International Paper posted lower first-quarter earnings on Wednesday that fell short of Wall Street expectations as price increases failed to offset higher raw material costs and declines in printing paper shipments.

Longbow Research analyst Joshua Zaret said the results were disappointing and noted that operating earnings were below expectations in every business. "They came in below the (whole) range of analyst estimates, so that's pretty amazing and a big miss," he said.Net income was $133 million, or 31 cents a share, from $434 million, or 97 cents a share, a year earlier.

Earnings from continuing operations, excluding one-time items, were 41 cents a share compared to 45 cents a share a year ago. Wall Street was expecting 51 cents a share, according to Reuters Estimates.

Net sales rose 8.6 percent to $5.67 billion, slightly above analysts' expectations of $5.60 billion.

The company's shares closed down 4.17 percent, or $1.14, at $26.17 on Wednesday on the New York Stock Exchange.

COSTS WEIGH

Higher costs for chemicals and energy were the main drag in the quarter, but a weakening U.S. economy and operational issues at certain mills, also weighed on results, Longbow's Zaret said.

The company's global input and freight costs rose $161 million, or 24 cents a share, on a quarter-over-quarter basis.

"We think investors had been bracing for a weak result, but the magnitude of the earnings miss (cost-driven) was greater than we had been expecting," JPMorgan analyst Claudia Shank Hueston wrote in a note to clients.

Printing paper shipments declined 7 percent in North America and 1 percent in Europe due largely to a mill conversion that reduced capacity, and weakening demand from the financial sector in the United States. International Paper is one of the world's largest paper and packaging producers.

"In printing papers we ... saw that the end of March was certainly slower than January and February," Chief Executive John Faraci said on a conference call. "There is no question the economy has slowed, and it's having an impact on commercial printing."
The company also reported lower land sales in the quarter, which hurt operating profit from its forest products segment.

In 2006, International Paper sold about the bulk of its forest lands, but it still has some 300,000 acres, which it plans to sell over the next few years.

OUTAGES EXPECTED

International Paper, based in Memphis, Tennessee, said it expects continued pressure from rising costs in the second quarter and maintenance outages.

It expects outages in the second-quarter to impact operating results by $113 million, compared with a $53 million impact in the first quarter, and to reduce third- and fourth-quarter earnings by $36 million and $44 million, respectively.

The company said paper prices would rise in the second quarter in North America and overseas.

But, it said it expected North American paper shipments to decline in the second quarter, while rising overseas.

Prices for packaging are likely to be flat in all regions, with packaging shipments expected to be flat in North America but increase overseas.

The company has been focusing on expanding business in fast growing emerging economies, and it has operations in Brazil, Russia and China.

Last month, International Paper agreed to buy Weyerhaeuser Co's packaging business for $6 billion, which will make it the largest U.S. containerboard and corrugated packaging maker, ahead of Smurfit-Stone Container Corp and Temple-Inland.

Faraci said the company was working to get regulatory approval for the acquisition and expected the deal to close in the third-quarter.

Shares of International Paper have fallen 18.7 percent in the last three months, while the Standard & Poor's 1500 Paper and Forest Products Industry Index .15GSPAFP has declined 12 percent over the same period. (Editing by John Wallace, Maureen Bavdek, Toni Reinhold)