Tim S. Nicholls
Senior Vice President and Chief Financial Officer at International Paper
Thank you, Mark. Turning to our first quarter key financials on Slide 5. Revenue was down slightly versus prior periods, while operating earnings per share came in above prior year, and better than the outlook we provided last quarter.
Operating margins in the quarter were impacted by weaker demand and seasonally high planned maintenance outages. Free cash flow for the first quarter included a use of cash, totaling $193 million for the final settlement with the IRS related to our timber monetization actions we highlighted during our last earnings call. This settlement allowed us to further derisk our balance sheet. Also, about 31% of our annual capital expenditures occurred in the first quarter.
Moving through the first quarter, sequential earnings bridge on Slide 6. First quarter operating earnings per share were $0.53 as compared to $0.87 in the fourth quarter. Price and mix was lower by $0.10 per share due to the index movements across our portfolio. Lower export sales prices and unfavorable product mix in our Global Cellulose Fibers business as a result of lower absorbent pulp shipment.
Volume was flat sequentially, as weaker demand and customer inventory destocking across both businesses was offset by four additional shipping days in our North American Industrial Packaging business. In our Global Cellulose Fibers business, the first quarter was also lower due to the Chinese New Year.
In operations and costs, our mills ran very well. However, quarter-over-quarter was unfavorable because the fourth quarter benefited from favorable one time items, totaling $71 million or $0.15 per share, related to lower employee benefit costs, workers' comp expenses and medical claims. In addition, our Cellulose Fibers business was impacted by higher economic downtime due to the lower demand environment I mentioned earlier.
Maintenance outages were higher in the first quarter as planned, and we saw a significant relief from input costs, which were $134 million or $0.28 per share lower in the first quarter, primarily driven by lower energy and OCC costs. Corporate and other items was impacted by FX and timing of spend, partially offset by lower tax expense.
Turning to the segments and starting with Industrial Packaging on Slide 7. Pricing mix was lower due to index movements and lower export prices. This was partially offset by benefits from commercial mix initiatives, focused on margin improvement. Sequentially, volume benefited from four additional shipping days. However, demand for packaging weakened in March across most channels and segments from lower consumer demand and ongoing destocking across the supply chain.
Even in this dynamic demand environment, International Paper is well positioned due to our diverse portfolio of products and services and our strategic relationships with a large number of national and local customers across a broad range of attractive end segments.
Sequentially, operating costs were impacted by the non-repeat of approximately $57 million of favorable one time items I mentioned earlier, as well as timing of spend.
Overall, our mill system ran very well. The lower demand environment impacted operations and costs in the quarter, as we adjusted our system to align our production with customer demand. These actions resulted in approximately 421,000 tons of economic downtime across the system. Input costs were significantly lower and improved earnings by $105 million sequentially. Almost two-thirds of the benefit was from lower energy costs in North America and Europe, and the remainder was primarily from lower OCC and freight cost.
Overall, we continue to face very elevated supply chain costs, as well as the impact from the high inflation on materials and services, during the past couple of years. In a lower demand environment, we are running at full capacity. We believe there is a large opportunity to further optimize our system and take out high marginal cost. This remains a key lever in 2023.
Turning to Slide 8, we thought it would be helpful to 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 8.5% year-over-year in the first quarter and down almost 12% year-over-year in the month of March. We saw a demand decline across all end-use segments on a year-over-year basis and experienced another demand shift in March that impacted all segments except for e-commerce.
Furthermore, demand declines were more pronounced in segments that generally are more discretionary in nature, as consumers had to make choices while dealing with high inflation and rising interest rates. The yellow indicators represent segments where the demand decline was less than our overall average of 8.5%, and the red indicators represent declines that were greater than the average decline.
For example, processed food and protein were more resilient, down low to mid single digits, as consumers focus on essentials and value, and poultry serves as a low cost consumer staple. Fresh pulp produce was impacted by poor weather conditions on the West Coast and also in Florida. On the other side of this spectrum, segments like durables and other nondurable consumer goods are more discretionary in nature, along with shipping and distribution, these segments came under the most pressure with declines in the mid-teens. These segments also tend to be more affected by the inventory destocking efforts across the longer supply chains.
E-commerce was down mid-single digits versus last year, but showed more resilience through the quarter and is still up 50% from pre-pandemic levels. Based on feedback from our customers, we believe the majority of retailer inventory destocking has been completed through the first quarter. However, manufacturers are still reducing inventories, as a result of lower demand levels, improved supply chain velocity and focus on working capital, given higher interest rates.
We also believe the majority of destocking will be completed in the first half of the year, and considering our performance in April and looking at order backlogs, we expect sequentially higher volume in the second quarter. Despite these near term headwinds, we understand the critical role 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.
Moving to Cellulose Fibers on Slide 9. Taking a look at our first quarter performance, price and mix was relatively flat sequentially. Our strategic initiatives related to contract restructuring generated significant earnings improvement in the first quarter. However, this was offset by a less favorable mix due to lower fluff volumes in the quarter and a higher percentage of commodity grades, as well as the unfavorable impact from index movements.
Volume was lower due to customer inventory destocking in response to improvements in the supply chain velocity from last port congestion and improved vessel reliability and also impacted by the Chinese New Year. Feedback from our customers suggests the majority of destocking will be completed in the second quarter.
With that said, we believe fluff demand will continue to grow over the long term. This is due to the essential role that absorbent personal care products play in meeting consumer needs. The lower demand environment significantly impacted operations and costs in the first quarter as we adjusted our system to align our production with our customer demand. These actions resulted in approximately 130,000 tons of economic downtime across the system and accounted for approximately two-thirds of the ops and cost variance.
Sequentially, ops and costs were also impacted by inflationary pressures, as well as the nonrepeat of approximately $14 million of favorable one time items in the fourth quarter that I mentioned earlier. Planned maintenance outages were higher by $11 million sequentially and represents one of the highest outage quarters of the year. In addition, input costs were lower by $29 million due to lower energy and fiber costs.
Turning to Slide 10. Our Global Cellulose Fibers business continues to make progress, executing our strategy to deliver value creating returns over the business cycle. Business increased earnings by approximately $100 million in 2022 and is focused on driving incremental earnings growth this year, despite operating in a more challenging macro environment.
Our team successfully deployed a commercial strategy, focused on building strategic relationships with key global and regional customers and aligning the most attractive regions and segments. In the fourth quarter, we finalized our fluff pulp contract negotiations, which is contributing meaningful commercial benefits this year. Going forward, we believe there are significant opportunities to improve our cost to serve by reducing supply chain costs, which have increased significantly during the past couple of years. We expect to see these benefits will start to show up in our second quarter outlook.
We are focused on creating value for our customers by delivering products that meet their stringent performance and 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. We believe this is reflected in the premium we earned for fluff pulp over commodity grades, which has expanded over time. We are committed to building on this momentum and expect to drive additional earnings growth going forward.
Turning to Slide 11, I'd like to update you on the Building a Better IP initiatives. We're making solid progress and delivered $65 million of year-over-year incremental earnings improvement in the first quarter. Our lean effectiveness initiative was mostly completed early in the program, generating $110 million of cost savings, since we began our Building a Better IP program. By streamlining our corporate and staff functions to realign with a more simplified portfolio, we more than offset 100% of the dissynergies from the printing paper spin-off.
The most significant driver of the year-over-year results was strategy acceleration, as we deliver profitable growth through commercial and investment excellence. As I mentioned earlier, we generated solid earnings growth, and our Global Cellulose Fibers business on a path to deliver value-creating returns. We're also focused on profitably growing our Industrial Packaging business by improving margins and investing for the long term.
Process optimization initiative has the potential to reduce costs across areas, such as maintenance and reliability, distribution and logistics and sourcing, as we leverage advanced technology and data analytics. We believe these initiatives will deliver meaningful benefits going forward, as we finish implementing new capabilities across our business.
Turning to Slide 12. I want to take a moment to update you on our capital allocation actions. As Mark highlighted earlier, we have a very strong balance sheet, which we will preserve because we believe it is core to our capital allocation framework. Our 2022 year-end leverage was 2.1 times on a Moody's basis, which is below our target range of 2.5 times to 2.8 times.
Looking ahead, we have limited medium-term debt maturities. And finally, even in this environment, the risk mitigation strategies we've taken help ensure our pension plan remains fully funded. Returning cash to shareholders is the meaningful part of our capital allocation framework. In the first quarter, we returned $319 million to shareholders, including $157 million through share repurchases, which represents 4.3 million shares or about 1.2% of shares outstanding.
At the end of the quarter, our total authorization was approximately $3 billion. Going forward, we're committed to returning cash through maintaining our dividend and through opportunistic share repurchases. Investment excellence is essential to growing earnings and cash generation. We invested $341 million in our businesses in the first quarter, which includes funding for our cost reduction projects with attractive returns and for our strategic projects to build out capabilities in our box system.
Going forward, we plan to make additional investments across our box system to support long-term profitable growth, and we will remain disciplined and selective when assessing M&A opportunities.
Turning to Slide 13 and our second quarter outlook. I'll start with Industrial Packaging. We expect price and mix to decrease earnings by $110 million mainly as a result of prior index movement in North America and lower average export prices based on declines in the first quarter. Volume is expected to increase earnings by $30 million due to normal seasonal increase in daily shipments in North America, offsetting one less shipping day.
Operations and costs are expected to decrease earnings by $35 million due to the timing of spending. Maintenance outage expense is expected to decrease by $10 million. Second quarter should represent approximately 30% of the total planned outage cost in 2023. And through the first half of the year, we will have completed about 70% of expected annual outages.
The second quarter includes approximately $19 million of spend associated with the Riverdale Mill printing papers outage. This cost will be fully recovered as part of the charges to Sylvamo over the course of the year. And lastly, input costs are expected to decrease by $30 million from lower average costs for energy and freight.
Switching to Global Cellulose Fibers, we expect price and mix to decrease earnings by $45 million, as a result of prior index movement. Volume is expected to increase earnings by $5 million, primarily based on seasonally higher demand. Operations and costs are expected to increase earnings by $40 million due to lower supply chain costs and lower unabsorbed fixed costs from higher volume. Maintenance outage expense is expected to decrease by $33 million, and lastly, input costs are expected to decreased by $15 million, mostly due to lower energy and fiber cost.
Moving to our full year outlook on Slide 14. As Mark discussed earlier, as we entered the year, we recognized there were macroeconomic uncertainties ahead of us and that our businesses are not immune to these risks. The macro trends have shifted, resulting in weaker than expected demand for our products and price reductions across our portfolio through the first quarter, including prior index changes that will be implemented over the remainder of the year.
As a reminder, our previous outlook represented price indexes at that time. We are now projecting full year 2023 EBITDA for the company to be in the range of $2. 3 billion to $2.5 billion. We continue to optimize our system by reducing high marginal costs, driving additional benefits from our Building a Better IP initiatives. This includes delivering continued earnings growth in our Global Cellulose Fibers business despite cycle headwinds. I would also note that our outlook includes only the impact from published price changes today.
Free cash flow is expected to be $800 million to $900 million, which includes a one time tax payment of $193 million in the first quarter related to our timber monetization settlement. In addition to free cash flow, we also expect to receive approximately $500 million of cash proceeds from the Ilim sale.
For 2023, we are targeting capex of $1 billion to $1.2 billion with increased investments in our U.S. box system to build additional capabilities and position us for long term profitable growth with our customers. We will also focus on high return cost reduction projects across our systems.
With that, I'll turn it back over to Mark.
