PaperAge Magazine

International Paper Reports Strong Third Quarter 2018 Earnings

Mark Sutton "International Paper delivered very strong performance and significant year-over-year earnings growth in the third quarter." – Mark Sutton, Chairman and CEO, International Paper.

Oct. 25, 2018 - International Paper (NYSE: IP) today reported third quarter 2018 net earnings attributable to International Paper of $562 million ($1.37 per diluted share) compared with $405 million ($0.97 per diluted share) in the second quarter of 2018 and net earnings of $395 million ($0.95 per diluted share) in the third quarter of 2017. Net earnings in all periods include the impact of special items, if any, non-operating pension expense and discontinued operations.

Adjusted operating earnings in the third quarter of 2018 were $641 million ($1.56 per diluted share) compared with $498 million ($1.19 per diluted share) in the second quarter of 2018, and $420 million ($1.01 per diluted share) in the third quarter of 2017.

Net sales were $5.9 billion in the third quarter of 2018 compared with $5.8 billion in the second quarter of 2018 and $5.5 billion in the third quarter of 2017.

Business segment operating profits were $738 million in the third quarter of 2018 compared with $697 million in the second quarter of 2018 and $674 million in the third quarter of 2017.

Cash provided by (used for) operations was $941 million in the third quarter of 2018 and $(709) million in the third quarter of 2017. Free cash flow (non-GAAP) was $584 million in the third quarter of 2018 and $624 million in the third quarter of 2017.

"International Paper delivered very strong performance and significant year-over-year earnings growth in the third quarter," said Mark Sutton, Chairman and Chief Executive Officer. "We had solid commercial performance and continued momentum across the businesses, and we continue to work aggressively to offset higher distribution and input costs. I'm proud of the outstanding work to safely prepare, secure and restart the facilities affected by Hurricane Florence. Looking ahead to the fourth quarter, we see continued healthy demand for our products and remain confident in our commitment to deliver strong full-year earnings growth in 2018."

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). Third quarter 2018 business segment operating profits and business trends compared with the prior quarter are as follows:

Industrial Packaging operating profits in the third quarter of 2018 were $472 million ($598 million excluding special items) compared with $537 million ($569 million excluding special items) in the second quarter of 2018. In North America, earnings improved due to higher sales prices for boxes and containerboard and lower planned maintenance outage expense, partially offset by lower seasonal volumes and higher input and distribution costs. In Europe, seasonally lower volume and higher Madrid mill start-up costs negatively impacted the quarter.

Global Cellulose Fibers operating profits in the third quarter of 2018 were $83 million ($85 million excluding special items) compared with $66 million ($69 million excluding special items) in the second quarter of 2018. Earnings improved on continued price realization, higher absorbent pulp sales volume and lower planned maintenance outage expense. Results were negatively impacted by $28 million associated with Hurricane Florence.

Printing Papers operating profits in the third quarter of 2018 were $183 million ($188 million excluding special items) versus $94 million in the second quarter of 2018. In North America, improved earnings were driven by further price realization and lower planned maintenance outage costs. Results were negatively impacted by $7 million associated with Hurricane Florence. In Brazil, improved earnings were driven by seasonally stronger sales volumes and higher sales prices, which were partially offset by higher input costs. In Europe and Russia, improved earnings were driven by price realization, higher sales volume, improved operations and lower planned maintenance outage expense, which were partially offset by higher input costs.

EQUITY METHOD INVESTMENTS

Ilim joint venture equity earnings were $74 million in the third quarter of 2018 compared with $57 million in the second quarter of 2018. Operating results were favorable due to continued price realization offset by lower sales volumes due to annual outages. The Company recognized a non-cash after-tax foreign exchange loss of $23 million in the third quarter of 2018 ($0.06 per diluted share) compared with a loss of $39 million in the second quarter of 2018 ($0.09 per diluted share), primarily due to Ilim's U.S. dollar denominated net debt.

International Paper recorded equity earnings of $19 million in the third quarter of 2018 on its 20.5% ownership position in Graphic Packaging compared with $15 million in the second quarter of 2018.

CORPORATE EXPENSES

Corporate expenses were $20 million for the third quarter of 2018, compared with $30 million in the second quarter of 2018.

EFFECTIVE TAX RATE

The reported effective tax rate for the third quarter of 2018 was 15%, which reflects the impact of adjustments associated with the U.S. Tax Cuts and Jobs Act ("Tax Reform"), compared to a 2018 second quarter reported effective tax rate of 27%. In the fourth quarter of 2017, the Company recorded a provisional net benefit related to the enactment of the Tax Reform, including a non-cash benefit for the remeasurement of the Company's U.S. deferred taxes and additional tax expense related to the deemed repatriation of earnings of its foreign subsidiaries. The Company continues to analyze the impacts of Tax Reform and in the current quarter recorded a $36 million tax benefit primarily related to the deemed repatriation of earnings of foreign subsidiaries. The updated provisional amounts will be finalized in the fourth quarter.

Excluding special items, non-operating pension expense and discontinued operations, the effective tax rate for the third quarter of 2018 was 24%, compared with an effective tax rate of 25% in the second quarter of 2018. The lower effective tax rate for the third quarter is primarily due to state tax credits and provision to return adjustments related to the U.S. Federal tax return completed during the third quarter.

EFFECTS OF SPECIAL ITEMS

Special items in the third quarter of 2018 included a pre-tax charge of $122 million ($81 million after taxes) related to the impairment of fixed assets and an intangible asset in our Brazil Packaging business, a pre-tax charge of $9 million ($7 million after taxes) for an adjustment to an environmental remediation reserve, pre-tax charges of $6 million ($4 million after taxes) related to the removal of abandoned property at our mills and a pre-tax charge of $5 million ($4 million after taxes) for accelerated depreciation associated with the announced conversion of a paper machine at our Riverdale mill to containerboard production. Also included in special items is a tax benefit of $36 million related to updates to our provisional estimates of the impacts of Tax Reform.

Special items in the second quarter of 2018 included a pre-tax charge of $26 million ($18 million after taxes) in Restructuring and other charges related to the optimization of our EMEA Packaging business. Special items also included a pre-tax charge of $12 million ($9 million after taxes) for costs associated with our proposal to acquire Smurfit Kappa, pre-tax charges of $9 million ($7 million after taxes) related to the removal of abandoned property at our mills and a tax expense of $9 million due to state income tax legislative changes.

Special items in the third quarter of 2017 included pre-tax charges of $6 million ($4 million after taxes) for integration costs associated with the 2016 acquisition of the Weyerhaeuser pulp business, a pre-tax charge of $10 million ($7 million after taxes) for accelerated amortization of an intangible asset in Brazil Packaging and pre-tax charges of $7 million ($4 million after taxes) related to the removal of abandoned property at our mills. Also included in special items is a net tax expense of $19 million due to international legal entity restructuring.

DISCONTINUED OPERATIONS

As a result of the transfer of the North American Consumer Packaging business on January 1, 2018, all current and prior year amounts have been adjusted to reflect this business as a discontinued operation. There were no discontinued operations in the third quarter of 2018 compared with a loss of $23 million ($0.05 per diluted share) in the second quarter of 2018 and income of $29 million ($0.07 per diluted share) in the third quarter of 2017. Discontinued operations in the second quarter of 2018 included a pre-tax loss of $28 million ($21 million after taxes) to adjust the gain on the transfer of the business as a result of final post-closing adjustments and charges of $2 million (before and after taxes) for costs associated with the transfer. Discontinued operations in the third quarter of 2017 included the operating earnings of the North American Consumer Packaging business.

International Paper 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, India and Russia. To learn more, please visit: internationalpaper.com.

SOURCE: International Paper