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International Paper 2Q Earnings Fall on Charges

July 30, 2009 - International Paper today reported preliminary 2009 second-quarter net earnings attributable to common shareholders of $136 million ($0.32 per share) compared with $257 million ($0.61 per share) in the first quarter of 2009 and $227 million ($0.54 per share) in the second quarter of 2008. Amounts in all periods include special items.

Earnings from continuing operations and before special items in the 2009 second quarter totaled $86 million ($0.20 per share), compared with $34 million ($0.08 per share) in the first quarter of 2009 and $235 million ($0.56 per share) in the second quarter of 2008.

Quarterly net sales were $5.8 billion in the second quarter compared with $5.6 billion in the first quarter of 2009 and $5.8 billion reported in the second quarter of 2008.

Operating profits in the 2009 second quarter were $788 million, up from $779 million in the first quarter of 2009 and $393 million in the second quarter of 2008.

"Over the course of this recession, International Paper has consistently demonstrated our ability to execute well despite the economic environment," said Chairman and Chief Executive Officer John Faraci. "Our performance in the second quarter once again generated solid earnings and strong free cash flow. We're also well ahead of our announced plans to pay down debt.

"When we look at global economic conditions today, it appears the worst is behind us. We have not seen any signs of sustainable progress in North America, but it appears demand has stabilized at lower levels. We are seeing improvement in Latin American paper markets and solid packaging demand growth in China. The good news is that mill and channel inventories are lean for both paper and containerboard, which positions us well for the eventual upturn in demand."

At the end of the 2009 second quarter, International Paper had $4.2 billion in cash and committed liquidity facilities. The company also generated $1.3 billion of free cash flow (cash provided by operations less capital expenditures) during the quarter, reflecting its continued focus on reducing capital spending, managing working capital and decreasing overhead spending, as well as cash received from alternative fuel mixture credits. The company also repaid $600 million of debt.

SEGMENT INFORMATION

To measure the performance of the company's business segments from quarter to quarter without variations caused by special or unusual items, management focuses on business segment operating profits excluding those items. Second-quarter 2009 segment operating profits and business trends, excluding special items, compared with the prior quarter are as follows:

Industrial Packaging operating profits increased to $255 million, up from $188 million in the first quarter of 2009 as improved volume, favorable input costs, strong manufacturing operations and synergy benefits related to the CBPR acquisition offset weakened pricing.

Printing Papers had operating profits of $86 million compared with an operating profit of $101 million in the first quarter of 2009. Benefits from improved volume, input cost relief and strong operations were offset by higher annual maintenance outages, mix and pricing pressure in global paper and pulp markets.

Consumer Packaging had operating profits of $38 million, up from $22 million in the previous quarter due to improvements in volume and operating performance, as well as lower input costs, partially offset by higher annual maintenance outages.

The company's distribution business, xpedx, reported operating profits of $10 million, up from a loss of $7 million in the previous quarter due to cost reductions and improved volumes.

Forest Products operating profits totaled $3 million, up from $2 million in the first quarter of 2009. The pending sale of 143,000 acres is expected to close in the fourth quarter of 2009, subject to the buyer's receipt of financing.

Net corporate expenses totaled $44 million for the 2009 second quarter, down from $51 million in the 2009 first quarter but up from $21 million in the second quarter of 2008. The decline compared with first-quarter levels principally reflects the finalization of full-year 2009 pension expense based on actual versus estimated year-end census data. The increase from the 2008 second quarter reflects higher pension expense, lower supply chain initiative costs and the effect of an $11 million gain on the sale of the former Natchez mill site in 2008.

EFFECTIVE TAX RATE

The effective tax rate from continuing operations and before special items was 33 percent for both the second and first quarters of 2009 compared with 32.5 percent in the second quarter of 2008.

EFFECTS OF SPECIAL ITEMS

Special items in the second quarter of 2009 included a credit of $482 million before taxes ($294 million after taxes) for alternative fuel mixture credits earned under 2007 legislation enacted to provide a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses, a $48 million before and after-tax charge to write down the assets of the Etienne mill in France to estimated fair value, a $18 million pre-tax charge ($11 million after taxes) for integration costs associated with the Industrial Packaging business integration, and a pre-tax charge of $79 million ($55 million after taxes) for restructuring and other charges. Restructuring and other charges included a $34 million charge before taxes ($21 million after taxes) for severance and benefit costs associated with the Company's 2008 overhead reduction program, a $25 million charge before taxes ($16 million after taxes) for early debt extinguishment costs, a $15 million before and after-tax charge for severance and other costs related to the Company's Etienne mill in France, and a $5 million charge before taxes ($3 million after taxes) for other closure costs. Additionally, the second-quarter income tax provision included a $156 million charge to establish a valuation allowance for net operating loss carryforwards in France, and a $26 million credit related to the closing of the 2004 and 2005 U.S. federal income tax audit and related state income tax effects.

Special items in the first quarter of 2009 included a credit of $540 million before taxes ($330 million after taxes) for alternative fuel mixture credits, a pre-tax charge of $36 million ($22 million after taxes) for costs related to the Industrial Packaging business integration, a pre-tax charge of $83 million ($65 million after taxes) for restructuring and other charges, and a $20 million after-tax charge for certain income tax adjustments. Restructuring and other charges included a $52 million pre-tax charge ($32 million after taxes) for severance and benefits associated with the company's 2008 overhead reduction program, a pre-tax charge of $23 million ($28 million after taxes) for closure costs for the Inverurie mill in Scotland, a $6 million pre-tax charge ($4 million after taxes) for closure costs for the Franklin lumber mill, sheet converting plant and converting innovations center, and a $2 million pre-tax charge ($1 million after taxes) for costs associated with the reorganization of the company's Shorewood operations.

Special items in the second quarter of 2008 consisted of a $13 million pre-tax charge ($9 million after taxes) for costs associated with the reorganization of Shorewood operations in Canada and a $3 million pre-tax gain ($2 million after taxes) for an adjustment to the gain on the 2006 transformation plan forestland sales.

About International Paper
International Paper is a global paper and packaging company with manufacturing operations in North America, Europe, Latin America, Russia, Asia and North Africa. Its businesses include uncoated papers and industrial and consumer packaging, complemented by xpedx, the company's North American distribution company. Headquartered in Memphis, Tenn., the company employs more than 58,000 people in more than 20 countries and serves customers worldwide. 2008 net sales were approximately $25 billion.

SOURCE: International Paper




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