Tim S. Nicholls
Senior Vice President and Chief Financial Officer at International Paper
Thank you, Mark. Good morning, everyone. I'm on Slide six, which shows our sequential earnings bridge. Third quarter operating earnings per share were $1.01 as compared to $1.24 in the second quarter. Price and mix improved by $151 million or $0.31 per share with strong price realization across both segments. Volume is lower in Industrial Packaging as a result of the softer demand across all channels. Global Cellulose Fibers demand was stable. However, pulp shipments were higher due to improved supply chain velocity.
Operations and costs were impacted by the nonrepeat of favorable onetime items in the second quarter, significant economic downtime in our Industrial Packaging business and higher distribution costs and other inflation across all businesses. As you may recall, our operations and costs in the second quarter benefited from $96 million or $0.19 per share of favorable onetime items related to insurance recovery for our Prattville mill as well as lower employee benefit costs, medical claims and workers' comp expenses.
Maintenance outages were lower in the third quarter as planned, improving earnings by $0.13. Input costs continue to be a headwind and were $75 million or $0.15 per share higher in the third quarterdriven by higher energy and chemicals, partially offset by lower OCC cost. On Slide 34 of the appendix, we provide details on our consumption of key inputs, including natural gas which was a significant cost headwind in the quarter for our businesses in North America and Europe.Corporate and other items include benefits from lower tax expense and a lower share count. Lastly, equity earnings were below the quarter prior, primarily due to the lower sales price and FX related to Ilim.
So turning to the segments and starting with Industrial Packaging on Slide seven. We had very strong price and mix improvement in the quarter as we successfully completed implementation of our March price increase, while also benefiting from higher average export prices and commercial initiatives focused on margin improvement.As Mark mentioned earlier, the challenging macro environment resulted in much lower volumes and unfavorable cost in our North American and European Packaging businesses. Demand for Packaging weakened significantly mid-quarter across all channels and segments from lower consumer demand and retailer inventory destocking. This large decline in volume impacted operations and costs in the quarter as we adjusted our system to align our production with our customers' demand. These actions resulted in approximately 400,000 tons of economic downtime across the system, resulting in higher unabsorbed fixed cost and a suboptimized system.
This represented approximately 1/3 of the higher cost and ops quarter-over-quarter. In addition, when not constrained, our mills ran very well, which increased the amount of economic downtime needed to match the reduced level of demand. Sequentially, operations and costs was also impacted by significantly higher distribution costs, inflation on materials and services and the nonrepeat of favorable onetime items we discussed in the second quarter. It also includes some additional spending on recovery boilers and bark boilers across our mills to make our own energy given the significant increases in natural gas prices.
Input costs were another significant headwind in the quarter and much higher than we expected, primarily due to higher energy costs that were only partially offset by lower OCC cost. These cost headwinds are even more significant for our packaging business in Europe, where natural gas prices doubled since the second quarter and averaged about 9x the normal level.
Turning to Slide eight. We thought it would be helpful if we share some additional perspective on underlying segment trends for our corrugated packaging business. As shown on the previous slide, our U.S. box shipments were down 5.4% year-over-year, and our overall U.S. channel was down 5.9%. As a reminder, our U.S. channel includes the U.S. box system as well as our open market Containerboard customers and our equity partnerships with strategic sheet feeders.
In the third quarter, we saw demand decline across all end-use segments. The yellow indicators represent segments where the demand decline was less than our overall average of 5.4% and the red indicators represent declines that were worse than our overall average. Segments, including beverage, durables and nondurables, which are more discretionary in nature, came under the most pressure as consumers had to make choices while dealing with high inflation. In addition, retailer inventory destocking has exacerbated the demand decline is for most segments in the near term.
Based on feedback from our customers and our performance in October, demand appears to be stabilizing at these lower levels as companies continue to work through their inventories in the fourth quarter. Despite these near-term headwinds, we understand the critical role that corrugated packaging plays in bringing essential products to consumers and believe that IP is well positioned to grow with our customers over the long term.
Turning to Slide nine. As Mark mentioned earlier, in the softer demand environment, where we are able to run our systems at full capacity, we have the ability to shed high marginal cost due to a wide range of options and capabilities across our large system of mills, box plants and supply chain. For example, we are shifting between fiber options based on the marginal cost of wood versus OCC. In this case, our mill teams consider the total cost to process the fiber, including the benefits from own-make energy when consuming wood versus the cost of natural gas used to process OCC.
Another example would be in the supply chain area. Our teams are reducing premium freight through mode optimization and increased availability of lowest-cost carriers. At mills, we're working to lower our planned maintenance outage cost by reducing overtime and premium pay that is traditionally associated with the shorter schedule. We are also continuing to invest in our operations to drive structural cost reduction from efficiency improvements in the areas of fiber and energy consumption. Ultimately, we are focused on restoring margins to historical levels by aligning our production with customer demand, while optimizing our cost structure.
Turning to Cellulose Fibers on Slide 10. I'll start with an update on the demand environment and supply chain. Demand for fluff pulp remains stable across all regions. Feedback from customers continues to indicate that fluff pulp inventories are near historical lows. We are experiencing moderate improvement in supply chain efficiencies. However, they continue to remain stretched driven by ongoing port congestion and vessel delays. We believe fluff pulp will continue to grow over the long term and are confident in the essential role of absorbent personal care products and meeting consumer needs.
Taking a look at the second quarter performance. Price and mix improved by $62 million due to the successful execution of previously announced price increases with solid momentum as we enter the fourth quarter. Volume in the quarter was higher due to some improvement in supply chain velocity. However, I would note that backlogs remain above normalized levels due to ongoing logistics challenges. Our mills continue to run well. Operations and costs were unfavorable in the quarter due to higher distribution cost and nonrepeat favorable onetime items in the second quarter. Planned maintenance outages were lower by $26 million sequentially, while input costs were higher by $12 million.
Turning to Slide 11. Our Global Cellulose Fibers business continues to make significant progress towards growing earnings and delivering cost of capital returns in the third quarter. And the business remains well positioned to sustain this level of performance in the fourth quarter. Our team successfully deployed a commercial strategy focused on building strategic relationships with key global and regional customers and aligning with the most attractive regions and segments. We are focused on creating value for our customers by delivering products that meet their stringent product safety standards and deliver innovative value. In addition, we are driving structural margin improvement by ensuring we get paid for the value we provide. To date, we have made solid progress in our fluff pulp contract negotiations, which will provide additional commercial benefits as we move into 2023. We are committed to building on this momentum and delivering value-creating returns over the business cycle. I would also note that this is a key part of building a better IP initiative in the category of strategy acceleration.
Turning to Slide 12. I would like to update you on Building a Better IP set of initiatives. We're making solid progress in delivering $70 million of earnings in the third quarter for a total of $175 million year-to-date. And we're on track to exceed the high end of our full year target. About half of the benefits to date are from our lean effectiveness initiative, by rapidly streamlining our corporate and staff functions to realign with a more simplified portfolio, we have already offset 100% of the dis-synergies from the Printing Papers spin-off. Although most of these benefits have been achieved, we will continue to pursue additional opportunities. The process optimization initiative has the potential to significantly reduce costs across areas such as maintenance and reliability, distribution and logistics and sourcing, as we leverage advanced technology and data analytics.
These initiatives will deliver meaningful benefits in 2023 as we finish implementing new capabilities across our businesses. And finally, strategy acceleration is about delivering profitable growth through commercial and investment excellence. Getting our Global Cellulose Fiber business to deliver value-creating returns is one example of this. We are also focused on profitably growing our Industrial Packaging business by improving margins and investing for organic growth.
Turning to Slide 13 and a look at the fourth quarter outlook. As Mark mentioned, our earnings will remain under pressure in the near term given the current demand environment. With that, I'll start with Industrial Packaging. We expect pricing mix in the export channel to be lower by $10 million. Volume is expected to decrease by $30 million with 4 less days sequentially in North America. And the traditional seasonal pickup from holiday demand is not expected to be as strong this year. This will be partially offset by seasonally higher produce volume and EMEA packaging. Operations and costs are expected to decrease earnings by $120 million. A little more than half of this is from the higher unabsorbed fixed costs resulting from lower volumes as well as seasonally higher costs, primarily from energy consumption and labor benefits. The remainder includes such items as inflation on materials and services and timing of spending. Maintenance outage expense is generally flat.
And lastly, input costs are expected to decrease by $80 million from lower fiber and energy costs. In Global Cellulose Fibers, we expect pricing mix to improve by $20 million on the realization of prior increases. Volume is expected to decrease by $10 million based on timing of shipments through the supply chain. Operations and costs are expected to increase by $5 million due to seasonality, while maintenance outage expense is expected to increase by $34 million. Lastly, input costs are expected to increase by $5 million primarily related to energy costs at our converting operations in Poland.
Turning to Slide 14, I'll take a moment to update you on our capital allocation actions in the third quarter. As Mark mentioned earlier, we have a very strong balance sheet, which we will preserve because we believe it is core to our capital allocation framework. Our 2021 year-end leverage was 2.3x on a Moody's basis, which is below our target range of 2.5 to 2.8x. Looking ahead, we have limited medium-term maturities with about $1.3 billion due over the next 10 years. And finally, even in this environment, the risk mitigation strategies we've taken to ensure our pension plan remains fully funded, and are in place and are delivering. Returning cash to shareowners is a meaningful part of our capital allocation framework. In the third quarter, we returned $434 million to shareholders, including $260 million through share repurchases, which represents 6.4 million shares or about 1.8% of shares outstanding. As a result, we've returned approximately $1.6 billion of cash to shareholders so far this year. In October, our Board of Directors authorized an additional $1.5 billion of share repurchases, which brings our total authorization to approximately $3.4 billion.
Going forward, we are committed to returning cash through maintaining our dividend and through opportunistic share repurchases. Investment excellence is essential to growing earnings and cash generation. We are targeting between $900 million to $1 billion, which includes the funding for cost reduction projects with attractive returns and for strategic projects to build out capabilities and capacity in our box system to support future profitable growth.
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 focus primarily on bolt-on opportunities in our packaging businesses in North America and Europe. Any potential opportunity we pursue must create compelling long-term value for our shareholders. And with that, I'll turn it back over to Mark.
