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International Paper posts best 1st quarter since 2000

May 3, 2007 - International Paper today reported preliminary first-quarter 2007 net earnings of $434 million ($0.97 per share) compared with fourth-quarter net earnings of $1.98 billion ($4.38 per share) and a loss of $1.2 billion ($2.54 per share) in the first quarter of 2006. Amounts in all periods include special items, including the receipt of proceeds from the sale of the majority of the company's U.S. forestlands in the fourth quarter of 2006.

Earnings from continuing operations and before special items in the first quarter of 2007 were $203 million ($0.45 per share), compared with $216 million ($0.47 per share) in the fourth quarter of 2006 and up from $58 million ($0.12 per share) in the first quarter a year ago.

Quarterly net sales were $5.2 billion, compared with $5.3 billion in the fourth quarter of 2006, and $5.5 billion in the first quarter of 2006, primarily reflecting lower forestland sales.

Industry segment operating profits continued to rise to $530 million for the 2007 first quarter versus $425 million in the 2006 fourth quarter and $411 million in the first quarter of 2006. The increase reflects continued strong average price realizations and strong manufacturing operations.

"We've hit the ground running in 2007 with our best first quarter since 2000 and operational margins up nearly 300 basis points versus the first quarter last year," said Chairman and Chief Executive Officer John Faraci. "Our pricing momentum remains strong, with volumes flat overall as we took some downtime and shifted product among global markets to match our supply with our customers' demand. Our manufacturing operations performed well and improvements in cost and mix more than offset some overall increases in input costs. We've also now bought more than $800 million in shares on the open market, which has brought our outstanding share count down."

Commenting on the second quarter of 2007, Faraci said, "We expect somewhat higher earnings from continuing operations in the second quarter, with seasonally stronger volumes and improvements in average price realizations. We continue to improve the performance of our global manufacturing operations, and we'll realize earnings from our first full quarter of operations from the Luiz Antonio mill in Brazil. We expect that input costs will remain high and also expect to have slightly higher maintenance outage expense in the second quarter."

SEGMENT INFORMATION

First-quarter 2007 segment operating profits and business trends compared with the fourth quarter of 2007 are as follows:

Operating profits for Printing Papers were $231 million, up from fourth quarter 2006 operating profits of $191 million, excluding special items. The increase is attributable to improved results across our global paper businesses, including record first-quarter performance from European Papers and the addition of the Luiz Antonio mill in Brazil. Pulp earnings also grew in the first quarter, resulting from higher shipments, improved operations at the Riegelwood, N.C., mill, and higher prices.

Industrial Packaging operating profits were $103 million, compared with $130 million in the prior quarter. The decrease was principally due to a change in accounting treatment for planned mill maintenance outages in the first quarter. Box volumes were slow early in the quarter, with substantial pick-up in March. Strong manufacturing performance offset most of the impact from higher fiber costs through the quarter. The European container business had record first-quarter earnings thanks to better volumes, higher prices and strong manufacturing operations.

Consumer Packaging operating profits were $61 million in the first quarter, up from $27 million in the 2006 fourth quarter, due to higher earnings in U.S. and European coated paperboard and foodservice businesses, as well as contributions from the IP-Sun Paper joint venture in China. The foodservice business had its best quarter in eight years with strength in volumes, price and cost control. Higher earnings in the U.S. business reflect, in part, the change in accounting treatment for planned mill maintenance outages. Shorewood Packaging is seasonally slow in the first quarter, but posted better results due to the absence of a one-time non-cash charge that impacted fourth-quarter results.

The company's distribution business, xpedx, reported record first-quarter operating profits of $29 million compared with operating profits in the prior quarter of $31 million. Sales revenues were slightly down versus the fourth quarter of 2006 because of seasonal slowdowns in volumes.

Forest Products operating profits declined to $100 million from fourth- quarter operating profits of $162 million. Second-quarter Forest Products operating profits could be slightly down from first quarter due to timing of some land sale transactions. The company's objective in managing the sale of its remaining lands is to earn maximum value for shareowners.

Net corporate expense totaled $164 million for the quarter, essentially even with $166 million in the 2006 fourth quarter and well below $180 million for the 2006 first quarter. Compared with the fourth quarter, the benefit of lower pension expense was largely offset by higher benefits-related costs and the effect of a fourth-quarter favorable inventory-related adjustment. Lower pension expense net of inventory-related adjustments were the major factors in the decline versus the 2006 first quarter.

EFFECTIVE TAX RATE

The effective tax rate from continuing operations and before special items for the first quarter of 2007 was 32 percent, compared with a tax rate of 28 percent in the fourth quarter of 2006 and 26 percent in the first quarter of 2006. The increase reflects the higher percentage of total company earnings generated from U.S. operations.

DISCONTINUED OPERATIONS

Discontinued operations for the 2007 first quarter included a $21 million pre-tax gain ($9 million after taxes) relating to the sale of wood products operations, a pre-tax loss of $9 million ($35 million after taxes) for adjustments to the losses on sales of the beverage packaging and kraft papers businesses, a pre-tax credit of $10 million ($6 million after taxes) for additional duty refunds received related to our former Weldwood of Canada Limited business, and the operating results of the beverage packaging and wood products businesses during the quarter.

Amounts recorded in the 2006 fourth quarter included pre-tax charges of $102 million and $18 million ($69 million and $11 million after taxes) to adjust the carrying values of the wood products and beverage packaging businesses, a $38 million pre-tax credit ($23 million after taxes) for Canadian duty refunds received, a $3 million pre-tax charge ($2 million after taxes) to adjust prior discontinued operations estimates, and the quarterly operating results of the kraft papers, wood products and beverage packaging businesses.

Discontinued operations in the 2006 first quarter included a $100 million pre-tax charge ($61 million after taxes) to reduce the carrying value of the kraft papers business, and the operating results for the quarter of the kraft papers, Brazilian coated papers, wood products and beverage packaging businesses.

EFFECTS OF SPECIAL ITEMS

Special items in the first quarter of 2007 included an $18 million pre-tax charge ($11 million after taxes) for severance and other charges associated with the company's Transformation Plan, a pre-tax gain of $205 million ($164 million after taxes) relating to the assets exchanged for the Luiz Antonio mill in Brazil, a pre-tax gain of $103 million ($96 million after taxes) from the sale of the Arizona Chemical business, and a $6 million pre- tax credit ($4 million after taxes) for adjustments relating to the coated papers business.

Special items in the 2006 fourth quarter 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 company's Saillat, France, mill, 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 on Canadian duty refunds, 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.

Special items in the 2006 first quarter included a $1.3 billion pre-tax charge ($1.2 billion after taxes) to reduce the carrying value of the company's coated papers business, an $18 million pre-tax charge ($11 million after taxes) for organizational restructuring charges related to the company's transformation plan, an $8 million pre-tax charge ($5 million after taxes) for losses on early debt extinguishment, and an $18 million pre-tax charge ($11 million after taxes) for legal reserves.

SOURCE: International Paper




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