By Ann Levine July 29, 2004 -- International Paper (NYSE: IP) reported second quarter earnings of $193 million and $0.40 per share, up from $88 million or $0.19 per share for the second quarter of 2003. Second quarter sales were $6.5 billion as compared to sales of $6.1 billion for the same period last year. Topic of this summary: Second Quarter Overview Business Segment Performance Developments Outlook Q & A Second Quarter Overview International Paper, IP, delivered the best EPS results in over 15 quarters. Sales were the strongest since 2001. Inventory levels decreased by double digits except for one area in the business, wood products, demonstrating an increase in customer demand. Drops in inventories indicate the increase in customer demand. The company as maintained its focus on manufacturing excellence and has achieved cost improvements. Overall equipment efficiencies at US mills have increased over 1% each year since 2000. Where possible, IP has reduced its purchased energy consumption and has instituted conservation efforts. Overall, energy consumption was reduced by 10% with natural gas consumption down 40% through the substitution of lower cost options. Business Segment Performance Printing Papers Sales were $1.915 million with earnings of $141 million over sales of $1.97 million and earnings of 83 million for the same period last year. Results reflect higher prices for uncoated free sheet and market pulp and increased operational performance and efficiencies in the U.S. mill system. Coated paper showed in increase in volume due in increased demand for direct mail and catalog paper. Packaging In this segment, sales for the quarter were $1.775 million as compared to $1.7 million for the same period last year. Earnings for the quarter were $115 million over $79 million for the second quarter in 2003. The higher earnings are a reflection of higher corrugated box prices as the company begins implementing its higher prices. Volumes were higher on containerboards. Wood Products Sales during the second quarter were $850 million over $790 million for the same period last year. Earnings were $273 million for the quarter over earnings of $232 million for the second quarter of 2003. Volumes for lumber and plywood both increased, but prices were trending lower at the end of June. Developments IP plans to sell its Canadian Pulp operation, Weldwood of Canada, for $950 million. The transaction will exceed $1 billion in U.S. dollars. The transaction is also expected to dilute IP’s earning by $0.05-$0.10 per share. Outlook IP officials stated their pleasure with second quarter results and expect a continuing positive impact on the paper and packaging business, offset by lower earnings on wood products, higher transportation, energy and chemical costs. Contributing to the positive outlook, IP indicated maintenance downtime has been taken during the first and second quarters contributing to a capacity upside for the remainder of the year. Additionally, paper and packaging price increased are currently being implemented. Q & A Commenting on the European uncoated paper business, IP divides its business into two segments, Eastern Europe and Western Europe. In Western Europe, economies have been sluggish and currency has been holding prices down which has impacted business there. This business is doing well but not as well as Eastern European which has been more robust. Bleachboard volumes dropped by 1% during the quarter and realizations were flat, as prices have not moved in the same way as other IP business segments. The company expects a gradual improvement over the next few quarters. Corporate spending declined from expectations during the quarter due to positive impacts of decreased spending. The deceleration of uncoated paper volumes was due to maintenance downtime during the quarter. IP is beginning to see a strengthening in demand. IP stated its continued focus on its three business segments, with emphasis on certain regions over others. No business segment is considered a favorite. Focus will be to improve all core business in selected areas. Each segment will be expected to earn cost to capital plus returns. Choices will continue to be made to improve the portfolio. Transportation costs over the quarter were not a serious problem. Since, the acquisition of Box USA just closed at the beginning of July, IP was not able to comment on the integration of the businesses. The divestiture of Weldwood has not changed IP’s overall acquisition strategy of looking for opportunities that provide value. IP has made significant strides on energy conservation and usage. Officials would have taken more conservation efforts had they known energy prices would have remained the same for the past three years. IP does not disclose quarterly statistics on timberland sales, acreage or revenues generated. The second quarter showed a good realization on a sales per acre basis. The general level of disclosure on timberland sales will be on an annual basis. As most of the downtime has been taken, there was no upcoming downtime schedule to report during today’s call. Providing an economic outlook, IP today stated the economy was in solid shape. Company officials were frustrated last year when the GDP showed growth but it wasn’t evident in demand for IP’s business. Currently IP sees manufacturing activity improving and the creation of jobs reflecting a solid economy. The worst economic issue the company faces is competition. The company must make strides to earn and keep customers. IP’s box business saw gains due to the company’s positioning in the right segment with the right customers and offering the service customers demand. Ann Levine is an associate with