By Trevor Shackelford May 5, 2005 -- International Paper (NYSE: IP) today reported its best first quarter sales in four years. Net sales were $6.6 billion, up from $6.1 billion last year. Operating profits fell to $551 million from $583 million in the first quarter of 2004. Despite this, the company posted net earnings of $77 million, or $0.16 per share, compared with $73 million, or $0.15 per share, in the first quarter of 2004. This increase was due to pricing increases and a more favorable tax rate, although increased raw material prices and corporate expenses offset some of the gain. Topics of this Summary Quarter Highlights Segment Performance Guidance Raine Radar Q & A Quarter Highlights Input prices, primarily in wood, energy, and chemicals, continued to rise in the first quarter. January and February had slow sales, with performance picking up in March. The company pointed out that first quarter sales are typically soft. International Paper took downtime at selected mills to reduce supply. This was the most downtime taken since the Q4 2003. Higher prices have led to some loss of market share to competitors. The first quarter saw several large special items related primarily to divestitures and goodwill impairment totaling $0.18 per share. Chris Liddell, CEO of International Paper subsidiary Carter Holt Harvey and former International Paper CFO leaves company to join Microsoft as CFO. Segment Performance Printing Papers First quarter operating profits were $183 million, down from $196 million in the fourth quarter of 2004. The company took 40,000 tons of uncoated free sheet downtime during the quarter. International Paper also cited seasonally lower volumes and rising input costs as reasons for the decrease from last quarter. Industrial Packaging First quarter operating profits were $105 million, down from $131 million last quarter. The company took close to 45,000 tons of containerboard downtime and noted reduced earnings from European box sales and increased input costs as reasons for the decrease. Consumer Packaging First quarter operating profits were $23 million, compared to $39 million from last quarter. The company again cited seasonal decreases and increased input costs. xpedx International Paper’s distribution business, xpedx, reported operating profits of $18 million, down from $22 million last quarter. Forest Products The forest products segment was the only group to see an increase from last quarter, as operating profits increased to $207 million from $176 million last quarter. These increases were due stronger sales volumes and increased prices and improved operational performance. Carter Holt Harvey The company’s New Zealand based 50.5% owned subsidiary, Carter Holt Harvey, saw operating profits fall to $5 million from $12 million last quarter, due in part to lower Australian housing starts. Guidance Second quarter should see seasonal volume improvements as well as some operational improvements, although raw material costs are expected to decrease margins by an additional $0.03 - $0.05 per share. Both the industrial and consumer packaging businesses are expected to improve in the second quarter. Printing papers performance is expected to be mixed, and decreased harvest volumes should negatively impact forest products. No further guidance was given by the company during the call. However, the average analyst earnings estimate for the second quarter is $0.42 per share with the full year 2005 estimate at approximately $1.88 per share. Raine Radar Print service providers should be aware that with raw material costs looking the way they are, International Paper will likely continue to raise prices during the course of 2005. If wood prices continue to come down, it might help, but chemical prices and energy prices remain high. The company has so far preferred to take downtime and permanently reduce capacity to control supply rather than reduce prices, even at the expense of some decrease in market share. Q & A International Paper is still evaluating potential options for a new Brazilian facility. The focus is in looking at this expansion as a means to reduce costs. The company expects to know more by the end of 2005. When asked about building facilities in China to serve that growing market, the company remarked that China will have to import the vast majority of its paper regardless. Therefore, it is considering the proposed Brazil facility as a facility specifically designed to export. China could potentially be one of the large countries importing from this facility. The company sees container board performance improving during 2005. International Paper indicated that it would consider increasing its dividend if debt levels decrease over the next few quarters and earnings stay on pace. The company sees wood costs flattening, but chemical costs are increasing, as have gas energy costs. Transportation costs are also rising. International Paper is expecting to take “quite a bit” of maintenance downtime during the second quarter. During the Q & A session, the company also disclosed that it had shut down two machines that amount to 250,000 tons of capacity during the first quarter.