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VOL. 128 | NO. 180 | Monday, September 16, 2013

International Paper Keeps Eye on Rainy Summer

By Bill Dries

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The president and CEO of Memphis-based International Paper Co. has been watching the weather a lot lately.

FARACI

John Faraci, in a session with analysts and investors at a UBS gathering last week, said the wettest summer since 1895 is causing the global paper company some headwinds for the third quarter.

“We’re on track in the Southeast … of having the wettest year since 1895. … That really started to happen at the end of May,” Faraci said at the Thursday, Sept. 12, event. “What that’s meant is our wood costs, particularly hardwood – they are going to rise a lot more significantly than we thought.”

It means IP will probably end up spending about $20 million to $30 million more than it anticipated. But Faraci emphasized the problem shouldn’t have lasting effects on the company.

“It’s seasonal,” he said. “Eventually it will dry out and we won’t have to go as far to get hardwood. But our inventories are coming down.”

Faraci talked with analysts the day after the company announced it would close its Courtland, Ala., paper mill in phases, leaving 1,100 workers in the town east of Muscle Shoals out of work by the spring of 2014.

“We knew we were going to have to shrink our footprint to match our supply with our demand,” Faraci said of the decision to close one of five U.S. mills to account for a drop in demand for its uncoated freesheet paper products, which are called “printing papers.”

The printing papers are used in copiers and computers as well as business forms and envelopes and textbooks.

Printing papers once accounted for 20 percent of International Paper’s EBIDA – earnings before interest, depreciation and amortization, according to Faraci. Today, it’s 7 to 8 percent and will become a smaller percentage as International Paper makes growing those earnings a priority.

“We’ve built an International Paper that’s prepared to be successful and grow out EBIDA,” Faraci told the analysts and investors who questioned whether the decision in Courtland reflected any further transformation plans for the company’s overall footprint.

“We’re on track in the Southeast ... of having the wettest year since 1895. ... What that’s meant is our wood costs, particularly hardwood — they are going to rise a lot more significantly than we thought.”

– John Faraci

Faraci said it didn’t, adding the company’s multi-year transformation is considered complete.

The recent acquisition of Temple-Inland, IP’s one-time Austin, Texas, rival, has moved from integration to optimizing an industrial packaging business that has grown to become a $12 billion a year business. Faraci referred to the business as the company’s equivalent of an “aircraft carrier” in its portfolio of paper businesses.

Still in progress are talks about International Paper’s printing distribution business, xpedx, merging with Unisource of Atlanta. Both sides in the talks went public with the discussions in April.

“Think of this as two private companies merging and going public,” Faraci said last week. “Bain (Capital) approached us with a transaction. We thought it could make sense to us. It’s not something we have to do.”

Bain now has audited financial statements on xpedx, according to Faraci. And the talks, which already have anti-trust clearance, are now focused on how the organization would be built.

When the two companies signed a letter of intent on the talks in April, executives from each talked of a new spin-off company on the IP side, which would then merge with Unisource. The resulting combined company would be publicly traded, independent of IP or Unisource. And both sides said then their expectation was that a combination of executives from the two old entities would lead the new company.

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