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International Paper Fourth Quarter Profit Jumps

Feb. 1, 2007 (Press Release) - International Paper today reported preliminary full-year 2006 net earnings of $1.1 billion ($2.18 per share) compared with $1.1 billion ($2.21 per share) in 2005. The company posted fourth-quarter 2006 net earnings of $2.0 billion ($4.37 per share) compared with earnings of $202 million ($0.42 per share) in the third quarter of 2006 and a loss of $77 million ($0.16 per share) in the fourth quarter of 2005. Amounts in all periods include special items, and all periods presented now reflect the wood products and beverage packaging businesses, along with the kraft papers and Brazilian coated papers businesses, as discontinued operations.

Full-year 2006 earnings from continuing operations and before special items were $635 million ($1.33 per share), compared with $329 million ($0.70 per share) in the 2005 full year. Earnings from continuing operations and before special items in the fourth quarter of 2006 were $211 million ($0.47 per share), compared with $196 million ($0.40 per share) in the third quarter and $18 million ($0.04 per share) in the fourth quarter of 2005.

Quarterly net sales were $5.3 billion for the quarter, down slightly from $5.4 billion in the third quarter and $5.5 billion in the fourth quarter of 2005. Annual net sales were $22 billion in 2006 compared with $21.7 billion in 2005.

Operating profits for the fourth quarter were $418 million, compared with operating profits of $657 million in the third quarter of 2006. Excluding special items, operating profits were $546 million in the fourth quarter versus $644 million in the third quarter, mainly due to lack-of-order downtime and operating issues at specific mills. Full-year 2006 operating profits were $2.1 billion versus $1.6 billion in 2005.

"International Paper delivered solid fourth-quarter results," said International Paper Chairman and Chief Executive John Faraci. "Prices remained strong, inventory levels are in good shape, and cost controls continued to produce results. We saw some upside from lower interest expense and fewer shares outstanding. Significant debt reduction and our share repurchase program strengthened our balance sheet and returned value to shareowners. However, as is typical, volumes were seasonally slower. We also saw our operations affected by lack-of-order downtime, planned maintenance outages and the impacts of capital projects in our North American and Brazilian paper businesses."

Faraci continued, "Year over year, we saw strong gains in pricing, volume, cost and mix in 2006, and delivered our best performance since 2000. We achieved approximately $330 million in profit improvement, which boosted our earnings per share by about 56 cents. While we are not satisfied with the absolute level of earnings, we are encouraged by the continued supply/demand balance in our North American uncoated papers and industrial packaging businesses, the strength in our global papers business, and the progress we made in our transformation plan. We are well positioned to continue building on these gains in 2007."

Commenting on the first quarter of 2007, Faraci said, "We expect volumes to improve slightly in the first quarter, the result of seasonal improvements in our container and printing papers businesses, but expect some of that to be offset by slightly higher input costs. Timber harvest revenues will also drop off next year, now that we've completed the sale of most of our U.S. forestlands."

He added, "Our priorities in 2007 are to significantly improve our profitability and returns and continue to return value to shareowners. We're targeting $400 million in improvements to our existing businesses, and expect to deliver about $165 million in operating earnings this year from recent selective reinvestments in Brazil and China. We also remain committed to returning value to shareowners. We currently have an open-market plan in place to buy back shares and plan to repurchase up to $1.6 billion of our stock by year-end."

SEGMENT INFORMATION

Fourth-quarter segment operating profits and business trends compared with the third quarter of 2006 are as follows:

Printing Papers operating profits were $62 million, or $190 million excluding special items, down from the third quarter's record operating profits of $249 million, due to lower North American volumes that more than offset some modest volume increases in Europe and Brazil; higher operating costs related to lack-of-order downtime in North America and planned maintenance outages in North America, Europe and Brazil; as well as the impact of spending related to other planned upgrades and conversions.

Industrial Packaging operating profits were $122 million in the fourth quarter, compared with $138 million in the third quarter, or $125 million excluding special items. The slight decrease reflects slightly lower volumes, higher manufacturing expense and higher input costs.

Consumer Packaging operating profits were $28 million in the fourth quarter, down from $48 million in the third quarter due primarily to a one- time non-cash charge related to Shorewood Packaging, as well as lower volumes and mill operating issues.

The company's distribution business, xpedx, reported record fourth-quarter operating profits of $31 million compared with operating profits in the prior quarter of $34 million, due to seasonal slowdown.

Fourth-quarter Forest Products operating profits of $162 million were generally flat with third-quarter operating profits of $166 million. Higher real estate sales were offset by lower recreational and harvest revenues following the completion of the sale of 5.1 million acres of U.S. forestlands in the fourth quarter.

Net corporate expenses totaled $166 million for the quarter, down from $221 million in the third quarter, reflecting favorable year-end adjustments of full-year LIFO and other benefits-related charges.

EFFECTIVE TAX RATE

The effective tax rate from continuing operations and before special items for the fourth quarter of 2006 was 28 percent, unchanged from third quarter, bringing the 2006 estimated full-year rate to 29 percent. The 2005 full-year tax rate was 20 percent, reflecting favorable adjustments from the finalization of prior period income tax audits.

DISCONTINUED OPERATIONS

Discontinued operations includes the operating results of the kraft papers, Brazilian coated papers, wood products and beverage packaging businesses. During the fourth quarter of 2006, International Paper announced the signing of a definitive agreement to sell its beverage packaging business for approximately $500 million, subject to certain adjustments and conditions at closing. Additionally, the company announced two separate definitive agreements for the sale of 13 lumber mills for approximately $325 million and five wood products plants for approximately $237 million, both subject to various adjustments and conditions at closing. Net pre-tax charges of $18 million ($11 million after taxes) for the beverage packaging business and $102 million ($69 million after taxes) for the wood products business were recorded in the fourth quarter to adjust the carrying value of these businesses based on these planned transactions. Additionally, a $38 million pre-tax credit ($23 million after taxes) was recorded during the quarter for refunds received from the Canadian government of duties paid by the company's former Weldwood of Canada Limited business, and a pre-tax charge of $3 million ($2 million after taxes) was recorded for smaller adjustments of prior discontinued operation estimates. The net after-tax effect of these items, including $12 million of after-tax net operating losses for these units in the fourth quarter, was a charge of $71 million, or $0.16 per share.

In the 2006 third quarter, pre-tax charges of $165 million and $115 million had been recorded to adjust the carrying values of the wood products and beverage packaging businesses to their then estimated fair values, and a $101 million pre-tax gain was recorded upon the completion of the sale of the Brazilian coated papers business. Additionally, pre-tax charges of $16 million and $101 million had been recorded in the 2006 second and first quarters relating to the pending sale of the kraft papers business.

EFFECTS OF SPECIAL ITEMS

Special items in the fourth quarter of 2006 included a pre-tax gain of $4.4 billion ($2.7 billion after taxes) from sales of U.S. forestlands included in the company's transformation plan, a charge of $759 million (before and after taxes) for the impairment of goodwill in the company's coated paperboard and Shorewood Packaging businesses, a $128 million pre-tax impairment charge ($84 million after taxes) to reduce the carrying value of the fixed assets of the company's Saillat, France, mill to estimated fair value, a $111 million pre-tax charge ($69 million after taxes) for restructuring and other corporate charges, a $6 million pre-tax credit ($4 million after taxes) for interest received from the Canadian government on refunds of prior-year softwood lumber duties, a $21 million pre-tax charge (zero after taxes) relating to smaller asset sales and a $5 million pre-tax credit ($3 million after taxes) for reductions of reserves no longer required. Restructuring and other corporate charges included a $34 million charge ($21 million after taxes) for severance and other charges associated with the company's transformation plan, a gain of $115 million ($70 million after taxes) for payments received in the fourth quarter relating to the company's participation in the U.S. Coalition for Fair Lumber Imports, a charge of $157 million ($97 million after taxes) for losses on early debt extinguishment, a $40 million charge ($25 million after taxes) for increases to legal reserves, and a $5 million credit ($4 million after taxes) for other items. In addition, a $4 million tax expense was recorded in the quarter. The net after-tax effect of these special items was a gain of $1.8 billion, or $4.06 per share.

Special items in the third quarter of 2006 included a pre-tax charge of $92 million ($56 million after taxes) for restructuring and other charges, a pre-tax credit of $304 million ($185 million after taxes) for gains on the sale of U.S. forestlands included in the company's transformation plan, a pre- tax gain of $74 million ($44 million after taxes) for net gains on sales and impairments of businesses, and a $4 million income tax adjustment. The net after-tax effect of these special items was a gain of $0.35 per share.

Special items in the fourth quarter of 2005 included a pre-tax charge of $221 million ($135 million after taxes) for restructuring charges and other charges, a pre-tax charge of $46 million ($30 million after taxes) for adjustments of estimated losses on businesses sold or held for sale, a $35 million pre-tax credit ($21 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation, and a $1 million credit for changes to previously provided reserves. In addition, a $19 million net income tax benefit was recorded in the quarter, reflecting a $74 million favorable adjustment from the finalization of the company's 1997 through 2000 U.S. federal income tax audit, a $43 million provision for deferred taxes related to earnings being repatriated under the American Jobs Creation Act of 2004, and $12 million of other tax charges. The net after-tax effect of all of these special items was a charge of $0.26 per share.

SOURCE: International Paper




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