“2012 WAS AN IMPORTANT TRANSITION YEAR FOR INTERNATIONAL PAPER. I BELIEVE NO OTHER COMPANY IN OUR INDUSTRY IS AS WELL-POSITIONED TO CREATE VALUE FOR OUR SHAREOWNERS ON A GLOBAL SCALE-OR COMPETE AS SUCCESSFULLY IN OUR DOMESTIC MARKET IN BOTH PACKAGING AND PAPER.”
Chairman and Chief Executive Officer
For International Paper, 2012 was marked by strong execution and good results against a challenging global economic backdrop. We delivered our second best earnings per share1 since 1995 and generated record cash from operations. Shareowners benefited from strong free cash flow as International Paper raised the dividend 14 percent in 2012 and maintained a strong balance sheet, retiring $1.9 billion in debt. International Paper’s success was bolstered by industry leading margins in our Industrial Packaging business, as well as record revenue and earnings performance in both IP Russia and our Foodservice business.
Strong performance in a challenging and unpredictable economic environment is the result of International Paper’s strategic positioning and global balance. However, we should not be measured by prior results. We should instead be defined by Our Path Forward.
In 2012, we shared with investors International Paper’s plan to reach our potential through several strategic earnings drivers—that with continued great execution—will result in our goal of 38 percent improvement in EBITDA to more than $5 billion in a mid-cycle environment.
The pages following this letter provide more clarity around the earnings drivers within each business. It is a story that begins in North America with the acquisition of Temple-Inland and our creation of a premier Industrial Packaging business, as well as a powerful cash flow engine. In less than a year, we achieved higher and faster synergy and run rate targets, as the acquisition delivered more than $300 million in 2012—and we expect a synergy run rate of at least $400 million by first quarter 2013. In North America, we also highlight our Franklin Mill in southeast Virginia, which was repurposed and restarted to make fluff pulp, a key material used in manufacturing baby diapers for customers in emerging markets. And we describe International Paper’s distribution unit, xpedx, and its progress in improving buy, handle and sell processes.
Our improvement runway is equally evident around the globe. In China, the construction of a new paper machine in the International Paper/Sun Paper joint venture expands our capability to profitably serve the world’s largest marketplace. The new biomass boiler at our Mogi Guaçu Mill in Brazil will significantly reduce energy costs and fossil fuel usage—while the expansion of our industrial packaging platform to Brazil and Turkey will strengthen and extend our geographic reach. IP India also stands poised for double digit volume and earnings growth over the next several years.
Finally, the Ilim joint venture in Russia is close to completing the largest build out in the Russian pulp and paper industry in the last 30 years—and the largest project in the history of International Paper. With the joint venture we have made solid progress on a one billion dollar-plus upgrade of facilities in northwest Russia and Siberia. By installing a new paper machine in northwest Russia (Koryazhma) and a softwood pulp line in Siberia (Bratsk), International Paper will be able to grow in-step with paper demand in western Russia and meet rising pulp demand in China.
2012 was an important transition year for International Paper. I believe no other company in our industry is as well—positioned to create value for our shareowners on a global scale—or compete as successfully in our domestic market in both packaging and paper. And, as we carve Our Path Forward, we continue to be guided by a long-standing mission to improve the world today and for generations to come.
In 2012, we earned a Climate Leadership Award from the U.S. Environmental Protection Agency for excellence in greenhouse gas management. Along those same lines, we also earned two major industry awards from the American Forest and Paper Association—one award for reducing workplace accidents by 70 percent over 10 years, and the second, for progress toward reducing energy consumption and greenhouse gas emissions. Sustainability is something we take seriously, as it affects so much that we do. To that end, we established this year a set of tough but achievable sustainability goals to build upon our progress and our legacy of forest stewardship.
Reflecting our commitment to the highest of ethical standards, International Paper received its seventh straight award from the Ethisphere Institute as one of the World’s Most Ethical Companies. On a similar note, we were recently named No. 1 by Fortune Magazine’s The World’s Most Admired Companies in the Forest and Paper Product industry for the 10th time over the last 11 years.
All of the pieces are in place for significant and sustained growth in our free cash flow—a key metric for International Paper. We will use the cash to keep International Paper competitive and create value for our investors. We have re-positioned our global enterprise and stand well-positioned to meet the needs of global markets. This is the direct result of International Paper’s leadership team, our Board of Directors and our 70,000 employees around the world. On that note, International Paper’s Board of Directors welcomed Ilene Gordon, Chairman, President and CEO of Ingredion, who was elected to the Board in June. And after a combined 11 years of dedicated service, Alberto Weisser and Lynn Elsenhans both retired. We wish Alberto and Lynn well in their future ventures.
In 2013, International Paper will celebrate its 115th year in operation—a benchmark that few companies achieve. As we look toward the future, I am confident that International Paper will continue to win by doing the right things, in the right way, with the right people and above all, perform as a company of substance. Thank you for your continued support and confidence.
John V. Faraci
Chairman and Chief Executive Officer
1Before special items and non-operating pension expenses.