Tim S. Nicholls
Senior Vice President and Chief Financial Officer at International Paper
Thank you, Mark. Good morning, everyone. I'm on Slide five, which shows our sequential earnings bridge. As Mark mentioned, we generated strong earnings growth in the second quarter relative to both prior quarter and prior year, driven by strong price realization and execution of our Building a Better IP initiatives. Second quarter operating earnings per share were $1.24 as compared to $0.76 in the first quarter. Price and mix improved by about $206 million or $0.40 per share with strong price realization in both business segments and across all channels. Volume was relatively flat sequentially in our Industrial Packaging segment, and global cellulose fibers, fluff pulp shipments continue to be constrained by ongoing vessel delays. Operations and costs improved sequentially as our mills and converting system performed well.
In the second quarter, we received $16 million of insurance recovery related to Prattville. In addition, onetime items were things like lower employee benefits costs, medical claims and workers' comp contributed favorably to operations and costs. These onetime items added about $80 million or $0.16 per share, which will not repeat in the third quarter. We successfully completed our second highest maintenance outage quarter of the year and 65% of our annual maintenance program through the first half of the year. Input costs were about $100 million or $0.20 per share in the second quarter, driven by higher energy chemicals and distribution costs, in large part because of higher diesel fuel prices. On Slide 33 of the appendix, we provide details on our consumption by key inputs, including natural gas, which was also a significant cost headwind in the quarter. Corporate and other items included benefits from lower tax expense and a lower share count.
Lastly, equity earnings were stable versus the prior quarter. Turning to the segments and starting with Industrial Packaging on Slide six. Looking at the second quarter performance, we delivered meaningful revenue growth and margin expansion. Price and mix was strong and better than our expectations due to faster-than-expected implementation of our March price increase and higher export prices. Our volume was flat sequentially and below last year's strong comp. As Mark mentioned earlier, we saw a shift in consumer spending through good to services and the retail channel managed through elevated inventories, which then impacted box demand across segments like e-commerce and shipping and distribution, durables and other nondurables. We firmly believe these segments will continue to grow over time and that IP is well positioned to grow with them.
In addition, the tight labor environment continues to constrain our box plant system. We're experiencing this, especially in regions where we are consistently operating our plants on weekends to serve elevated demand from segments like e-commerce and shipping and distribution that have grown significantly during the last couple of years. Going forward, we will continue to focus on further optimizing our system by improving staffing levels and investing across the system to serve the growing demand of our customers. Operations and cost improved sequentially. Our mills and box system ran very well, and we successfully executed our second highest maintenance outage of the year. The business also benefited from additional insurance recovery of $16 million related to Prattville and the onetime items I mentioned earlier by approximately $60 million. Operating costs remain elevated due to ongoing logistics constraints.
However, we are in a much better position to navigate this environment with healthier system inventories. Input costs were a significant headwind in the second quarter and higher than our expectations due to higher costs for energy, chemicals and distribution. We expect these elevated costs to persist in the third quarter. These cost headwinds are even more significant for our packaging business in Europe, where input costs in the second quarter were $45 million higher than the second quarter of last year. About 70% of that headwind was from higher energy costs, where natural gas prices have averaged about 5 times normal historical levels. Turning to Slide seven and staying with North American Industrial Packaging. We are focused on continuing to grow earnings by restoring margins to historical levels in the low 20% range. We've made solid progress in the quarter and delivered a 19% margin, up from just over 15% in the first quarter despite higher-than-expected input costs. We're still confident we can achieve our target. However, the additional input cost inflation may influence the timing. Our mills and box plants operated very well. Containerboard inventories across our system were back to sufficient levels so we are better positioned to proactively manage through the ongoing supply chain constraints.
As I said earlier, we will deploy an investment strategy that further enhances our capabilities and footprint to grow with our customers while generating attractive financial returns on these investments. This is a key part of building a better IP. And an example of this is the greenfield box plant that we are building in Southeast Pennsylvania, which is expected to start up early next year. In addition, our Building a Better IT initiatives are also focused on structurally reducing costs and deploying commercial strategies to improve mix and margins. Moving on to Global Cellulose Fibers on Slide eight. I'll start with an update on the demand environment and supply chain. Demand for fluff pulp remains solid across all regions. Our confidence reflects the essential role of the absorbent hygiene products and meeting customer needs. In addition, we expect the supply-demand environment for fluff to remain favorable near term. Feedback from our customers continues to indicate that fluff pulp inventories are near historic lows. Supply chains continue to remain stretched, driven by ongoing port congestion and vessel delays, and we expect these challenging conditions to continue for the foreseeable future.
Taking a look at the second quarter performance. Price and mix improved by $53 million due to successful execution of previously announced price increases with solid momentum as we enter the third quarter. Volume in the quarter was stable. I would note that backlogs remain high and are about double our normalized levels due to the logistics challenges. Our mills continue to run well. Ops and costs were better in the quarter as the business benefited from onetime items I mentioned earlier by approximately $20 million. Lastly, input costs increased by $22 million sequentially. About 65% of the additional cost was the result of higher energy prices with the remainder coming from higher chemicals and freight. Turning to Slide nine. I want to reaffirm that Global Cellulose Fibers remains 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 supply/demand outlook for fluff pulp with price realization from prior increases accelerating as we move through the year. I would also note that as part of Building a Better IP, we are focused on driving structural margin improvement by ensuring we get paid for the value we provide to our customers and aligning with the most attractive regions and segments to deliver profitable growth. We are also making solid progress in our fluff pulp contract negotiations, which we anticipate will provide additional commercial benefits as we move into 2023. Turning to Slide 10. I'd like to update you on the Building a Better IP set of initiatives. We're making solid progress and delivered $65 million of earnings in the second quarter for a total of $105 million for the first half of the year. Given the strong momentum, we're on track to achieve the high end of our full year target. About half the benefits to date are from our lean effectiveness initiative 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 printing paper 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. We believe our process optimization initiatives have the potential to significantly reduce cost 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 are beginning to scale these capabilities across our system, which we believe will yield significant savings as we go through 2023. And finally, strategy acceleration is about delivering profitable growth through commercial and investment excellence.
As I mentioned earlier, we're focused on profitably growing our North American packaging business by improving margins and investing for organic growth. We are further optimizing our European operations by improving performance and increasing integration of our Madrid mill and box system, and we're well on our way to achieve cost of capital returns in our global cellular business by realizing more value for absorbent pulp. In summary, Building a Better IP is about driving structural margin improvement and profitable growth. Turning to Slide 11. I'll cover our third quarter outlook. I'll start with Industrial Packaging. We expect price and mix to improve by $40 million on realization of prior increases. Volume is expected to increase by $10 million with one more day sequentially and stable demand. Ops and costs are expected to decrease earnings by $75 million, largely due to the non-repeat of the onetime favorable items I mentioned earlier. Maintenance outage expense is expected to decrease by $41 million. And lastly, input costs are expected to increase by $30 million. In Global Cellulose Fibers, we expect price and mix to improve by $60 million on the realization of the prior increases.
As a reminder, price realization in this segment has a 2- to 3-quarter lag. We're running on the longer end of that range right now due to the ongoing vessel delays. Volume is expected to remain stable sequentially. Operations and costs are expected to decrease earnings by $30 million due to nonrepeat of favorable onetime items in the second quarter and timing of spending. Maintenance outage expense is expected to decrease by $24 million. And lastly, input costs are expected to increase by $5 million. Moving to our full year outlook on Slide 12. We remain confident in our full year EBITDA outlook of $3.1 billion to $3.4 billion and our free cash flow target of $1.3 billion to $1.5 billion. We generated strong revenue growth and margin expansion in the second quarter, exceeding our earnings outlook for the quarter, which provides solid momentum as we enter the second half of the year. We expect demand for corrugated packaging to remain stable.
In cellulose fibers, we see a continued favorable supply/demand backdrop for fluff pulp. We continue to realize benefits across the portfolio from the implementation of higher price increases while distribution and input costs are expected to stabilize later this year at elevated levels. As I mentioned earlier, we are also confident in achieving $225 million of gross earnings from our Building a Better IP set of initiatives. Regarding capital expenditures, we have lowered our full year estimate by $100 million due to extended lead times on equipment purchases. Despite these equipment delays, we are committed to investing in our business to support strategic growth opportunities and to structurally reduce our costs. Let me turn to Slide 13 and take a moment to update you on our capital allocation actions in the second 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 two 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 medium-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 second quarter, we returned $565 million to shareowners, including $395 million through share repurchases, which represents 8.7 million shares or about 2.3% of shares outstanding. As a result, we've returned more than $1.1 billion of cash to shareholders so far this year. At the end of the second quarter, we had $2.1 billion remaining in share purchase -- share repurchase authorization. Investment excellence is essential to growing earnings and cash. As I mentioned, we are targeting capex of $1 billion, which includes funding for strategic projects in our packaging business to build our capabilities and capacity in our box system to drive profitable growth.
We also plan to increase funding for cost reduction projects with expected returns 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 in North America and Europe. Any potential opportunity we pursue must be compelling long-term value for our shareholders. Turning to Slide 14. I want to highlight the strength and resiliency of International Paper going forward. With this as a backdrop, I'm confident IP will navigate any economic environment from a position of strength. We have a very strong balance sheet, which we will preserve because we believe it's core to our capital allocation framework. Our strong balance sheet ensures financial stability and optionality and softer economic environments and is the foundation to create significant value throughout the economic cycle. As a result, we can continue to return cash to shareowners in a meaningful way through a sustainable and competitive dividend and through opportunistic share repurchases.
We can also proactively invest in our business throughout the cycle to create significant value by reducing costs and by developing the capabilities we need to meet the growing demand of our customers. Our large system of mills and box plants provides us with added advantage of flexibility and optionality. We've demonstrated our ability to optimize our cost structure throughout different demand environments by making more of our cost, less fixed and more variable. For example, we can increase utilization across our system during strong demand environments. And if demand moderates, we can shift production to our lowest-cost operations and share high marginal costs across the system based on regional costs for fiber, energy and supply chain. We also have levers to manage working capital needs to align with the demand signal. One last point. As I talked about our confidence in delivering our Building a Better IP initiatives, we have line of sight to these opportunities and believe they are largely within our control and not dependent on economic tailwinds. In summary, the strength and resilience in IP enables us to consistently create significant value for our shareowners over the cycle.
And with that, I'll turn it back over to Mark.
