International Paper Co (IP) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to your fourth-quarter 2004 Temple-Inland earnings conference call. My name is Bernie and I would be your coordinator today. At this time, all participants are in a listen-only mode and we will be conducting a question-and-answer session at the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, Mr. Chris Nines, Director of Investor Relations. please proceed, sir.

Good morning. My name is Chris Nines, Director of Investor Relations for Temple-Inland, and I would like to welcome each of you who have joined us by conference call or webcast this morning to discuss the results for fourth-quarter and full year 2004. Joining me this morning are Kenny Jastrow, Chairman and CEO of Temple-Inland, Richard Warner, President, and Doyle Simons, Chief Administrative Officer.

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. The format this morning is for Kenny Jastrow to give a 15 to 20 minute presentation on the results for the fourth quarter and full year 2004. After 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?

Thank you, Chris. Let me also welcome everyone to our call this morning. We appreciate your interest in Temple-Inland.

Looking at the fourth-quarter results, which we just released earlier this morning, net income for the fourth quarter was $55 million, versus a loss of 39 million in the fourth quarter of 2003 and 41 million in the third quarter of 2004. EPS was 97 cents for the quarter versus the fourth quarter '03 of a loss of 71 cents, and third quarter '04 of 73 cents.

Now, in the fourth quarter of 2004, special items totaled 8 cents per share, made up of the following -- first, repositioning of the mortgage activities resulted in a charge of $8 million, or 14 cents per share; converting facility closures and Project TIP resulted in a charge of $7 million, or 12 cents per share. Also during the quarter, because of the resolution of IRS exams for years 1997 through 2000 in state tax returns, a benefit of $20 million or 34 cents per share was noted.

Now, looking at the fourth-quarter results, excluding special items, earnings per share were 89 cents for the quarter, versus 40 cents for 2003 fourth quarter and for the third quarter of 2004, net income, excluding special items, was 99 cents per share.

On a segment basis, corrugated packaging recorded 27 million in the fourth quarter of 2004 compared with a loss of 5 million in the fourth quarter of 2003 and 42 million the third quarter of 2004. Forest Products was $50 million in the fourth quarter of 2004 and I might add, this is the best fourth quarter that Forest Products has ever had. The 50 million in the fourth quarter of 2004 was compared to 35 million the fourth quarter of 2003 and 68 million the third quarter of 2004.

For financial services, earnings in the fourth quarter were $58 million, and let me also note that this was the best fourth quarter that financial services has recorded. The 58 million in the fourth quarter of 2004 compares to 54 million the fourth quarter of 2003 and 37 million in the third quarter, 2004.

Now turning to corrugated packaging, operating income for the fourth quarter of 2004 was $27 million. This compares, as I said earlier, to a loss of 5 million in the fourth quarter of 2003 and $42 million in operating income third quarter of 2003.

On the price front, the fourth-quarter average box price was up $57 versus fourth-quarter of 2003 average. The fourth-quarter average box price was up $63 a ton versus first-quarter 2004 average. The fourth-quarter average box price was up $26 a ton versus third-quarter 2004 average.

Volume -- on a volume-per-workday basis, shipments were up 5 percent in the fourth quarter of 2004, compared with shipments in fourth quarter of 2003 and up 1 percent compared with third-quarter, 2004 levels. On an actual basis, shipments were down 4 percent compared with third quarter 2004, due primarily to 3 less shipping days.

For 2004, on a volume-per-workday basis, Temple-Inland shipments were up 6 percent compared with industry growth of 3 percent despite the closure of 7 box plants since the third quarter of 2003.

Recycled fiber -- prices were up $20 a ton versus fourth quarter of 2003 and down $2 a ton versus third quarter of 2004.

OCC is in the range of around $115 to $120 a ton.

On a reconciliation basis, you can see the third quarter of $42 million. Compared to fourth quarter, price accounted for $20 million. Major mill maintenance and optimization -- and this had to do primarily with the outages at our mills for maintenance -- was $15 million. Volume was a -$8 million, and higher costs, primarily energy and health care, were a negative of $20 million, resulting in fourth-quarter of 2004 operating income of $27 million.

Now, before leaving corrugated packaging, let me give some color on markets and our first quarter of 2005. Box markets are in good shape. There has been some interruption for weather in Florida and California but generally, we view markets as in good shape. Secondly, despite cost pressures, we anticipate improved results in the first quarter of 2005, compared to the fourth quarter of 2004, from our corrugated packaging group.

Now, let me turn to Forest Products. Operating income in the fourth quarter of 2004 was $50 million. Once again, this is the best fourth quarter that Forest Products has had. The $50 million compares to $35 million in the fourth quarter of 2003 and $68 million in the third quarter of 2004.

Lumber -- the average price was up $9 versus the fourth quarter of 2003 but down $28 versus the third quarter of 2004. Volume was down 1 percent versus the fourth quarter of 2003 and down 8 percent versus the third quarter of 2004. I might note that, in January, lumber prices are just slightly down from the fourth-quarter average by approximately $3.

Particleboard -- the average price was up $67 versus the fourth quarter of 2003 but down 17 versus the third quarter of 2004. Volume was down 11 percent versus the fourth quarter of 2003 and down 3 percent versus the third quarter of 2004.

MDF -- the average price was up $68 versus the fourth quarter of 2003 but down $9 versus the third quarter of 2004. Volume was down 5 percent versus the fourth quarter of 2003 and down 7 percent versus the third quarter of 2004.

Gypsum -- average price was up $19 versus the fourth quarter of 2003 but down $2 versus the third quarter of 2004. Volume was up 14 percent versus the fourth quarter of 2003 but down 4 percent versus the third quarter of 2004. I make note that, currently, gypsum prices are up $3 versus the fourth-quarter average, reflecting strength in the gypsum market and a recent price increase in January.

On the high-value land front, $7 million in high-value land sales were recorded in the fourth quarter of 2004, versus 4 million in the fourth quarter of 2003 and 3 million in the third quarter of 2004. Average sales price was $7,500 an acre for the fourth quarter of 2004 and $7,000 an acre for the full year, 2004.

Turning now to financial services, operating income for the fourth quarter was $58 million. Once again, let me note that this is the best fourth quarter that financial services has turned in. Results in the fourth quarter were affected by spreads improving, the fact that we've continued to focus on low costs and that we had better-than-normal credit performance for the quarter. The 58 million in the fourth quarter of 2004 compares to 54 million in the fourth quarter of 2003 and 37 million in the third quarter of 2004. I might note that third-quarter 2004 income was negatively impacted by $15 million from the increase in the mortgage servicing valuation allowance.

Now, during the fourth quarter, the repositioning of the mortgage banking operation was completed. We sold or closed over 100 retail branch locations; we did complete the sale of the third-party mortgage-servicing portfolio. As a result of all of these repositioning activities, 1,500 positions or 35 percent of the workforce in financial services was eliminated. Now, we believe financial services is well-positioned to continue to deliver outstanding financial results going forward.

Now let me make some comments regarding the year. During the year, Project TIP annualized savings of $60 million were achieved. We anticipate, by year-end 2005, that a total of $75 million in savings will be achieved, and that was our forecasted level.

Box plant consolidation -- 7 box plants have been closed since the third quarter of 2003. Annual savings are $36 million in place at year-end, 2004, and we are on target to achieve $60 million forecasted by year-end of 2005. We will continue to stay focused on improving asset utilization, especially in box plants, which lowers the costs.

Pension expense in 2004 was $50 million, and we anticipate, for 2005, that pension expense will once again be $50 million.

Now, looking at the full year on a net income per diluted share, excluding special items, for 2004, EPS, including special items, was $3.37 compared to 63 cents for 2003. Debt and other long-term liabilities, including timber leases, were reduced $191 million in 2004.

On a full-year segment basis, corrugated packaging earned $105 million versus $11 million in 2003. Forest products earned $215 million in 2004, compared to $67 million in 2003. Financial Services earned $207 million in 2004, compared to $186 million in 2003. On a total basis, then, $527 million was the operating income from the segments in 2004, compared to $264 million in 2003.

Now, looking at corrugated packaging, 2004 versus 2003, market factors, box, board pricing, OCC, etc., on a year-over-year basis created a headwind of $49 million. However, through strategic initiatives, volume, mill and converting costs improved $143 million. The net improvement in this business, then, was $94 million for the year, driven by the business improvement of 143 million.

For 2004, forest products had record earnings of $215 million. For 2004, financial services had record earnings of $207 million.

Also, let me note that Friday, this pas Friday, that the Board of Directors of Temple-Inland increased the annual dividend from $1.44 per share to $1.80. This is the third increase in our dividend. Excuse me, this is the third increase in the last 3 years in our dividend. In addition to that, we paid a $1 special dividend in December, 2004. Also, the Board authorized a 6 million or 10 percent share repurchase program and approved a two-for-one stock split.

Let me conclude by saying that we remain focused at Temple-Inland on creating shareholder value. Now, with that, I will be happy to entertain questions and take your comments.

This begins your question-and-answer session. (OPERATOR INSTRUCTIONS). Rich Schneider of UBS.

Good morning, Kenny. If you look at your shipments of boxes in the quarter, they clearly were improved, year-over-year, over the kind of comparison you had in the third quarter, which was a little disappointing. Did you get back the volume that you may have lost in the third quarter?

Yes, there were differences in shipping days, Rich, between the quarters but as I said, trying to provide some color on the marketplace, we believe that box markets are in good shape.

Okay. Could you give us an idea of maybe what further carryover you may have in box prices going into the first quarter?

Well, let me make a general comment. I'm not going to make any forward-looking statements on price, but I will say to that, in our view, the U.S. economy looks to be in good shape for 2005, which is positive for our business. Secondly, supply and demand are in better balance. Thirdly, operating rates have improved. Finally, as I said, we believe box markets are in good shape.

Okay. Looking again to the first quarter, could you give us an idea of any downtime you are going to be taking there, as opposed to the 15 million hit that you took in the fourth quarter?

Rich, as you know, one of the things we've been working on is integrations, and we are the most integrated in the industry at over 100 percent. That strategy is intended to keep our mills running full because of our box plant demand. So, in the first quarter, we don't have any scheduled downtime for maintenance. The fourth quarter, we did take maintenance downtime at our large mills, and this created both cost and volume issues.

Then last on the share repurchase, you are looking to reduce shares by 6 million before you do the stock split; that seems to coincide well with the debts (ph) that are coming due in May. Do you sort of look at it as taking out the roughly 5.4 million shares that will come out with the conversion of the debts?

Well, we announced the share repurchase program to reflect our confidence in our strategy and I will say to you, as most of you know, that in 2000 we announced a share repurchase program and bought the shares back.

Mark Weintraub of Buckingham Research.

Thank you. First, Kenny, I just want to follow up on the box pricing side. You had pretty good progression in the fourth quarter relative to the third quarter. Was that at all mixed-affected or was that just kind of apples to apples comparison?

There's always some mix in any average pricing, Mark, depending on the relative position of box plants and sheet meters (ph), etc., but that just was the average that we experienced for the quarter.

Okay, but no significant mix impact that you can point to?

No, not anything out of the ordinary or unusual.

Then looking to the first quarter, you have a fair number national account customers, which I believe some of them reprice in January. I understand you don't want to give a prediction on what you price is going to be but I just want to clarify. Do some of those accounts, or at least a meaningful number of those accounts, reprice in January, or do I have that wrong?

Well, throughout the year, accounts price at different times, including January, but I don't want to make a comment relative to the mix of that. But yes, there are accounts that, throughout the year, price at different times.

Okay. On the cash side of the equation, I just wanted to, if I could, get what you cash tax rate in 2004 was and if you have a sense of where, given consensus estimates or whatever you want to use as a base, where your cash tax rate in 2005 most likely would come out.

Yes, Mark, as you know, we have benefited from some tax issues relative to recapturing A&P (ph), etc., and we would expect that, for 2005, that our cash tax rate would be roughly in the same neighborhood as previous years of 20 percent. I will say to you, though, we will ,at some point in time as earnings have improved, burn the A&P position and therefore return to a full tax rate. But for 2005, as best we can tell know, it looks like our cash tax rate could be roughly 20 percent.

On the topic of the cash flow items, CapEx versus DD&A for '05, if you have that handy?

I can give some color on that. As you know, we have generally targeted CapEx roughly in the 75 percent of the depreciation range, and that is a good proxy for long-term CapEx issues. You'll always have the issue of carryovers, etc., so that if you look over an expanded time, I would say 75 percent is a very good proxy. However, for next year, CapEx will be up slightly just because of carryovers. But then once we come out of the year, those carryovers should not translate going toward as heavy as they have coming from 2004.

Very good. Lastly then, on pension, you mentioned expense would come in roughly in line with this year at 50 million. I believe you had minimum contribution this year. Will that also be the case in '05?

We have pension expense of $50 million and although not required, we anticipate funding the expense.

In 2005?

Correct.

In 2004, had you contributed? Had you funded the expense or not?

We made a $15 million contribution in the fourth quarter.

Thank you very much.

Once again, not required.

Chip Dillon of Smith Barney.

Good morning. My question is, do you have any balance sheet numbers? We just wanted to know what your total debt was at the end of the year, short-term and long-term debt, obviously not counting the F&L and also what the cash balance was.

I don't have those numbers available to me here.

Okay. The second question was, I remember, about a couple of years ago, I was thinking a little bit about the natural gas consumption you have, I think down in 3 mills in Texas, and it seemed to me at the time that you all could probably spend roughly 20 million per mill and change I would guess your ability to be flexible in Texas. Have you done any of those projects? If so, how far along are you?

Let me answer that by looking back in time and maybe bringing you up to where we are today. In prior years, we burned about 25 million Mmbtus of gas and then, through the closure of Antioch and other that work we done, Mmbtus on an annual basis for the Company was roughly 20 million. We've actually done some projects as part of the optimization that I spoke about in the prepared remarks that will allow us to burn more bark, less gas, so that throughout this year we would anticipate achieving about a 10 percent reduction in gas usage this year.

Okay, I got you. Then next year, do you think that would drop further, based what your plans are or do you think it will stabilize there?

Well, the initial plans that we had were to grab this 10 percent reduction then we will just have to continue to evaluate future initiatives as we go through the year.

The last thing on S&L which had certainly a fabulous fourth quarter -- obviously we know that -- because you try to be careful, as you should be, early in the year with the credit quality initiatives and taking reserves. I would expect us not to see the first quarter be nearly as good, but would you expect it to be similar to a drop like we saw last year from the fourth to first?

Well, I would say to you that credit markets seem to have stabilized and I think, as we look forward to 2005, it would be more like a normal year.

Peter Ruschmeier of Lehman Brothers.

Thanks and good morning. A couple of questions -- I was curious if you could, maybe Kenny, give us an update on the balance of the NOL position.

Pete, I'm not sure I have those numbers available to me at this meeting. As I said earlier, as we look through the year, our cash tax rate, because A&Ps and NOLs, would be around 20 percent, but the fact that earnings have improved will burn through those so that, going toward after this year, we will begin to return to a more normal texture. But I can't give the specific numbers on that; I don't have them available.

Okay, but it sounds like, from your comments, you had expected, perhaps given a reasonably good year in 2005, that you could be a full cash taxpayer in 2006?

I think we will be heading towards that direction in 2006, correct.

Okay, fair enough. You mentioned your high-value land sales versus a year ago in 3Q. Do you have those figures available for full year '04 versus '03, and whether you have any guidance for '05?

I think I reported in the prepared remarks that, for '04, the average high-value land sales was $7,000 an acre with the fourth quarter at $7500 an acre. If I remember right -- and I am recalling now -- I think the average for 2003 was $6,500 an acre. Now, that's the remembrance, so cut me a little slack on that but I think that's correct.

I guess I was looking for the absolute dollar amount.

Oh. I don't have the number right here with me.

Maybe just lastly, you mentioned some of the trends for volume and price for MDF and particleboard. Any thoughts on why we are seeing such a big correction on the volume side? I mean, price, you would expect it to be down seasonally but volume was quite weak, even on a year-over-year basis for both businesses. Anything particular to note there?

No, I don't think there's any specific issues like we saw in years past where a lot of the RTA business moved offshore. I would say to you, both those businesses, though, had a better year this year and as a result of that are reflective of stronger markets.

Pete, I did find out that, for 2004, the total high-value land sales is $20 million.

Christopher Chung of Deutsche Bank.

Thanks, good morning. Kenny, I was just wondering if you'd care to comment on some big-picture strategic issues. You know, the possible sale of the bank has been on the table it seems like forever. I was wondering if you might discuss under what conditions you might consider divesting that, as well as your land base other than sort of the steady sale of your high-value land.

Let me answer your question this way -- at Temple-Inland, we are focused on creating long-term shareholder value, which is achieved by delivering superior and sustainable return on investment. Now, our strategy, which is a four-point strategy, is on target, and our strategy is to be market-driven, customer-oriented; next, we are focused on corrugated packaging from an integrated platform; third in the Forest Product area is to maximize value of timberlands through alignment of well-located converting operations and accelerated fiber growth and the development of significant real estate opportunities on high-value land; finally, fourth, the realization of earnings and cash flow from financial services, which is a low-cost, low-risk provider of financial product.

Now, we've been executing our strategy and earning and ROI are improving. We are focused on ROI and we're confident that we can create long-term value for shareholders through our strategic initiatives.

George Staphos of Banc of America Securities.

Maybe just following on that last question from Chris, you know, given the performance that you've seen over the last couple of years, what do you think perhaps the Street and investors miss about the strategy and so far its ability to deliver very good returns and cash flow?

I didn't hear your question, I'm sorry.

I apologize, I'll try it again. Thinking back on Chris' question, obviously Temple has put up some very good numbers the last couple of years. What do you think the Street and investors perhaps miss the most about your ability to deliver the financial performance you've put up from your strategy?

Well, I think that, if you look back over time, that clearly superior and sustainable returns drives shareholder value and as I said just a minute ago, we believe our strategy is on target, we have been executing our strategy, and as I pointed out in my prepared remarks, we had a very good year last year. We improved the corrugated packaging business by $143 million and we're working on initiatives to increase asset utilization, lower cost, coupled with the fact that now markets are improving and now prices actually increased throughout 2004. In addition to that, we have this wonderful and I think unique opportunity to monetize this growing fiber in our forest over time. We know that fiber could accelerate by 50 percent over the next 10 years and roughly double over the next 30 years, and with converting in place -- that being sawmills and paper mills -- we are uniquely positioned to monetize that fiber (inaudible) growth. Of course, if you have the high-value land sales that long-term as Atlanta continues to grow, this could be a significant opportunity for our Company. Finally the bank had a record year last year but quite honestly, it is positioned with deposit markets in Texas and California, the two highest growth markets -- it's positioned very well on the deposit side. With the economy improving, loan growth certainly appears to be a reasonable prospect. So as we look forward, I think as I said, we are confident in our direction and we're very focused on creating shareholder value.

Kenny, are you still envisioning sometime in the springtime getting investors together to go over your strategy?

Yes, we had planned to have a meeting to reflect on and provide more transparency on the high-value land issue and we still have plans to do that.

Okay. Two last quick ones and then I'll turn it over. In terms of thinking about maybe getting a little more transparency on FSG, how is that business going to look perhaps differently than what we saw in the fourth quarter, given that the repositioning is now completed?

Well, the repositioning in the bank was a strategic move to take out a lot of cost in the mortgage banking operations by repositioning the group to basically generate loans for the bank's portfolio. Now, as part of that, we also sold the third party servicing. I would say to you, had we done this earlier, the results of the bank would've been improved in 2004. So we clearly think it was the right move for us, not only from a cost standpoint but we also have a platform now that is not burdened with as much overhead.

Okay, and really the way to think about this is, adjusted for seasonality, the relative level of profitability shouldn't change that much on a going-forward basis, independent obviously of credit conditions?

Not because of the repositioning of the mortgage portfolio, as I said, lowers costs. As I've said many times, the profitability of the bank and therefore financial services is really driven by the asset size of the bank to the extent we can generate new loan volume and with spreads being managed on a duration basis, so that we don't take interest-rate risk, then earnings should track the size of the bank.

Last two quick ones -- what was net interest margin in the quarter and what was your reserve LLP?

I don't have the net interest margin at my hand here.

Okay, and reserves?

I don't have that figure either.

Edings Thibault of Morgan Stanley.

Thanks and good morning. Kenny, I was wondering if we could switch back to the corrugated business. You guys obviously had a very successful year in that when you look at 2004 as a whole growing share above the overall market, but that growth rate slowed a little bit in the fourth quarter. Is there any way you can help us in terms of understanding what your business exposure might be in that business that might have caused some of that weakness in the fourth quarter relative to the total box market? Or perhaps if you could just shed some light on that.

Well, I would say to you box markets are competitive and so, as we go throughout the year, any year, obviously we have competitive factors. We had a very good year in 2004, growing at 6 percent versus the industry's growth of 3 percent. I would say to you that we are very encouraged that that growth was accomplished with 7 last box plants. I said in my prepared remarks that we are very focused on this issue of asset utilization and think that there is more opportunity to continue to drive asset utilization and lower costs in this business while at the same time certainly price reflective of a better balance between supply and demand has been improving.

Absolutely. But when you look at that volume gain there, do you think that is -- is there a way you could help us out? Is that representative of new customers or does it increase shares at existing customers, or does it simply increase business by your existing customers?

All of the above. It's a combination of all of the above.

Finally, perhaps going now to a question that was asked earlier but a different way, can you talk about the change in your average box prize from September to December? I know you talked about the quarter-on-quarter average change but perhaps beginning of quarter to end of quarter?

In the remarks, I think I said that the fourth-quarter average box prize was up $26 a ton versus the third-quarter, 2004 average price.

Okay.

Fourth quarter was up $63 a ton versus first quarter, 2004.

No, I mean, those are average prices. Can you give us some additional guidance perhaps on where the average price in December was versus September?

We are going to just communicate our average price for the quarter.

Your final question comes from John Tumazos of Prudential.

Congratulations on all the progress in your results and even some of the extra external attention you've been getting. There may be people in the markets who try to value the land or Savings and Loan as though it were sold. Of course, there would be tax obligations if something were sold. Probably the best way to sidestep tax obligations would be to distribute your land or your Savings and Loan to shareholders, but there is some uncertainty as to where the smallest in our small timber company would trade for it in the market, you know, not as prominent as some of the bigger ones. I know you've stated continuously that you want to keep an integrated whole for long-term shareholder value. Are there any other ways that you might move to realize value? I'm sure that some of your shareholders have offered you suggestions from time to time.

Well, John, I think that, if you look long-term at shareholder value issues, I don't think there's any questions that delivering superior and sustainable return on investment is the key. Our strategic focus is on-target; our businesses contribute to that so that we firmly believe the best way to create shareholder value is to deliver superior and sustainable return and that's what we are focused on.

We appreciate your interest in Temple-Inland, and we now will adjourn. Thank you.

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