International Paper 2015 Annual Report Download - page 34

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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 $3.65 in 2015, compared with
$3.00 in 2014, and $3.06 in 2013. Diluted earnings (loss)
per share attributable to common shareholders were
$2.23 in 2015, compared with $1.29 in 2014 and $3.11 in
2013.
International Paper delivered solid results during 2015
driven by strong margins and earnings in our North
American Industrial Packaging business and record
performance from the Ilim joint venture. We generated
$1.8 billion of free cash flow which enabled the Company
to return cash to our shareholders in the form of
approximately $500 million in share repurchases and a
10% increase in the quarterly dividend beginning with the
2015 fourth quarter dividend payment. During 2015, we
successfully completed the restructuring of the 2006
timber monetization to achieve our objectives of reducing
risk and preserving financial flexibility, while maintaining
the deferral of $1.4 billion of deferred income taxes.
Finally, with respect to our balanced use of cash, we
completed a $2 billion bond issue and related tender offer
along with making a $750 million voluntary pension
contribution.
Our 2015 results reflect the benefits of favorable input
costs offset by price and mix declines across our North
American businesses. Volumes were generally flat
compared to 2014 except for lower volumes in our North
American Industrial Packaging business due to lower
containerboard export tons. Input costs decreased versus
2014 largely due to lower energy, chemicals and freight
costs. Price declined relative to 2014 driven mainly by
lower pricing in our North American Industrial Packaging
and Printing Papers and Pulp businesses. Our Ilim joint
venture generated record results in 2015 driven by
improved operations and increased margins. The positive
results were partially offset by the unfavorable impact of
non-cash foreign currency movements associated with
Ilim’s US dollar denominated debt. Finally, during 2015
we completed the divestiture of our interest in the IP-Sun
joint venture, generating $23 million in cash proceeds and
removing approximately $400 million of debt from our
balance sheet upon completion of the deal.
Overall, 2015 reflects solid performance in what
continues to be a challenging economic environment. We
once again generated returns in excess of our cost of
capital while returning cash to our shareholders in the
form of increased dividends and share repurchases. Our
focus on maximizing free cash flow generation and
deploying capital in a way that creates additional value
for our shareholders has positioned us for another
successful year in 2016.
Looking ahead to the 2016 first quarter, we expect
seasonally lower volumes in our North American
Industrial Packaging business, with some offset from
higher export volume which carries a lower margin.
Additionally, we expect seasonally lower volumes in our
Brazilian Printing Papers business as the fourth quarter
historically represents the strongest volume quarter for
this business. Pricing is expected to be lower for our North
American Printing Papers and Pulp business, primarily
driven by lower pulp prices. Additionally, pricing is
expected to be lower in our North American Industrial
Packaging business due to lower export pricing and price
index changes. We expect price improvements in our
EMEA Printing Papers business, including Russia, and
Brazilian Printing Papers business following announced
price increases although these will be largely offset by
inflationary cost pressures. We expect operating
performance to be in line with the 2015 fourth quarter with
some modest improvement in our North American
Industrial Packaging business. Planned maintenance
downtime costs should increase, primarily driven by
outages in our North American Industrial Packaging and
Printing Papers businesses, including costs associated
with the Riegelwood mill conversion. Equity earnings from
our Ilim joint venture are expected to benefit from strong
operations offset by softwood pulp price pressure and
normal seasonality. Additionally, we expect Ilim’s
earnings to be impacted by the absence of the positive
impact from foreign currency movements driven by Ilim’s
U.S. dollar denominated debt as we assume no change
in foreign currency rates in our outlook.
For the 2016 full year, we continue to face an uncertain
macroeconomic environment but believe we are well
positioned to deal with whatever the market brings. We
will continue to improve our North American Industrial
Packaging business by further realizing optimization
opportunities during 2016. We expect to complete the
Riegelwood mill conversion during first half of 2016 and
be fully ramped by the 2016 fourth quarter, initially
producing softwood market pulp. Additionally, we will
continue executing against our plan to drive profitable
growth following the recent expansion within the
Foodservice business as well as optimizing commercial
opportunities and mix within the North American Printing
Papers portfolio. Finally, we will remain focused on
maximizing free cash flow generation and deploying that
capital in a way that creates additional value for our
shareholders.