International Paper Focusing on Cash Flow to Lift Dividend

International Paper Co., the world’s largest paper and pulp producer, said it’s focusing on improving cash flow to lift the company’s dividend and help fund expansion outside North America.

“Our highest priority is not growth, it’s sustainable and improving cash flow,” Chief Executive Officer John Faraci said yesterday in an interview at Bloomberg headquarters in New York. “We’ve got more cash flow runway ahead of us.”

International Paper, which is based in Memphis, Tennessee, is seeing demand and prices for its corrugated packaging and office paper in North America rebound after they collapsed during the financial crisis.

“The way we generate more cash is we build and run businesses that have healthy margins,” said Faraci, 61. “The way you do that in our businesses in North America is you manage supply and demand very well, very aggressively, so you don’t overproduce.”

International Paper fell 43 cents to $27.24 at 4:02 p.m. in New York Stock Exchange composite trading. The shares have climbed 13 percent in the past 12 months, compared with a 26 percent advance in the S&P 500 Materials Index.

The board will consider this year whether to boost the company’s dividend, he said. International Paper has raised its quarterly payout twice since April, to 18.75 cents. The dividend was cut to 2.5 cents in 2009 from 25 cents as the global economic crisis unfolded.

‘Slow Recovery’

“It’s a priority to get our dividend back to a sustainable level,” he said.

The U.S. accounted for 79 percent of International Paper’s sales in 2009. The U.S. economy is “recovering, but it is not recovered,” Faraci said.

“I’m pretty positive on the U.S. economy, I just think it’s going to be slow, and not as fast as we’d like,” he said. “That’s probably good news for inflation, with the exception of oil going over $100 a barrel.”

The price of linerboard, one of two types of paper used to make corrugated-cardboard containers, has climbed 19 percent in the past 12 months, according to data from Pulp and Paper Network LLC. The price of office paper has advanced 9 percent.

While U.S. demand for corrugated packaging recovers, it isn’t likely to return to levels seen in the late 1990s anytime soon because of the amount of manufacturing capacity that has moved to other countries, Faraci said.

Chinese Acquisition

“If you think about the business’s 1 to 2 percent growth, in 15 years from now it may be a market the same size it was in 1999,” he said. ‘That’s a long time.’’

International Paper owns and operates plants outside the U.S. in countries including Russia, Morocco and Turkey. It paid $200 million in June for Svenska Cellulosa AB’s Asian packaging business. It may consider opportunities to expand in Eastern Europe, China and India where it sees greater profitability, Faraci said.

Rock-Tenn Co., a Norcross, Georgia-based maker of packaging, agreed last month to pay $3.5 billion for Smurfit- Stone Container Corp. to become North America’s second-biggest containerboard producer.

International Paper, which paid $6 billion for Weyerhaeuser Co.’s industrial packaging and recycling business in 2008, sees further North American containerboard acquisitions as “possible but not essential,” Faraci said.

International Paper’s net income dropped 2.9 percent to $644 million, or $1.48 a share, in 2010 while sales increased 7.8 percent to $25.2 billion. It had $2.07 billion of cash and equivalents at the year-end. Free cash flow, its cash from operating activities minus capital expenditures, was $726 million in the fourth quarter, compared with a negative $397 in the preceding three months.

To contact the reporters on this story: Christopher Donville in New York at cjdonville@bloomberg.net; Jack Kaskey in New York at jkaskey@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

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