, second quarter of 2004, debt and other long-term liabilities including timber leases were reduced by $117 million and cash increased $36 million. Now let me walk you through a comparison of second quarter results excluding special items. In the second quarter of 2004, excluding special items of 6 cents, net income per share was $1.05. This compares to net income per share excluding special items in the second quarter of 2003 of 10 cents. And 44 cents excluding special items or earnings per share in the first quarter of 2004.

On a segment basis corrugated packaging in the second quarter 2004, earned $26 million compared to $7 million in the second of quarter 2003 and $10 million in the first quarter 2004. Forest products earnings were $65 million in the second quarter of 2004, compared to $15 million compared to the second quarter of 2003 and $32 million in the first quarter of 2004. Financial-services reported $59 million in earnings in the second quarter of 2004 compared to $44 million in the second quarter of 2003 and $53 million in the first quarter of 2004. Making total operating income in the second quarter of 2004 $150 million, compared to $66 million in the second quarter of '03 and $95 million in the first quarter of '04.

I might make note that both forest products and financial services achieved record results for the quarter. Now let me turn to Corrugated Packaging. Our operating income in the second quarter was $26 million compared to $7 million in the second quarter of '03 and $10 million in the first quarter of '04. On the price front, average box prices were down $22 a ton versus second quarter of 2003, but up $4 a ton versus first quarter of 2004. Let me comment about price before I move on to volume.

In the second quarter, price was $4 on average above the first quarter. However, during the first quarter, prices actually declined where the average in the second quarter was actually $7 above the low point in the first quarter. At the end of the second quarter, prices were $20 above the low for the first quarter. During the third quarter we expect price increases to reflect the first price increase of $45. We are now in the process of implementing a second price increase of $50. We expect this price increase to be reflected in the third and fourth quarter as we move through the customer base and that would of course exclude customers who have changed dates after the first of the year.

On the volume front, volume on a per workday basis, shipments were up 7.9% in the second quarter of 2004 with 4 less box plants compared with second quarter of 2003 and up 7% compared to first quarter of 2004. Industry shipments were up 4.2% on a volume per workday basis in the second quarter of 2004, compared with second quarter of 2003 and up 4.5% compared with the first quarter of 2004.

OCC, their prices were up $21 a ton versus second quarter of 2003 and up $13 a ton versus first quarter of 2004. I might add that OCC prices currently are in the $118 range. Energy costs were down $1 million versus the second quarter of '03 and the first quarter of '04. Pension expense was up $2 million versus the second quarter of 2003.

Now Corrugated Packaging improvements, let me make a comment in comparing the second quarter of 2004 with the second quarter of 2003. Market factors such as pricing and OCC had a $28 million negative impact quarter over quarter. However, these factors were more than offset by reductions in the mill and converting costs and increased box volume, which resulted in approximately $47 million in improvements, quarter over quarter.

Forest products. Operating income for the second quarter of 2004 was $65 million. And as I mentioned earlier, this was a record quarter for this group. This compares to $15 million in the second quarter 2003 and $32 million in the first quarter of 2004. On the price front, average prices are up $81 lot versus the second quarter of 2003 and up $45 versus the first quarter 2004. I might add also in looking at pricing on a current basis, today lumber pricing is approximately $25 below the average for the second quarter. On a volume basis, we were up 8% versus the second quarter of 2003 but down 1% versus the first quarter 2004.

Particleboard. Average price was up $59 versus the second quarter 2003 and up $37 versus the second quarter 2004. Excluding the Mt. Jewett facility, which was closed in the second quarter of 2003, volume was up 17% versus the second quarter of 2003. And up 1% versus the first quarter of 2004. MDF. Average price was up $48 versus the second quarter of 2003 and up $35 versus the first quarter of 2004. Excluding the Clarion facility which was closed in the third quarter of 2003 and sold during the second quarter 2004, volume was up 28% versus the second quarter of 2003 and up 19% versus the first quarter of 2004.

Gypsum arena, the average price was up $27 versus the second quarter 2003 and up $9 versus the first quarter of 2004. Volume was up 35% versus the second quarter of '03 and up 15% versus the first quarter of '04. High-value land sales. $6 million was resulted from high-value land sales in the second quarter of 2004 compared to $5 million in the second quarter '03 and $3 million in the first quarter of 2004. Average sales price for the second quarter of 2004 was approximately $7000 per acre.

Financial Services operating income in the second quarter of 2004 was $59 million and like building products, this was a record quarter for Financial Services. This compares to the second quarter of 2003 of $44 million and first quarter 2004 of $53 million. Improvement in second quarter 2004 earnings compared with second quarter 2003, were favorable for the following reasons: Spreads had increased during the quarter, the revised asset allocations targets designed to increase single-family mortgage assets has had a positive impact. Also lower loan loss provisions resulting from improved credit conditions over the second quarter. And also we have a continued focus on low costs.

Now looking forward to the third quarter. Refinance activity has slowed down given the changes in interest rate. We are in the process of lowering costs on our mortgage operations by downsizing. And we are also in the process of repositioning the mortgage origination group, to primarily generate loan volumes for Guaranty Bank. We expect third quarter earnings in '04 to be in line with third quarter 2003 earnings of approximately $50 million. Project TIP, which is our shared services and supply chain initiatives to lower costs created $14 million in savings during the second quarter 2004, representing an annual run rate of $56 million. $60 million in annual savings from projected TIP consolidation and supply chain initiatives are on schedule to be realized by year-end 2004 and on target to achieve $75 million by year-end 2005. Let me make a couple of comments and then I'll take the questions.

First, I'd like to make comments about our box plants cost improvement initiatives. First of all, in terms of headcount reduction, over 300 positions were eliminated in the fourth quarter of 2003, which resulted in an annual savings of $20 million or $5 million in the second quarter 2004. Our box plant closures, the savings associated with previous box plants closures were $4 million during the second quarter of 2004 and represented annual savings of $16 million. Raleigh box plant was closed during the second quarter of 2004 and we have announced the closure of Louisville, Mishawaka and Rock Hill box plants over the third quarter of 2004. And I would remind you that even though we've had closures of box plants, our volume has been up. All and all, it was a good quarter for us. We are beginning to see the convergence of strategic initiatives and improving market conditions.

With that, I'll be happy to take questions from those who are listening in.

Thank you, sir. Ladies and gentlemen if you wish to ask a question at this time, please press star followed by 1 on your touchtone telephone. If your question has been answered or you wish to withdraw your registration, then press star 2. We will take questions in the order they are received. Once again, star 1 at this time for any questions. One moment please. Sir, your first question is from Mark Connelly with Credit Suisse First Boston.

Thank you. Just a couple of things. Can you tell us -- I'd appreciate the detail on the prices in gypsum and MDF? Can you tell us what your operating rates on those businesses are and whether you expect similar results based on business conditions now for Q3?

Mark, I would say to you that business conditions remain firm and we would anticipate that the third quarter would continue on in that mode.

OK. Thank you. And Container Board. Can you give us a sense of the operating rates at your mills and how full your box plants are running right now?

Well, part of the objective that we have that with an integration in strategy is to have an internal demand for boxes that keep our mills running full. And that began to materialize in the third quarter of 2003 and continues today. So from a mill perspective, we're hustling to keep up with our box demand. Now, relative to the box plants, we have initiatives to increase asset utilization by in fact closing down box plants transferring customer accounts to nearby box plants and thereby increase asset utilization. I think the results both in the first quarter of this year and also in the second quarter indicate success for that project that not only have we shut down box plants, but also volume has grown. I think there are 3 key initiatives that have allowed that strategy to be effective. First of all, we have consistent quality throughout our box plant system. Secondly, we have a large systems so that we have the ability to in fact transfer customers to nearby located box plants. And thirdly, we have a state of the art technology system that allows these transfers to essentially to be seamless for customers. So we have shut down 4 box plants as I indicated. And we are in fact -- and have announced the closure of 4 more.

OK, and one last question. Can you give us a sense of how much the lower loan loss reserve would have contributed to Q2?

I said in my comments that I thought the third quarter of 2004 would be similar to the third quarter of 2003 and that's the only guidance that we want to give.

Fair enough. Thanks Kenny.

Sir, your next question is from George Stavros (ph) with Bank of America.

Good morning. Kenny, just following on that question from Mark. Can you at least tell us what the loan loss looked like relative to charge-offs?

Say that question again. I'm sorry I didn't hear you, Geroge.

Just loan loss reserves relative to charge-offs?

Well, over time, the loan loss reserve and the charge-off vary, George, because ultimately loan losses do transfer into charge-offs. I can't give you the specifics of exactly what they were in the quarter but over a long time, they essentially merge.

OK, fair enough. I would say over the last couple of quarters though, you've been provisioning below the charge-offs. So ultimately, we should see that catch up?

Well, no. It goes in reverse. You basically set the loan-loss up first and then you have charge-offs.

Correct. Fair enough. I'll pick it up off line.

OK.

Thanks, Kenny. Now, in terms of the retention rate on your box plant closures and the volume's been terrific. What do you think you've been keeping off the volume? Has it been moving? Has it been well in excess of 90%?

Well, I think what's instructive is that our volumes grow at 7% in the quarter compared to industry volumes despite the fact that we have a 4 less box plants. So I think it's reflective of the fact that our ability to execute this strategy seems to be working and it's for the 3 reasons that I gave earlier.

OK. So, just to finalize it then. Your retention rate's been well over 90% then?

Then, good. I can't give you the exact number.

OK. Fair enough. Last question. In terms of the volume growth you're seeing by end market, are there any standouts?

No, I think the market conditions are reflective of the U.S. Economy's growth. And I'd say to you it's not a specific area but rather the fact that the U.S. Economy has done better this year.

Are your customers getting a sense that their customers are starting to rebuild inventories as would be normal in this case or are they truly seeing, you know, 7%/8% increase in consumption out there year-on-year?

I think the market is reflective of the pickup in the economy.

OK. Thanks Kenny. Good quarter.

Thank you.

Sir, your next question is from Richard Schneider with UBS.

Kenny, I was wondering if you could talk about the improvement in Corrugated Packaging in the second quarter versus first quarter. There is a lot of moving parts. I know you said you picked up about $4 million in lower costs because of the closure of box plants. But pricing didn't help you much and that was largely offset by the rise in the OCC costs. Yet you ticked up $16 million in improve profits in the second quarter. Should we assume that almost entirely that improvement was due to the 7% improvement in volume of second quarter over the first?

Rich, if you look at the first quarter of '04 compared to the second quarter of '04, market factors such as OCC and price actually were a negative of $4 million. However volume, mill and converting cost quarter to quarter were $20 million improved, netting $16 million.

The and of that, you know, $20 million you said volume and cost played a part. Was volume the predominant factor in that $20 million improvement?

Say it again rich.

Of that $20 million that you indicated was beyond price and cost, was it predominantly volume that drove that $20 million?

That $20 million is volume, mill and converting costs altogether.

OK. OK. Can you talk about the, you know, your views on how the price increases are going through and how much of a struggle is it and do you feel comfortable being able to pass through the containerboard increase?

First of all, I made comments about our price initiatives in my comments. And I'd say to you that we are now in the process of implementing the second price increase. I think a couple of things are noteworthy. First of all, certainly some of the arrangements with customers are based on publication prices and when you look at publications, there have been several increased prices reported. So it has been staged over time, not all one time. Secondly, we are an integrated company. And we have over 10,000 customers. So it takes time for price increases to work through the system. As I said in my comments, we are working through the second price increase now in the third and fourth quarters. And other than those accounts that have changed dates after the first of the year, we are working through those accounts due to the $50 increase.

OK. On the saving you made about lowering your mortgage operation costs. Can give us a figure as to how much you are trying to take that out of the cost structure there?

Well, it's still work in process, Rich. But in the mortgage business, refinance activity creates a very strong volume for which you got to stack up for and then when refinance activity begins to slow down, then the reverse happens. And we are actually in that mode as we speak. I would say to you, though, that as part of this process, we're going to reposition better origination group to focus primarily on originating products for the bank. So it's a 2-phased process as far as the one that's under way.

And just last, another strong quarter of debt repayment. Cash flow is extremely strong for you. Should we continue to look for continued debt repayment over the next couple quarters?

We have a $100 million in debt coming due in September which we will pay with cash on hand and cash flow between now and then. And then, you know, over a longer term, we obviously look to grow our businesses. As I have said in the past, part of our capital decisions certainly include the payment of a dividend which we think is important. So all of the above.

Okay. Thank you. Great quarter.

Thank you.

Sir, your next question is from Mark Winthrop (ph) with Buckingham Research.

Thank you. Kenny, first you told us where lumber prices are relative to the second quarter. Where would gypsum, MDF and particleboard roughly be?

They're roughly in the range of where the second quarter averages were. Lumber has actually come off at $25 like you said, Mark.

OK. Are there any more price initiatives in gypsum on the table?

Yes, there are some price initiatives out that in the $10 range and gypsum market's are strong.

OK. And, Kenny, you mentioned your -- the price I think was now $118 for OCC?

Absolutely right.

Where was that on average in the second quarter?

I don't know that I have that information, Mark. Maybe we'll give that to you off line. I don't have that -- I don't have that in my fingertips.

OK. Terrific. And lastly, on the corrugated pricing, I think you indicated that your prices at the end of the quarter were about $20 higher than the low point in the quarter which, given that the $45 first board increase and then subsequent $50, if you were to be able to pass through all of the board increase would suggest that there could be as much as $75 per ton. Is it realistic to expect a substantial portion or all of that to essentially be in place over the next couple of quarters as all the contracts et cetera roll through? Or in the early stage of the price increases, there is sometimes slippage in putting all those price increases through to the boxes.

As I said in my comments, we would expect a third quarter would reflect the first price increase and that during the third and fourth quarter, we're implementing the second price increase and of course, we do have a significant amount of customers. So we have to work it through the system. And it takes time to do that, especially those contracts that have changed dates, that may be after the first of the year. So it's working through the system.

OK. Thanks Kenny.

And sir, your next question is from Chip Dillon with Smith Barney.

Yes -- excuse me -- good morning. The building products segment, I just had a question on the future. And you mentioned that the lumber prices were, as you put it, currently $25 below and I know it's different from different regions. In the last weeks we have seen randomly from positive, a goal of about 9% in the last Friday was actually a $1 above it averaged in the second quarter. And I wondering if you had included, excuse me, any of this 2-week rally in lumber in that comment or was this sort of a number that was gathered before that? And then as we -- and the second part of that question on lumber, do you have any views on the volumes in the third quarter? You mentioned the second quarter is, you know, backed off a bit from the first quarter. Does the other quarter typically stay the same as the second or do we see it go up or down from the second?

Well, relative to your first question, I gave you where our (inaudible). On the volume side, obviously until we work through the quarter you don't know. But housing markets continue to be strong and at least currently, volumes are strong.

OK . And you do sell most of your lumber, I guess, in the southeast and southwest. And I know Weyerhaeuser, one company, mentioned that the home building activity was very strong except they noticed, Houston had been a little slower. Have you noticed any regional changes in demand this year versus, say last year?

Well, markets obviously go up and down, Chip. But I'll say to you, we have a southeast location for converting in forest. So the most of what we produce in terms of lumber goes in these markets. But it's not exclusively to Houston. It's a wide swath that we sell lumber in terms of market. So, as I said earlier, markets still seem good and home building moves on.

OK. And then, shifting gears and looking at financial-services, you know, the Fed funds for (inaudible) and most people out there expect the Fed to be steadily or I guess, the --using their words, moderately raising short-term rates. You know, let's say we get, you know the, another 75, excuse me, or 100 basis points in the next, you know 6/12 months. How would that affect Guaranty. I mean, one fair argument, it'd actually help you because the interest in income would go up maybe faster than the interest expense since I guess some of your deposits are not as sensitive to interest rates, when they're this low. Could you talk about that?

Yes. Currently, the Fed has signaled its intent to look at the increasing interest rates given market factors. I would say two things have -- are at play here. First of all, as I mentioned, clearly as rates increase, refinance activity slows down. So you have to take steps to change your cost structure particularly in the mortgage operation, which we are doing. Secondly, in today's environment, as you said, the bank is slightly asset sensitive meaning if the rates go up, there will be a little positive movement because of the way things are re-priced. But in general, we intend, and have for many years, managed the Financial Services Group, particularly the bank, on a very low interest rate risk profile so that interest-rate risks generally do not affect the bank's profitability.

OK. Thank you.

Sir, your next question is from Mark Wilde with Deutsche Bank.

Good morning Kenny.

Good morning.

Congratulations on a very good quarter.

Thank you.

I wondered whether you can give us a little more color over on the paper side of the business? And just that mill operating rate question I came up earlier. As I recall, you pretty much were running flat out in the first quarter because of the integration level. And I assume that's the same for the second quarter and I just wondered incrementally what you're able to pick up right now?

As I said, Mark, beginning in the third quarter of 2003, when we finally got the full integration of Gaylord put together, we began to run full. And as I said, that has continued on through the fourth, first and now second quarter. And of course that's the objective with having an integrated strategy. As I said, it's to have an internal demand that keeps those locks (ph), that keeps the mills running full.

And I guess, what I'm asking, Kenny, is just, you know, incrementally what are you able to squeeze out? You and Pat and his team there now, is a 100 percent today, you know, mean 3% more volume than it did one year ago?

We are running some more volume, Mark, but that is a -- the main objective is to run full.

OK. I'm just trying to get a sense of, you know, what outlook looks like, if that's possible. OK. Kenny, can you also give us a little color, when you closed these box plants. Do you have a certain rule of thumb number as to, you know, how much cost you're able to take out assuming that you, hold on to three-quarters or 90 percent of the business?

I made a comment in the prepared part of the presentation that during the second quarter that roughly $4 million had been achieved on the closure of box plants. So that each one is obviously different, Mark, because what you basically do is eliminate fixed cost. And all fixed costs are not exactly the same for box plants. But that was intended to give you a little bit of a order of magnitude of cost savings that are potential (ph).

OK. And then finally, Kenny, would you like to provide any more color on the - this progress on the HBU land sales? You said you, you had $6 million in the quarter. Any thoughts on kind of, the next couple of quarters on whether this is shaping up to be a better program than you had expected?

Each quarter, Mark, we will indicate what we have done and that will be our pattern going forwards. In the second quarter, there was earnings of about $6 million as indicated, but I think more instructively, the average selling price was 7000 per acre.

Any thoughts going forward then?

No, we don't plan to make a comment on this.

OK. Very good. Thanks.

And Sir, your next question is from Peter Ruschmeier with Lehman Brothers.

Thanks. Good morning. And congratulations on a terrific quarter, Kenny.

Thank you.

I wanted to maybe follow up on Mark's question on the HBU program. Can you remind us how much you've identified as HBU land? I believe it's somewhere around t this summer and 13% of portfolio?

Yes, we actually started out, Pete, with about a 160,000 acres in the high-value land area. We have sold some over the last year /year and half. But today, we have added to that. So that's approximately 173,000 acres is the number we used for the amount of land in the high value portfolio.

And can you comment on the trends? The price per acre trends have been pretty astounding, I think, in the last year to two. Is it a coincidence? Is it a function of the mix that you just happen to be selling some particularly high-value land? Or is it more a function of the trend that you're seeing? It just seems like, a year or so ago we were seeing $3000/$4000/$5,000 and now we're seeing $6000 or $7000 an acre?

I think several things are at play. First of all, when we talk about high-value land, we mean land that we are working to create user value. User value comes from infrastructure, roads, water, sewer, et cetera. High-value land, once it becomes user value is not all the same. There is some that might be used for housing some that might be used for commercial. So, a lot of the valuation would be dependent upon how the land's ultimate user value is amalgamated. So that -- some of this is a mix issue. But in general, as Atlanta grows, which is where most of this land is located, as you know, clearly it could have impact on valuations. So I think you're saying, at play all of the above. And as I said, we now have a group of real-estate professionals over the last year and a half/2 years working on these tracks to continue the efforts to bring user values.

OK. Just a follow-up, if I could. On capital spending. I know your funds flow statement is not available, but do you have a capital spending figure for the quarter and more importantly, can give us a sense as to whether your guidance has changed for the year? And I guess, the longer-term question would be, do you change your Capex outlook at all? Historically, investors always worry that improving profits will lead to a ramp in Capex. You really have very, very strong free cash flow and it just seems like to have a high cost problem of figuring out what to do with that cash flow. And I'm just hoping for some reassurance, I guess, on the Capex front.

We have said in the past and we'll say again that we generally expect Capex to be in the range of 75% of depreciation. Now that's on a long-term basis. For this year, it will be higher than that because we had to carryover our projects from last year, where we underspent 75%. But I think, on a long-term basis as we said here today, we view 75% of depreciation as a good proxy for what Capex would be. Relative to cash flow, I gave you what we did in the quarter relative to net repayment and timber lease productions as well as cash increases which amounted to $153 million.

OK. and I'm sorry, just more broadly, though. I'm just trying to better understand your thought process given that you do have an extremely strong free cash flow, it looks like the visibility is quite good, going forward. If you are bouncing around 75% of Capex, do you see growth opportunities in terms of acquisitions? Or is there a new change coming where we're likely to see a much more aggressive dividend payouts from the company? Or I'm just kind of struggling to understand if these conditions today continue, what is the strategy of the company going to be?

Well ...

Measuring free cash flow?

Right. First of all, I think we've bee consistent saying that as we go forwards and look to the future, certainly we would anticipate and like thank you grow our businesses. Having said that, though, we are very disciplined on ROI so that as we look at growth opportunities, it is not growth for growth's sake, but rather to drive shareholder value and shareholder return. Secondly, we think it's important pay a dividend. We raised our dividend in '04. we raised our dividend in '03, and it's something we will continue to look at in terms of dividends going forwards. So as I say, it is sort of, all the above. But we are disciplined in growth opportunities to drive shareholder value.

Great. Congratulations on a good quarter.

Thank you.

Sir, you have no further questions at this time. I'll turn the call back over to you.

Thank you all for joining us this morning. We appreciate your attendance and we are now adjourned. Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect.