International Paper 2012 Annual Report Download - page 46

ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
Operating Earnings (a non-GAAP measure) is
defined as net earnings from continuing operations
(a GAAP measure) excluding special items and non-
operating pension expense. International Paper
generated Operating Earnings per diluted share
attributable to common shareholders of $2.65 in
2012, compared with $3.12 in 2011, and $2.30 in
2010. Diluted earnings (loss) per share attributable to
common shareholders were $1.80 in 2012, compared
with $3.03 in 2011 and $1.59 in 2010.
International Paper delivered strong results during
2012 despite challenging global economic con-
ditions, and generated record cash flow from oper-
ations of $3 billion. Our results were primarily driven
by the Temple-Inland acquisition and associated
integration synergies that exited the year at a run
rate above our first-year plan. We also divested three
mills required as a condition to close the Temple-
Inland acquisition and announced an agreement to
divest the building products business acquired with
Temple-Inland. These divestitures combined will
generate more than $1.2 billion of cash once the
building products divestiture closes.
Our global operations continued to execute well and
deliver on our cost management objectives, con-
tributing to another year of generating returns above
our cost of capital. We reduced our balance sheet
debt by $1.9 billion since the Temple-Inland acquis-
ition closed and increased our annual dividend by
14% to $1.20 per share. We also made significant
progress on our strategic and cost-reduction proj-
ects, including the Franklin fluff pulp mill conversion,
the biomass boiler at our Mogi Guacu mill in Brazil,
and our new coated paperboard machine in China,
among others. We also finalized two acquisitions in
Turkey and Brazil during the 2013 first quarter that
were announced in 2012. We believe these strategic
and cost-saving projects position International Paper
well for a step-change in earnings in 2013.
Summarizing our 2012 operations, the Temple-
Inland acquisition built a strong foundation for
steadily improving, as well as less cyclical, earnings
going forward. The acquisition and impressive
integration were meaningfully earnings accretive in
less than twelve months. While the slower global
growth environment took its toll on pricing in pulp,
consumer grades and export shipments across all
our product lines, the worst seems to be behind us
as pulp markets have stabilized and rebounded from
the bottom and export markets in containerboard
have recovered in the second half of the year. It was
another year of excellent execution across our global
operations, as the performance of our mills more
than offset ramp-up costs associated with the Frank-
lin fluff pulp mill conversion and the coated paper-
board machine start-up at our IP-Sun joint venture in
China. Lower average input costs helped us offset
the absence of significant favorable inventory valu-
ation adjustments that we experienced in 2011.
Looking ahead to the first quarter of 2013, we expect
seasonally weaker volume in our Europe-Russia and
Brazil papers businesses and stable demand across
our North American businesses. We expect the full
benefit of our 2012 fourth quarter North American
box price increase to be realized during the 2013 first
quarter, but it will be partially offset by unfavorable
seasonal mix issues in Brazil. Operationally, we
should see the impact of improved performance
across our mill businesses as supply chain con-
ditions improve and one-time unfavorable issues
from the 2012 fourth quarter do not repeat. Further,
lower costs at Franklin and the full impact of the
biomass boiler in Brazil should provide additional
earnings momentum. As to input costs, we expect
higher costs for recycled fiber, wood and energy.
The 2013 first quarter will be another heavy main-
tenance outage quarter with only a modest decrease
in expenses expected.
For the 2013 full year, our outlook for end-use
demand is based on global economic growth of
three to four percent and growth in the U.S. of one to
two percent. Our largest lever this year is the tra-
jectory of our North American industrial packaging
business, with year-over-year earnings improvement
due to pricing and continued system optimization.
Further, the ramp-up of our many strategic and cost
saving projects during the course of the year is
expected to drive significant incremental earnings in
2013 versus 2012. We do, however, expect higher
input costs, primarily associated with fiber and
energy, and an unfavorable impact associated with
the lost earnings and incremental containerboard
purchases from the divested mills.
Free cash flow (a non-GAAP measure) of $1.6 billion
generated in 2012 was lower than the $1.7 billion
generated in both 2011 and 2010 (see reconciliation
on page 33).
Operating Earnings per share attributable to com-
mon shareholders of $0.69 in the fourth quarter of
2012 were lower than both the $0.81 in the 2012 third
quarter and the $0.73 in the 2011 fourth quarter.
Diluted earnings (loss) per share attributable to
common shareholders were $0.53 in the fourth quar-
ter of 2012, compared with $0.54 in the third quarter
of 2012 and $0.65 in the fourth quarter of 2011.
Free cash flow of $384 million generated in
the 2012 fourth quarter was lower than the
$567 million generated in the 2012 third quar-
ter but slightly higher than the $328 million
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