Tim Nicholls
Senior Vice President and Chief Financial Officer at International Paper
Good morning, everyone and thank you, Mark. I'm on Slide 5, which shows our sequential earnings bridge. First quarter operating earnings per share were $0.76 as compared to $0.78 in the fourth quarter. Price and mix improved by about 131 million or $0.27 per share with strong price realization in both business segments and across all of our channels. Volume was slightly lower as expected due to seasonally lower demand in North America and the impact of omicron in the early part of the first quarter, and Global Cellulose Fibers fluff pulp shipments were constrained by the ongoing vessel delays. Operations and costs were an $0.08 headwind in the quarter. Our mills and converting system performed well, and we made excellent progress normalizing containerboard inventories across our network. We received $20 million of insurance recovery or about $0.04 per share related to Prattville. In Global Cellulose Fibers, ongoing logistics constraints impacted operating cost by about $25 million or $0.05 per share in the quarter, we successfully completed our highest maintenance outage quarter of the year. These costs were in line with our outlook and we expect to complete nearly 70% of our annual maintenance program in the first half of the year. Input costs rose sharply in the latter part of the first quarter driven by higher energy, chemicals and distribution costs, mostly due to higher diesel fuel prices. These costs more than offset moderately lower recovered fiber cost. On Slide 32 of the appendix, we provide details on our consumption of key inputs including natural gas, which was a significant cost headwind in the quarter. Moving to corporate expense. We improved by $0.05 per share sequentially. Lower corporate S&A was partly offset by higher tax corporate expenses also benefited from lower interest expense and a lower share count. Lastly, equity earnings improved sequentially. I'd also note that in the first quarter, we received a dividend from Ilim as expected.
Turning to the segments and starting with Industrial Packaging on Slide 6. In North America, demand normalized in February and March as expected, following the labor impact from omicron in the early part of the first quarter. Overall box demand in North America is stable as we enter the second quarter. Our mills and converting system performed well and we replenish system inventories, which puts us in a much better position to optimize our cost as we navigate continued logistics constraints and poor carrier reliability. Looking at first quarter performance, price and mix was strong, driven by realization of our August price increase. Volume was lower sequentially due to the slower seasonal demand and omicron labor constraints in the early part of the first quarter. To put the omicron impact into context, our January volume was down nearly double digits. As expected, our volume normalized at elevated levels following a very challenging January. Volume across our US channels continue to perform well. As a reminder, our US channels include our US box system, our open market containerboard customers and our equity partnerships with strategic sheet feeders. Operations and costs improved sequentially with overall performance significantly better than expected. As I mentioned, our mills and converting system performed well and we made good progress normalizing our system inventories. Operating costs remain elevated due to ongoing logistics constraints. However, we are in a much better position to navigate this environment with healthier system inventory.
I would also note that operation and cost includes $20 million of insurance recovery in the first quarter related to Prattville, which follows $40 million of insurance recovery we received in the fourth quarter. We successfully completed our highest maintenance outage of the quarter and expect to incur nearly 70% of outage costs in the first half of the year. Lastly, input costs were a significant headwind in the first quarter relative to our expectations. In the latter part of the quarter, we experienced sharply higher cost for chemicals, energy and distribution. We anticipate these higher costs to persist in the second quarter. Turning to Slide 7. As we look ahead in our North American Industrial Packaging business, we are making good progress restoring margins to our historical low 20% range and we fully anticipate margins to expand in the second quarter and step up further in the second half year. In the second quarter, we expect further benefits from the run rate of our August 2021 price increase, as well as the initial benefits from our March 2022 price increase with further realization in the second half of the year. Our price realization is expected to out -- outpace higher costs for energy, chemicals and distribution as we move through the second quarter and into the second half of the year. Operationally, we've recovered from the system disruptions that affected us last year. Our mills and converting system are performing well and labor across our box network continues to improve. Containerboard inventories across our system are back to normalized levels, which helps us proactively manage ongoing rail and truck constraints. And as mentioned, we will step down from the highest maintenance outage quarters. All of this gives us confidence in our path to restore margins as we move through the second quarter and into the second half of 2022. Moving on to Global Cellulose Fibers on Slide 8. I'll start with a few comments on the demand environment and supply chain. We feel really good about the resiliency of demand for fluff pulp. Our confidence reflects the essential role of absorbent hygiene products for consumers. In addition, we expect the supply-demand environment for fluff to remain relative -- to remain highly favorable. Feedback from our customers indicates that fluff pulp inventories are at historic lows, this is partly due to significantly stretched supply chains.
To put this into context, schedule reliability for ocean vessels which typically ranges from 70% to 80% is currently running at 30% to 40%. Additionally, the average vessel delay that was historically one day is now five days. We expect these challenging conditions to continue for the foreseeable future. Taking a look at the first quarter performance, price and mix improved by 17 million. I would note that the pace of price realization from our prior price increases is impacted by ongoing shipping delays. As a reminder, we export 80% to 90% of our pulp production with price realization typically achieved when the vessel sails. Volume in the quarter was stable. I would note that backlogs are about double our normalized levels due to the logistics challenges. Our mills ran well. However, operations and costs were impact for $45 million headwind in the quarter with more than half of the unfavorable impact due to ongoing logistics challenges. Higher seasonal costs related to energy consumption represented an additional $10 million headwind in the quarter. We also successfully completed the highest maintenance outage quarter of the year. And lastly, input cost increased by $50 million sequentially, split about evenly between wood, chemicals, and energy. Turning to Slide 9. Taking a closer look at our Global Cellulose Fibers business.
We are well-positioned to deliver cost of capital returns in the third and fourth quarters of this year. As I said earlier, we have a favorable demand-supply outlook for fluff pulp with price realization from prior increases accelerating as we move through the year. Again, keep in mind that price realization in this business lags about two to three quarters. I would also note that we are making solid progress in our fluff pulp contract negotiations, which will provide additional commercial benefits as we move into 2023. So now I'll turn to Slide 10 and our outlook for the second quarter. Starting with Industrial Packaging. We expect price and mix to improve by 75 million on realization of prior increases. Volume is expected to increase by $35 million on seasonally stronger demand. I would note that there is one less day sequentially. As we said earlier, volume is stable at elevated levels as we enter the second quarter. Operations and costs are expected to decrease earnings by $10 million driven mostly by lower sequential Prattville insurance recovery. Staying with Industrial Packaging, maintenance outage expense is expected to decrease by $60 million. And lastly, input costs are expected to increase by $50 million, again this is driven by higher energy, chemicals and distribution costs, mostly due to higher diesel fuel prices. In Global Cellulose Fibers, we expect price and mix to improve by $50 million on realization of prior increases. As a reminder, price realization in this segment has a two to three quarter lag.
We're running on the longer end of that range right now due to the ongoing vessel delays. Volume is expected to decrease by $5 million. Operations and costs are expected to decrease earnings by $10 million driven by logistics constraints. Maintenance outage expense is expected to decrease by $26 million. And again, lastly, input costs are expected to increase by $20 million, driven by higher energy, chemicals and distribution. Turning to the full year outlook on Slide 11. We're confident in our full-year EBITDA outlook of $3.1 billion to $3.4 billion. Input cost for energy, chemicals and distribution rose sharply in the latter part of the first quarter. We successfully mitigated the impact and deliver earnings that were better than our outlook in the first quarter. Demand for corrugated packaging normalized at elevated levels following omicron. In Global Cellulose Fibers, we see a favorable supply-demand backdrop for fluff pulp. As we look ahead, we began to realize our March 2022 price increase in our North American packaging business. Additionally, we anticipate margin recovery in our EMEA packaging businesses as box price begins to offset the higher energy and containerboard cost. In Global Cellulose Fibers, we expect price realization to accelerate in the second quarter. All in, we anticipate margin expansion in the second quarter with further acceleration in the second half of the year as price realization outpaces higher input costs. We will also step down from the highest maintenance outage quarters of the year with nearly 70% of our maintenance program completed in the first half.
We are also confident in achieving $200 million to $225 million of gross earnings from our Build a Better IP initiatives. As I said earlier, we are confident in returning to 20% plus margins in our packaging business and delivering cost of capital returns in our Cellulose Fibers business in the second half of the year. On Slide 12. I'll take a moment to update you on capital allocation actions in the first quarter. Starting with the balance sheet. As I said last quarter, we're very pleased with the progress we've made to strengthen our balance sheet. As a reminder, we reduced debt by $2.5 billion in 2021 and more than $4 billion over the past few years. With these actions, our 2021 year-end leverage was 2.3 times on a Moody's basis, which is below our target range of 2.5 to 2.8 times. And looking ahead, we have limited near term maturities with about $900 million due over the next five years. Returning cash to shareholders is a meaningful part of our capital allocation framework. In the first quarter, we returned $580 million to shareowners including $406 million through share repurchases, which represents 8.9 million shares or about 2.4% of shares outstanding. At the end of the first quarter, we had $2.5 billion remaining in share repurchase authorization. Investment excellence is essential to growing earnings and cash generation. We're targeting CapEx of $1.1 billion this year, which includes funding for strategic projects in our packaging business to build out capabilities and capacity in the box system to drive profitable growth.
We also plan to increase funding for cost reduction projects with expected returns on those projects in excess of 25%. We will continue to be disciplined and selective on assessing M&A opportunities that may supplement our goal of accelerating profitable growth. You can expect M&A to focus primarily on bolt-on opportunities in our packaging business -- businesses in North America and Europe. Any potential opportunity we pursue must create compelling value for our shareowners. One final comment on capital allocation. Last week, we monetized about half of our investment in Sylvamo with the proceeds of $144 million. This reduces our ownership interest to about 10.5%. Turning to Slide 13. I'll provide further detail on the work that we're doing around Building a Better IP. As you can see on the right side of the slide, we are also introducing a chart that will highlight our progress each quarter. We're confident in our Build a Better IP set of initiatives, which will deliver more than $200 million of gross incremental earnings in 2022. That represents more than two times the dis-synergies resulting from the spin off, and our value drivers continue to ramp in 2023 and 2024 with net incremental earnings of $350 million to $430 million in 2024. Through the first quarter, we achieved $40 million of earnings improvement from dedicated teams working on more than 50 initiatives across the company. Approximately 70% of these initial results are coming from structural cost reduction. By streamlining our corporate and staff functions to realign with our more simplified portfolio, we have already offset 100% of the dis-synergies from the Sylvamo spend, and we have line of sight to additional savings from initiatives targeting lower overhead spending and further optimization. We are designing the organization to support a packaging-focused company with a more focused footprint, which is what lean effectiveness is all about. Taking a closer look at the other two drivers. We believe our process optimization initiative has potential to significantly reduce costs across our operations by leveraging advanced technology and data analytics. Over the past year, dedicated teams have been working with outside experts to identify opportunities and develop new tools and capabilities to increase efficiency and reduce costs in areas such as maintenance and reliability, distribution, and logistics, and sourcing.
We believe these opportunities are significant, and we will begin scaling these capabilities across our system. And finally strategy acceleration is about delivering profitable growth through commercial and investment excellence. We are focused on profitably growing our North American box channel and optimizing our EMEA packaging business through organic growth and targeted capital investments. We are also committed to delivering cost of capital financial returns in our Global Cellulose Fibers business. Through the first quarter, we have structurally improved margins in our GCF business by realizing more value for absorb -- absorbent pulp through restructuring commercial contracts and we're growing our specialty products through innovation. We've also realized benefits from mix improvements in our North American packaging business and further optimizations on our European operations by improving performance and increasing integration of our Madrid mill and box system. As I mentioned earlier, there are dedicated teams working on many initiatives across the company that will drive structural earnings growth going forward. We have good line of sight on the expected benefits for 2022 and beyond, and we'll continue to update you on our results going forward. And with that, I'll turn it back over to Mark.
