International Paper Reports First Quarter 2017 Earnings

28 April 2017

International Paper today reported first quarter 2017 net earnings attributable to International Paper of $209 million ($0.50 per share) compared with net earnings of $218 million ($0.53 per share) for the fourth quarter of 2016 and net earnings of $334 million ($0.81 per share) in the first quarter of 2016. Net earnings in all periods include the impact of special items, if any, non-operating pension expense and discontinued operations.

Diluted Net EPS Attributable to International Paper Shareholders and Adjusted Operating EPS

   

First Quarter 2017

 

Fourth Quarter 2016

 

First Quarter 2016

Net Earnings

 

$

0.50

   

$

0.53

   

$

0.81

 

Add Back – Discontinued Operations (Gain) Loss

 

   

   

0.01

 

Net Earnings (Loss) from Continuing Operations

 

0.50

   

0.53

   

0.82

 

Add Back – Non-Operating Pension Expense

 

0.05

   

0.05

   

0.07

 

Add Back – Net Special Items Expense (Income)

 

0.05

   

0.15

   

(0.09)

 

Adjusted Operating Earnings*

 

$

0.60

   

$

0.73

   

$

0.80

 

*    Adjusted operating earnings (non-GAAP) is defined as net earnings from continuing operations attributable to International Paper Company (GAAP) excluding special items and non-operating pension expense.  Management uses this measure to focus on on-going operations, and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results.

Adjusted operating earnings in the first quarter of 2017 were $249 million ($0.60 per share) compared with $303 million ($0.73 per share) in the fourth quarter of 2016 and $330 million ($0.80 per share) in the first quarter of 2016.

Quarterly net sales were $5.5 billion in the first quarter of 2017 compared with $5.4 billion in the fourth quarter of 2016 and  $5.1 billion in the first quarter of 2016. The year-over-year revenue increase was primarily due to the pulp business that was acquired in late 2016.

Business segment operating profits in the first quarter of 2017 were $428 million, compared with $464 million in the fourth quarter of 2016 and $497 million in the first quarter of 2016.

Cash provided by operations was $633 million in the first quarter of 2017 and $620 million in the first quarter of 2016.  Free cash flow (non-GAAP) was $259 million for the first quarter of 2017 and $311 million in the first quarter of 2016.   

"International Paper delivered a solid first quarter in the face of several challenges, including the digester incident at our Pensacola mill and higher input costs driven by a significant rise in OCC prices," said Mark Sutton, Chairman and Chief Executive Officer.  "Given the market fundamentals across most of our businesses in combination with several IP commercial and operational initiatives, we expect improved results pointing to a particularly strong second half as well as positive momentum entering 2018.  I remain very confident in IP's ability to generate significant year-over-year earnings growth and continued strong cash flow in 2017."

SEGMENT INFORMATION

The performance of the Company's business segments is measured quarter to quarter without variations caused by special items, as management focuses on business segment operating profits excluding those items (non-GAAP).  The combination of IP's legacy pulp business with the acquired pulp business in 2016, will now be called Global Cellulose Fibers and reported as a separate business segment (previously reported in Printing Papers).  Prior periods have been restated to reflect this change.  First quarter 2017 business segment operating profits and business trends compared with the prior quarter are as follows:

Industrial Packaging operating profits in the first quarter of 2017 were $365 million ($360 million excluding special items) compared with $372 million ($379 million excluding special items) in the fourth quarter of 2016.  In North America, sales price increase realizations for containerboard and boxes were more than offset by seasonally lower box demand, higher OCC costs and higher mill outage expenses, along with the impact from the Pensacola mill digester incident.   

Global Cellulose Fibers operating profits in the first quarter of 2017 were a loss of $70 million (a loss of $51 million excluding special items) compared with a loss of $70 million (a loss of $32 million excluding special items) in the fourth quarter of 2016.  Results for the quarter reflect $50 million in maintenance outage expenses, which include a major energy optimization project at the Port Wentworth mill. Operations and costs were impacted by the Pensacola mill digester incident and a delayed start up at Port Wentworth following its outage.  The business is beginning to see benefits from announced price increases, along with synergies of $14 million in the quarter from the pulp business acquisition.

Printing Papers operating profits were $100 million in the first quarter of 2017 versus $121 million in the fourth quarter of 2016. Earnings in North America were impacted by higher input costs and maintenance outage expenses. Seasonally lower domestic sales volumes and an associated unfavorable mix led to lower earnings in Brazil. Operating profits in EMEA were higher due to lower maintenance outage expenses and lower operating costs, partially offset by seasonally lower sales volumes and higher wood costs in Russia.

Consumer Packaging operating profits were $33 million in the first quarter of 2017 compared with $41 million in the fourth quarter of 2016.  The earnings decrease in North America reflects modestly lower sales prices and a less favorable mix, partially offset by seasonally higher volume and lower planned maintenance outage expense.

International Paper recorded Ilim joint venture equity earnings of $50 million in the first quarter of 2017 compared with $45 million in the fourth quarter of 2016.  Operationally, sales volumes were seasonally lower, but average sales prices increased. The Company recognized a non-cash after-tax foreign exchange gain of $23 million in the first quarter of 2017 ($0.06 per share), compared with a gain of $6 million in the fourth quarter of 2016 ($0.01 per share), primarily due to Ilim's U.S. dollar denominated net debt.

CORPORATE EXPENSES

Net corporate expenses, excluding non-operating pension expense, were $11 million for the first quarter of 2017, compared with $11 million in the fourth quarter of 2016.

EFFECTIVE TAX RATE

The reported effective tax rate for the first quarter of 2017 was 34.0% compared to a 2016 fourth quarter effective tax rate of 38.6%. Excluding special items and non-operating pension expense, the effective tax rate for the first quarter of 2017 was 30.5%, compared with an effective tax rate of 29.0% in the fourth quarter of 2016.  The lower rate of 29.0% in the fourth quarter was due to the inclusion of a decrease in the Company's valuation allowance for state income taxes.

EFFECTS OF SPECIAL ITEMS

Special items in the first quarter of 2017 included a pre-tax charge of $14 million ($8 million after taxes) to amortize the inventory fair value step-up of the pulp business acquired in December 2016, pre-tax charges of $4 million ($2 million after taxes) for costs associated with the acquisition of that business, a net bargain purchase gain of $6 million (before and after taxes) on the June 2016 acquisition of the Holmen Paper newsprint mill in Madrid, Spain and a charge of $2 million (before and after taxes) for other items.  Also included in special items is a $15 million tax expense associated with an international investment restructuring.

Special items in the fourth quarter of 2016 included a pre-tax charge of $7 million ($6 million after taxes) for Restructuring and other charges for costs associated with the closure of a mill in Turkey.  Special items also included a pre-tax charge of $19 million ($14 million after taxes) for costs associated with the newly acquired pulp business, a pre-tax charge of $19 million ($11 million after taxes) to amortize the acquired pulp business inventory fair value step-up and a tax expense of $31 million associated with a tax rate change in Luxembourg.

Special items in the first quarter of 2016 included a loss of $1 million (before and after taxes) for Restructuring and other charges. Included within Restructuring and other charges were a pre-tax charge of $9 million ($6 million after taxes) related to costs associated with the conversion of the Riegelwood, North Carolina facility to 100% pulp production and a pre-tax gain of $8 million ($5 million after taxes) for the sale of our remaining investment in Arizona Chemical. Special items also included a pre-tax charge of $37 million ($34 million after taxes) for an impairment of the assets of our Asia Box business and costs associated with the sale of the business, a tax benefit of $57 million associated with the legal restructuring of our Brazil Packaging business and a tax benefit of $14 million related to the closure of a U.S. federal income tax audit.

DISCONTINUED OPERATIONS

Discontinued operations in the first quarter of 2016 included a pre-tax charge of $8 million ($5 million after taxes) for a legal settlement related to the xpedx business which was spun off in the third quarter of 2014.

EARNINGS WEBCAST

The company will host a webcast to discuss earnings and current market conditions, beginning at 10 a.m. ET (9 a.m. CT). All interested parties are invited to listen to the webcast via the company's Internet site at http://www.internationalpaper.com by clicking on the Performance/Investors tab and going to the Presentations and Events/Webcasts page. A replay of the webcast will also be on the web site beginning approximately two hours after the call. Parties who wish to participate in the webcast via teleconference may dial +1 (706) 679-8242 or, within the U.S. only, (877) 316-2541, and ask to be connected to the International Paper first-quarter earnings call. The conference ID number is 3134070.  Participants should call in no later than 9:45 a.m. ET (8:45 a.m. CT).  An audio-only replay will be available for ninety days following the call.  To access the replay, dial +1 (404) 537-3406 or, within the U.S. only, (855) 859-2056 or (800) 585-8367, and when prompted for the conference ID, enter 3134070.

ABOUT INTERNATIONAL PAPER

International Paper (NYSE: IP) is a leading global producer of renewable fiber-based packaging, pulp and paper products with manufacturing operations in North America, Latin America, Europe, North Africa, Asia and Russia.  We produce packaging products that protect and promote goods, and enable world-wide commerce; pulp for diapers, tissue and other personal hygiene products that promote health and wellness; papers that facilitate education and communication; and paper bags, cups and food containers that provide convenience and portability. We are headquartered in Memphis, Tenn., and employ approximately 55,000 colleagues located in more than 24 countries.  Net sales for 2016 were $21 billion.  For more information about International Paper, our products and global citizenship efforts, please visit internationalpaper.com.

Certain statements in this press release may be considered forward-looking statements. These statements reflect management's current views and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Factors which could cause actual results to differ include but are not limited to: (i) the level of our indebtedness and changes in interest rates; (ii) industry conditions, including but not limited to changes in the cost or availability of raw materials, energy and transportation costs, competition we face, cyclicality and changes in consumer preferences, demand and pricing for our products; (iii) global economic conditions and political changes, including but not limited to the impairment of financial institutions, changes in currency exchange rates, credit ratings issued by recognized credit rating organizations, the amount of our future pension funding obligation, changes in tax laws and pension and health care costs; (iv) unanticipated expenditures related to the cost of compliance with existing and new environmental and other governmental regulations and to actual or potential litigation; (v) changes in our estimates for the costs and insurance coverage associated with the January 2017 incident at our Pensacola, Florida mill; (vi) whether we experience a material disruption at one of our other manufacturing facilities; (vii) risks inherent in conducting business through joint ventures; (viii) the failure to realize the expected synergies and cost-savings from our purchase of the pulp business of Weyerhaeuser Company or delay in realization thereof; and (ix) our ability to achieve the benefits we expect from all other strategic acquisitions, divestitures and restructurings. These and other factors that could cause or contribute to actual results differing materially from such forward-looking statements are discussed in greater detail in the Company's Securities and Exchange Commission filings. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

INTERNATIONAL PAPER COMPANY
Consolidated Statement of Operations

Preliminary and Unaudited
(In millions, except per share amounts)

                 
     

Three Months Ended
March 31,

 

Three Months

Ended
December 31,

 
     

2017

 

2016

 

2016

 
 

Net Sales

 

$   5,511

 

$    5,110

 

$               5,381

 
 

Costs and Expenses

             
 

Cost of products sold

 

3,940

(a)

3,611

 

3,807

(i)

 

Selling and administrative expenses

 

422

(b)

376

 

433

(j)

 

Depreciation, amortization and cost of timber harvested

 

345

 

284

 

328

 
 

Distribution expenses

 

379

 

320

 

349

 
 

Taxes other than payroll and income taxes

 

45

 

41

 

41

 
 

Restructuring and other charges

 

 

1

(e)

7

(k)

 

Net (gains) losses on sales and impairment of businesses

 

 

37

(f)

 
 

Net bargain purchase gain on acquisition of business

 

(6)

(c)

 

 
 

Interest expense, net

 

142

 

123

 

136

 
 

Earnings (Loss) From Continuing Operations Before Income Taxes and Equity Earnings

 

244

(a-c)

317

(e,f)

280

(i-k)

 

Income tax provision (benefit)

 

83

(d)

41

(g)

108

(l)

 

Equity earnings (loss), net of taxes

 

48

 

63

 

47

 
 

Earnings (Loss) From Continuing Operations

 

209

(a-d)

339

(e-g)

219

(i-l)

 

Discontinued operations, net of taxes

 

 

(5)

(h)

 
 

Net Earnings (Loss)

 

209

(a-d)

334

(e-h)

219

(i-l)

 

Less: Net earnings (loss) attributable to noncontrolling interests

 

 

 

1

 
 

Net Earnings (Loss) Attributable to International Paper Company

 

$      209

(a-d)

$       334

(e-h)

$                  218

(i-l)