August 15, 2006 -- International Paper (NYSE: IP) recently reported second-quarter 2006 net sales of $6.3 billion, up 7%, compared to $5.9 billion a year ago. It was the company’s best second quarter since 2000. Net earnings were $115 million, or $0.24 per share, compared with a first quarter net loss of $1.24 billion, or $2.54 per share. Earnings in the same period last year were $77 million, or $0.16 per share. Contents of this Summary * Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A Quarter Highlights • Operating profits improved to $631 million from the previous quarter’s operating profits of $464 million due to higher average price realizations, lower manufacturing costs, and sales mix improvements. • The effective tax rate was 34 percent, compared with a tax rate of 30 percent in the first quarter and 31 percent in the second quarter of 2005. The 2006 first quarter rate included $5 million of credits related to state tax audit settlements and non-U.S. tax credits. • Net corporate expenses totaled $174 million for the quarter, down slightly from $176 million in the first quarter. • Special items in the second quarter of 2006 consisted of a pretax charge of $54 million ($33 million after taxes) for restructuring and other charges, including a pretax charge of $50 million ($30 million after taxes) for severance and other charges associated with the company’s transformation plan. • The company also had a $4 million charge ($3 million after taxes) for a legal settlement; and a pretax charge of $75 million ($51 million after taxes) for net gains (losses) on sales and impairments of businesses held for sale, including a pretax credit of $62 million ($39 million after taxes) for gains on sales of U.S. forestlands included in the transformation plan. Segment Performance Printing Papers Segment Second-quarter operating profits for this segment were $254 million ($205 million, excluding coated papers), markedly better than first-quarter operating profits of $128 million ($120 million, excluding coated papers). The segment’s results were bolstered by stronger sales and earnings in the US uncoated freesheet business, driven by increasing average prices, better input costs, strong mill operations and good sales mix. Higher price realizations and sales mix improvements also boosted results in pulp, coated papers and European papers. Coated papers operating results for the second quarter included a $31 million reduction ($19 million after taxes, or $0.04 per share) in depreciation expense to reflect its treatment as a business held for sale. Industrial Packaging Segment Industrial packaging had its best quarter since 2004, with second-quarter operating profits of $100 million, compared with first-quarter operating profits of $38 million. Improvements were largely due to higher average price realizations, modest volume and mix improvements, good cost control, and lower input costs. Consumer Packaging Segment Consumer packaging operating profits were $41 million in the second quarter, up from $35 million in the first quarter, due to slightly stronger volumes and price realizations. Results were negatively impacted by an $8 million charge related to the write-off of obsolete equipment. Distribution Segment The company’s distribution business, primarily xpedx, reported record operating profits of $36 million for the quarter compared with operating profits in the prior quarter of $27 million. Improved margins and good cost control drove xpedx to its best-ever quarterly earnings and highest sales in more than five years. Forest Products Segment Second-quarter forest products operating profits declined to $184 million from first quarter operating profits of $226 million principally as a result of lower price realizations in wood products and lower forestland sales. Earnings from forestland and real estate sales were $130 million versus $148 million in the prior quarter. Guidance No detailed earnings guidance for the following quarter was issued. However, the IP does plan to spend $6-7 billion to strengthen its balance sheet, and the board authorized up to $3 billion worth of shares to be repurchased. Raine Radar The company’s restructuring activities have apparently been very successful, with operating profits improving across every line of business except forest products (where forestland sales were down), in some cases dramatically. Paper prices have also been sticking, helping to improve the company’s situation. Capacity that was shut down last year has also helped to improve the pricing situation, particularly in photocopy paper and containerboard. Q & A 1. Within the industrial packaging segment, the company is struggling with supply chain issues. The company says that this will be a key driver in the 3rd and 4th quarters. 2. Prices on boxes were in line with what the company forecasted last quarter and they believe their pricing is where it needs to be. 3. In the third quarter, IP will be implementing their previously announced price increases in paper and packaging. 4. The effective tax rate for the fiscal year 2004 was 26%, 27% in 2005, and the projected effective tax rate for fiscal 2006 is roughly 33%. 5. IP’s management team believes that supply and demand is in balance and the economy looks healthy for their box, wood, and paper products. For the third quarter the company gave four key points to watch: volume, i.e., keeping inventories in good shape; implementing IP’s previously announced price increases in paper and packaging; continued progress in improving operations; and lowering costs. 6. The company will only add volume outside of North America and will be very cautious about doing so.