International Paper (IP) Comprehensively Beats Q2 Earnings

Paper and packaging firm International Paper Company (NYSE:IP) reported relatively healthy second-quarter 2016 results with operating earnings (excluding one-time items) of $379 million or 92 cents per share compared with $409 million or 97 cents per share in the year-ago quarter. Although operating earnings declined year over year due to lower revenues, it comprehensively beat the Zacks Consensus Estimate of 84 cents.

GAAP earnings for the quarter were $40 million or 10 cents per share compared with $227 million or 54 cents in the year-ago quarter. The year-over-year decrease in GAAP earnings was largely attributable to lower revenues and higher operating expenses during the reported quarter.

Net sales for the quarter were $5,322 million versus $5,714 million in the year-ago quarter and exceeded the Zacks Consensus Estimate of $5,267 million. The year-over-year decline in revenues was primarily due to the sale of the IP-Sun joint venture in fourth-quarter 2015 and sale of the Carolina Coated Bristols business in second-quarter 2015. Total operating profit in the reported quarter was $628 million compared with $676 million in the second quarter of 2015.

Segment Performance

Industrial Packaging: Sales from this segment declined to $3,597 million from $3,694 million in the year-ago period. Operating income was $459 million versus $528 million in the year-ago quarter. In North America, lower average sales prices for boxes and export containerboard were partially offset by higher box shipments due to seasonally patterns.

Printing Papers: Sales from this segment were $1,271 million in the reported quarter versus $1,249 million in the year-earlier quarter. Operating income for the segment was $96 million versus $101 million in the year-ago quarter. In North America, although papers business declined mostly due to increased planned maintenance outages, pulp improved due to lower conversion and outage costs associated with the Riegelwood mill conversion. Earnings were primarily impacted by higher planned maintenance outage costs in Europe, while earnings remained flat in Brazil on a sequential basis.

Consumer Packaging: Sales from this segment decreased 37.1% year over year to $501 million in the reported quarter. Operating profit was $73 million versus $47 million in the year-ago quarter due to lack of planned maintenance outage costs in North America and lower manufacturing costs.

Acquisition

During the quarter, International Paper inked a definite agreement with leading timberland owner Weyerhaeuser Co. (NYSE:WY) to acquire the latter’s pulp business for $2.2 billion in cash. The acquired asset portfolio includes five pulp mills and two converting facilities that produce fluff pulp, softwood pulp, and specialty pulp for consumer goods such as, diapers, hygiene products, tissue, and textiles.

With a combined capacity of nearly 1.9 million metric tons of pulp, the transaction is likely to strengthen International Paper’s position in the global fluff pulp market and augment its operating cash flow. In addition, the company expects the acquisition to generate annual synergies of approximately $175 million by the end of 2018 along with a higher flexibility to manage a wide portfolio of products to meet customer needs through superior R&D capabilities and priceless patent portfolio. The transaction is subject to mandatory closing conditions and regulatory approvals and is expected to be completed by fourth-quarter 2016.

Balance Sheet

Cash and temporary investments aggregated $1,254 million at quarter end, while long-term debt was $8,820 million. Cash flow from operating activities was $1,225 million for the six months of 2016 compared with $753 million in the prior-year period. Free cash flow at quarter end was $527 million at quarter end compared with $511 million in the prior-year period, bringing the respective tallies for the first half of the year to $838 million and $830 million.

International Paper recorded equity earnings of $46 million from its Ilim joint venture in the quarter compared with $62 million in the prior quarter. The company recognized non-cash after-tax foreign exchange gain of $6 million in the quarter.

Moving Forward

With Weyerhaeuser slated to come on board in the later part of the year, International Paper remains poised to strengthen its position in the growing global fluff pulp market for higher return on capital and higher cash return to its shareholders.

International Paper currently has a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the industry include Fibria Celulose S.A. (NYSE:FBR) and UPM-Kymmene Oyj (OTC:UPMKY) , each sporting a Zacks Rank #1 (Strong Buy).