John V. Faraci Chairman & CEO Marianne M. Parrs EVP & CFO International Paper & Ilim Pulp Joint Venture in Russia October 25, 2006
Forward Looking Statements This presentation contains forward-looking statements. These statements reflect the current views of management of International Paper and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Factors which could cause actual results to differ relate to: (i) the ability of International Paper Company and Ilim Pulp to agree on final terms of the joint venture and the long term investment plan; (ii) pulp and paper industry conditions, including changes in the cost or availability of raw materials and energy, changes in transportation costs, competition, changes in product mix and demand and pricing for either Company's products; (iii) supply and demand conditions and other economic factors affecting Russia, Eastern Europe and Asia, including changes in political conditions, changes in currency exchange rates and natural disasters; and (iv) compliance costs related to environmental and other governmental regulations and the uncertainty of the costs. International Paper Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. 2
Agenda Ilim Pulp JV Overview Strategic Rationale Economics Creating Value Next Steps 3
Selective Reinvestment - Russia Selective Reinvestments Ilim Pulp Profile Leading Russian integrated pulp and paper company Produces uncoated free sheet, coated board, containerboard, and pulp Serves customers in Russia, Eastern Europe, and China JV Profile Equal representation on JV BOD Ilim names Chairman IP nominates CEO 50:50 JV with Ilim Pulp CEO appoints key positions 4
Strategic Rationale Selective Reinvestments Russian JV gives multiple profitable growth options IP has enjoyed excellent results and growth in its Eastern European Business Svetogorsk and Kwidzyn platforms are fully developed and sold out Russian JV creates additional growth opportunities Paper and Packaging Products Russia, Eastern Europe, China regions JV capacity will be among lowest cost delivered to target markets 5
Economics Selective Reinvestments Attractive option for IP in Russia and China The Deal $ 1.3 Billion Enterprise value The lowest cost approach to participate in further growth in Russia ~$520 per ton of capacity acquired is less than replacement cost ~$520 per ton of capacity acquired is less than Svetogorsk build out cost $1.2 billion of capex over 6 years expected to be substantially funded by JV cash flow 6
Economics Selective Reinvestments The best option for IP in Russia Ilim Pulp is profitable today Earnings accretion would be immediate Projected EBITDA multiple is attractive and consistent with other Russian transactions IRR of investment expected to be greater than cost of capital 7
Value Creation Selective Reinvestments Repeat the Kwidzyn/Svetogorsk Success Models Transition JV s current products to higher value Improve quality to western standards Debottleneck mills to optimum capacity Cost reduction to best-in-class JV to invest new capital in existing assets 8
Next Steps Selective Reinvestments 6 + month process expected Complete due diligence Negotiate Shareholders and Share Purchase Agreements Russian regulatory approvals IP and Ilim Board Approvals 9
Appendix 11
Ilim Mills in Russia KPK Kotlas Ust Ilimsk Bratsk Beijing 12
Ilim Pulp Fact Sheet 2005 revenues of ~ $ 1.5 billion Leading Russian pulp, paper and packaging producer with 2.5 million tons Four world scale pulp and paper mills including Kotlas (Europe s largest) Top 10 in world in forest harvest volumes and pulp production Leading supplier to China customers for market pulp and linerboard Sustainably managed forest estate of 5.1 million hectares 13
Russian Macroeconomic Outlook is Attractive GDP 5% 7% p.a. growth 2002 2005 6.3% growth in 2006 4% 5% p.a. growth 2007 2010 Inflation Improving since 1998 RUR devaluation & Soviet collapse 21% in 2001 10% in 2006 7% 8% in 2008 2010 F/X Stable 28.3 RUR/USD in 2005 26.8 RUR/USD in Sept 2006 27 28 range in 2008 2010 Sources : EIU, Global Insight, X-rates.com, Citigroup 14
Demand Outlook Russia, CIS & Ukraine 06 Demand (k tons) 00 06 CAGR (%) 07 10 CAGR (%) Uncoated Wood free 920 10% 8% Coated Board (FBB) 180 Container Board 1,100 Corrugated Boxes (1 2,500 Pulp Imports to China 6,800 15% 10% 10% 9% 8% 8% 8% 7% 06 YTD August Actual & Full Year Estimate 1 in MM M 2 Sources: Pyrabelisk, RISI, Eugropa, Cepi Cartonboard, Cepifine, Jaakko Poyry, IP analysis 15
Global Cost Curve Bleached Softwood Kraft Market Pulp Manufacturing Costs ($/Metric Tonne) 1200 1000 800 600 400 200 Ust-Ilimsk Bratsk Cash Costs Delivered to Moscow + Import Duty Kotlas 0 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 Based on Jaakko Poyry 2005 CostTrac At 2 nd Quarter, 2006, Prices and Exchange Rates. Cummulative Annual Capacity (000 Metric Tonnes) TECHNOLOGY 16
Global Cost Curve Bleached Softwood Kraft Market Pulp Manufacturing Costs ($/Metric Tonne) 1200 1000 800 600 400 200 Ust-Ilimsk.. Bratsk Cash Costs Delivered to Shanghai + Import Duty 0 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 Based on Jaakko Poyry 2005 CostTrac At 2 nd Quarter, 2006, Prices and Exchange Rates. Cummulative Annual Capacity (000 Metric Tonnes) TECHNOLOGY 17
Global Cost Curve Bleached Hardwood Kraft Market Pulp Manufacturing Costs ($/Metric Tonne) 1000 800 600 400 200 Ust-Ilimsk Kotlas Cash Costs Delivered to Moscow + Import Duty 0 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000 26,000 Based on Jaakko Poyry 2005 CostTrac At 2 nd Quarter, 2006, Prices and Exchange Rates. Cummulative Capacity (000 Annual Metric Tonnes) TECHNOLOGY 18
Global Cost Curve 42# Linerboard Manufacturing Costs ($/Metric Tonne) 700 600 500 400 300 200 100 Cash Costs Delivered to Moscow + Import Duty Bratsk1 Kotlas 3 Kotlas 4 0 0 3,000 6,000 9,000 12,000 15,000 18,000 21,000 24,000 27,000 Cummulative Annual Capacity (000 Metric Tonnes) Based on Jaakko Poyry 2005 CostTrac At 2nd Quarter, 2006, Prices and Exchange Rates. TECHNOLOGY 19
Global Cost Curve 42# Linerboard Manufacturing Costs ($/Metric Tonne) 800 700 600 500 400 300 200 100. Cash Costs Delivered to Shanghai + Import Duty Bratsk1 0 0 3,000 6,000 9,000 12,000 15,000 18,000 21,000 24,000 27,000 Cummulative Annual Capacity (000 Metric Tonnes) Based on Jaakko Poyry 2005 CostTrac At 2nd Quarter, 2006, Prices and Exchange Rates. TECHNOLOGY 20
Global Cost Curve Uncoated Freesheet - Rolls (20#) Manufacturing Costs ($/Metric Tonne) 1400 1200 1000 800 600 400 200 Svetogorsk Kotlas 6 Kotlas 5 Cash Costs Delivered to Moscow + Import Duty 0 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000 26,000 28,000 Based on Jaakko Poyry 2005 CostTrac At 2 nd Quarter, 2006, Prices and Exchange Rates. Cummulative Annual Capacity (000 Metric Tonnes) TECHNOLOGY 21