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International Paper Second Quarter Earnings Up Sharply

Aug. 2, 2007 - International Paper today reported preliminary second-quarter 2007 net earnings of $190 million ($0.44 per share) compared with first-quarter net earnings of $434 million ($0.97 per share) and $83 million ($0.17 per share) in the second quarter of 2006. Amounts in all periods include special items, including a $264 million ($0.59 per share) after-tax gain on sales of businesses in the 2007 first quarter.

Earnings from continuing operations and before special items in the second quarter of 2007 were $223 million ($0.52 per share), compared with $203 million ($0.45 per share) in the first quarter and $145 million ($0.30 per share) in the second quarter a year ago.

Quarterly net sales were $5.3 billion, essentially flat with $5.2 billion in the first quarter and down slightly from $5.7 billion in the second quarter of 2006, primarily reflecting 2006 sales from the U.S. coated papers business, which was sold in August 2006.

Industry segment operating profits rose to $572 million for the 2007 second quarter versus $530 million in the prior quarter and $552 million in the second quarter of 2006. The increase reflects continued strong average price realizations and solid manufacturing operations.

"We had a solid second quarter, our best since 2000," said International Paper Chairman and Chief Executive Officer John Faraci. "We're seeing continued margin expansion quarter-to-quarter, because of solid operations improvement, improved pricing and stable volumes. In our business outside North America, demand for papers and packaging continues to grow. Earnings were impacted somewhat by higher raw material costs, planned maintenance outage costs, and expenses at our Pensacola, Fla., mill related to maintenance and the conversion of a paper machine to lightweight linerboard production; however, those factors were offset by ongoing results of profit-improvement initiatives."

Commenting on the third quarter of 2007, Faraci said, "We expect somewhat stronger earnings from continuing operations, with continued cost reduction and pricing improvement in some markets, including pulp and packaging, as well as higher land sales. Input costs will remain high, but we anticipate continued operations improvement and cost reduction across our global manufacturing base, as well as lower mill maintenance shutdown expenses in the quarter."

SEGMENT INFORMATION

Second-quarter 2007 segment operating profits and business trends compared with the previous quarter are as follows:

Operating profits for Printing Papers were $249 million, up from first- quarter operating profits of $231 million. The increase is due to improved results in the European papers, U.S. pulp, and Brazilian papers businesses, including the first full quarter of operating results from the recently acquired Luiz Antonio mill in Brazil. These factors more than offset costs of planned maintenance outages and high raw materials costs in the U.S. uncoated papers business.

Industrial Packaging operating profits were strong, increasing 35 percent to $139 million from $103 million in the prior quarter. Higher operating profits were driven by higher containerboard and U.S. box shipments, fewer planned maintenance outages than in first quarter, and better manufacturing operations. The Pensacola, Fla., mill maintenance and conversion expenses negatively impacted results.

Consumer Packaging operating profits declined to $48 million from $61 million in the first quarter, mainly due to more planned mill outages in the U.S. coated paperboard business and higher input and other costs across the segment. Volume, price and mill operations were otherwise solid in the sector, and the foodservice business posted record profits for the quarter.

The company's distribution business, xpedx, again reported record quarterly operating profits of $38 million compared with prior-quarter results of $29 million. Sales revenues increased in part because of seasonally stronger facility and packaging supplies markets. Margins and mix were slightly stronger than in first quarter, with continued excellent cost control.

Forest Products operating profits were $98 million, about flat with first- quarter operating profits of $100 million. While land sales are difficult to forecast within a quarter, the company expects third-quarter earnings from land sales to total between $110 million and $140 million. The company's objective in managing the sale of its remaining lands is to earn maximum value for shareowners.

Net corporate expense totaled $179 million for the quarter, compared with $164 million in the first quarter and $179 million in the 2006 second quarter. The increase principally reflects higher benefit-related costs. Compared with the 2006 second quarter, the benefits from lower pension expense were offset by higher benefit-related costs.

EFFECTIVE TAX RATE

The effective tax rate from continuing operations and before special items for the second quarter of 2007 was 29 percent, compared with a tax rate of 32 percent in the first quarter and 34 percent in the second quarter of 2006. The 2007 second-quarter rate includes $7 million of benefits related to tax audit settlements and other matters during the quarter.

DISCONTINUED OPERATIONS

Discontinued operations for the 2007 second quarter include pre-tax charges of $11 million ($7 million after taxes) for adjustments related to the previously sold wood products and beverage packaging businesses, and the second-quarter operating losses of these businesses.

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 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 relating to our former Weldwood of Canada Limited business, and the first-quarter operating results of the beverage packaging and wood products businesses.

Discontinued operations for the 2006 second quarter included a $16 million pre-tax charge ($10 million after taxes) to reduce the carrying value of the kraft papers business to its estimated fair value, and the second-quarter operating results of the kraft papers, wood products, beverage packaging and Brazilian coated papers businesses.

EFFECTS OF SPECIAL ITEMS

Special items in the second quarter of 2007 consisted of a $26 million pre-tax charge ($16 million after taxes) for organizational restructuring programs associated with the company's transformation plan, including $17 million ($11 million after taxes) of accelerated depreciation expense for long-lived assets being removed from service, and a pre-tax gain of $1 million (a loss of $7 million after taxes) for adjustments to estimated losses on sales of businesses previously sold.

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, and a pre-tax gain of $314 million ($264 million after taxes) from the sale of the Arizona Chemical business, the asset exchange for the Luiz Antonio mill in Brazil, and adjustments related to the previously sold coated papers business.

Special items in the second quarter of 2006 included a pre-tax charge of $53 million ($32 million after taxes), consisting of $49 million ($29 million after taxes) for severance and other charges associated with the company's transformation plan and a $4 million pre-tax charge ($3 million after taxes) for legal settlements; a pre-tax credit of $62 million ($39 million after taxes) for gains on sales of U.S. forestlands included in the transformation plan; and a pre-tax loss of $137 million ($90 million after taxes) on sales and impairments of businesses held for sale.

SOURCE: International Paper




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