International Paper (click ticker for report: ) reported strong second quarter results Thursday that showed impressive core operating-income improvement. Revenue advanced 3.6% during the period thanks to strong performance in its ‘Industrial Packaging’ and ‘Consumer Packaging’ segments, both of which jumped 9.6%. ‘Industrial Packaging’ was bolstered by higher selling prices for boxes and containerboard (and increased containerboard volumes), while the strength in ‘Consumer Packaging’ was primarily a result of higher volumes (namely from Asian coated paperboard). ‘Distribution’ revenues fell, while sales in its ‘Printing Papers’ division edged up 2%. On the whole, revenue performance was solid.
International Paper’s segment operating profit surged more than 40%, to $601 million, though a number of large special items in the prior-year period made the comparison an easy one. ‘Industrial Packaging’ operating profit leapt to $474 million in the period, an 80%+ jump. ‘Consumer Packaging’, ‘Printing Papers’, and ‘Distribution’ operating profit fell during the period, however. Excluding special items, business segment operating profits were $622 million, up nearly 9%. Adjusted operating earnings at International Paper came in at $288 million, or $0.64 per share, in the second quarter of 2013, up from $232 million, or $0.53, in the prior-year period (a 24% increase). For the first six months of 2013, cash flow from operations has dipped, but free cash flow has expanded to $751 million from $706 million, a 6% increase, thanks to lower capital outlays ($488 million versus $705 million).
Overall, we were very pleased with International Paper’s top-line increase, pricing strength, and ability to leverage sales growth into material operating earnings expansion, despite higher planned outage costs and the bankruptcy of customer National Envelope. Management noted that the firm is well-positioned to “significantly improve earnings and free cash flow for the balance of 2013.” Still, we’ll be watching closely to see if the expected free cash flow improvement comes from lower spending or higher-quality cash from operations and whether such improvement is sufficient to drive (which is weighed down by its net debt load). At the moment, we’re not rushing to enter a position in the cyclical paper and packaging leader in either of our actively-managed portfolios.