By Trevor Shackelford December 8, 2006 -- International Paper (NYSE: IP) recently announced preliminary third quarter net sales of $5.9 billion for the quarter, down from $6.2 billion in the second quarter, and flat with the third quarter of 2005. The decrease reflects declining average prices for wood products and the sale of the U.S. coated papers business. Operating profits continue to rise, at $636 million for the 2006 third quarter versus $624 million in the second quarter and $475 million in the third quarter of 2005. The increase is due to continued price realizations and strong manufacturing operations. Earnings from continuing operations and before special items in the third quarter of 2006 were $188 million or $0.39 per share, compared with $196 million, or $0.40 per share, in the second quarter and up from $130 million, or $0.27 per share in the third quarter of 2005. Net income was $201 million, or $0.42 per share, down from $1 billion and $2.03 last year. Contents of this Summary • Quarter Highlights • Segment Performance • Guidance • Raine Radar • Q & A Quarter Highlights • Discontinued operations include the operating results of the company's Kraft papers business and Brazil coated papers business. In the third quarter of 2006, International Paper completed the sale of its Brazil coated papers business to Stora Enso, resulting in a pre-tax gain of $101 million ($80 million after taxes, or $0.17 per share). • The effective tax rate from continuing operations and before special items for the third quarter of 2006 was 27 percent, compared with tax rates of 34 percent in the second quarter and 33 percent in the third quarter of 2005, reflecting a reduction of the 2006 estimated full-year rate to 31 percent. • Earnings per share from continuing operations and before special items were $0.39 (including $0.03 from the U.S. coated papers business), versus $0.40 (including $0.06 from U.S. coated papers) in the second quarter and $0.27 in the 2005 third quarter. • Third quarter 2006 net earnings were $0.42 per share, compared with $0.24 per share in the second quarter and $2.03 per share in the third quarter of 2005 (including $0.55 related to the sale of the company's interest in Carter Holt Harvey Limited and $1.07 of tax adjustments, principally from a U.S. federal income tax agreement). • Net corporate expenses totaled $216 million for the quarter, up from $174 million in the second quarter due principally to benefit related charges in third quarter. Segment Performance Printing Papers Segment Third quarter operating profits were $249 million ($231 million, excluding U.S. coated papers), up slightly from second quarter operating profits of $247 million ($198 million, excluding U.S. coated papers). Despite some elevated costs for input materials and distribution, the improvement (excluding U.S. coated papers) reflects a $25 million increase in U.S. uncoated papers earnings, driven by continued realization of previously announced price increases and strong mill operations. Industrial Packaging Segment Industrial Packaging operating profits increased significantly to $138 million in third quarter (including a $13 million gain from sale of a facility property in Spain), compared with $100 million in the second quarter. Improvements were largely due to higher average price realizations. Volumes increased in the mill system, but were down slightly in converting. Consumer Packaging Segment Consumer Packaging operating profits were $64 million in the third quarter, up from $41 million in the second quarter. Mill operations were much stronger, more than offsetting continuing inflationary increases in costs. Distribution Segment The company's distribution business, xpedx, reported record third quarter operating profits of $34 million compared with operating profits in the prior quarter of $36 million. A solid third quarter business environment resulted in higher revenues, but margins were slightly down due to rising product costs. Forest Products Segment Third quarter Forest Products operating profits declined to $129 million from second quarter operating profits of $184 million principally as a result of declining price realizations in wood products. Earnings from forestland and real estate sales were $130 million in third quarter 2006, flat with the second quarter. Guidance No detailed earnings guidance for the following quarter was issued. Chairman and CEO John Faraci said, "We expect volumes will be seasonally slower toward the end of the year. Through the end of the third quarter, for North America, we've realized most of our announced paper and packaging increases, and believe we are near the bottom on wood products pricing. Input costs will likely remain high, but we see some favorable signs on the horizon. In light of these factors, we expect earnings from continuing operations and before special items to be slightly lower than in third quarter." Raine Radar This quarter was disappointing for International Paper, which was looking to start a major turn-around. A weak housing market, and therefore demand for its wood products, and continued high input and distribution costs were blamed for the continued lackluster performance. Next quarter is not anticipated to improve as seasonality will become an issue at the end of the year. Q & A 1. Faraci highlighted some of the third quarter’s highlights: improved paper and packaging pricing; continued outstanding mill operations, solid volumes; higher distribution costs; and a lower tax rate. 2. The company mentioned that in the third quarter the paper and packaging pricing increases largely implemented and that wood products prices were near the bottom. Effective on November 1, 2007, IP announced to its customers that there will be a $40/ton linerboard increase. 3. The five key points to IP’s transformation plan are to: strengthen existing businesses; keep divestment the program on track; return value to shareholders; strengthen the balance sheet, and be selective on reinvestments. 4. The effective tax rate continues to increase in 2006. The effective tax rate in 2004 was 26%, 28% in 2005, and 31% in 2006. 5. International Paper struck a 50/50 joint venture with Llim Pulp in the third quarter. Strategically, the move should strengthen IP’s global paper and packaging businesses, investment returns will be above the cost of capital for Russia, and earnings accretive. 6. Capital spending has effectively remained flat over the past three years at $1.2 billion.