May 1, 2007 - Glatfelter today reported net sales of $281.0 million for the first quarter ended March 31, 2007, compared with $160.6 million for the first quarter of 2006. Net income for the 2007 first quarter was $3.3 million, or $0.07 per diluted share, compared with a loss of $11.9 million, or $0.27 per diluted share, for the prior-year period.

First-quarter 2007 net income includes $1.9 million in gains from the sale of timberlands, a $3.7 million charge to increase the Company's reserve for environmental matters at the Fox River, $0.1 million in shutdown and restructuring charges, and $0.4 million in acquisition integration costs, all after taxes. The results for the previous year's first quarter included $17.9 million of Neenah facility shutdown charges and $1.0 million of restructuring charges, on an after-tax basis. Excluding these items from each period's results, first-quarter 2007 adjusted earnings per share, which constitute a non-GAAP financial measure, were $0.12 per diluted share, compared to $0.16 per diluted share in the first quarter of 2006.

"Our results for the quarter were below our expectations, largely reflecting challenges associated with the Chillicothe acquisition," said George H. Glatfelter II, Chairman and Chief Executive Officer. "However, the balance of our Specialty Papers Business Unit performed well, benefiting from a more favorable pricing environment and the solid operating performance at our Spring Grove facility. Further, our Composite Fibers Business Unit continues to perform very well, as demonstrated by a 59% growth in operating income year-over-year from the momentum generated by the Lydney acquisition."

"With respect to Chillicothe, although we made significant improvements in total production volume and raw material usage, overall progress has been insufficient to achieve our accretion expectations. In addition we experienced an unplanned equipment outage at this facility that adversely impacted results. We are taking further actions to improve yields and the overall cost structure at Chillicothe and expect to begin to see the benefit from these actions in the second half of the year."

First-Quarter Business Unit Results

Specialty Papers

First quarter net sales in the Company's Specialty Papers business unit increased $94.6 million to $196.9 million. Carbonless and Forms net sales related to the Chillicothe acquisition represented $91.2 million of the increase.

Operating income totaled $6.7 million, up slightly from $6.5 million the same quarter a year ago. Price increases in the book, envelope and engineered products markets positively impacted operating income by $4.7 million in the first quarter compared with the year-earlier quarter. In addition, operating income reflects a $1.2 million increase in carbonless prices, which was announced in mid-2006. The full benefit of the carbonless price increase is expected to be realized by mid-2007. Shipping volumes, excluding carbonless products, were flat in the quarter compared to a year ago. Specialty Papers' production costs increased in the quarterly comparison primarily due to $1.5 million of higher coal costs and $0.8 million of higher fiber costs at our Spring Grove facility. These cost increases were partially offset by the improved productivity at the facility with paper production increasing 2.6% and pulp production increasing 4.4%. Chillicothe generated operating income during the first quarter of $0.2 million including $0.9 million of favorable pricing related to book products included in the price variance noted above. These results include an unplanned pulp mill production outage and weather related costs which reduced operating income by an aggregate $1.8 million.

Paper machine yields at Chillicothe have increased significantly over the past 6 months as a result of the Company's operational improvement initiatives but continue to be below our expectations. The lower than expected yields, the inability to fully reuse generated scrap, and an equipment outage at the Company's pulp mill resulted in greater pulp purchases and higher raw material costs during the quarter. To improve Chillicothe's overall cost structure, the Company is taking actions designed to:

• Optimize paper machine scheduling;
• Streamline paper production flows;
• Implement targeted investments and process changes to improve utilization of paper machine broke (scrap);
• Expand scope of yield and material usage improvement projects; and
• Expand previously initiated cost reduction efforts.

The Company expects to begin to see the benefit from these actions in the second half of the year and is continuing to identify additional opportunities for further improvements.

Composite Fibers

In Composite Fibers, net sales were $84.1 million for the 2007 first quarter, with operating income of $5.0 million, up from $58.3 million and $3.1 million, respectively, from the prior-year period. Lydney contributed $17.5 million of additional revenue in the comparison.

On a constant currency basis, average selling prices increased $1.7 million, and volumes increased approximately 4.3%, excluding the impact of Lydney, with increases seen in food and beverage and metalized. Energy and raw material costs were $1.5 million higher than a year ago.

Timberland Sales Update

The Company continues to move forward with its timberland monetization program. During the first quarter, approximately 1,520 acres were sold for $3.8 million in cash. The Company has contracts or agreements in principle for the sale of an additional $25 million of timberlands that are expected to close in 2007.

The Company's Timberland Strategy, which was initiated at the beginning of 2006, is expected to generate proceeds in excess of $150 million over the next two- to four-years assuming, among other factors, acceptable market conditions and a carefully executed plan of disposition in order to maximize the value realized. To date, the Company has realized $20.9 million of these proceeds and continues to target $50 million of timberland sales proceeds for the full year 2007.

Other Financial Highlights

Selling, general and administrative ("SG&A") expenses increased $12.0 million in the quarter-to-quarter comparison and totaled $28.7 million in the first quarter of 2007. The increase was due to a $6.0 million charge to increase the Company's reserve for the Fox River environmental matter, and the inclusion of the Chillicothe and Lydney operations in the current period's results.

Interest expense increased $3.9 million in the quarter-to-quarter comparison totaling $7.3 million for the first quarter of 2007. The increase was due to higher levels of debt incurred to finance acquisitions.

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). The cumulative effect of applying the provisions of this Interpretation was reported as an adjustment to the beginning of year retained earnings in the amount of $3.0 million. The Company's effective income tax rate on adjusted earnings for the first quarter of 2007 and 2006 was 35.5% and 35.9%, respectively.

Outlook

For 2007, Glatfelter expects a stable to improving pricing environment in both Specialty Papers and Composite Fibers. For the second quarter, shipping volumes are expected to improve somewhat from the first quarter although second quarter volumes are expected to be slightly lower than the 2006 second quarter. During the second quarter of 2006, the Company operated its Neenah, WI facility, which was shutdown on June 30, 2006.

As previously announced, the Company will complete annually scheduled maintenance outages at both its Spring Grove and Chillicothe facilities in the second quarter, with an estimated $0.22 to $0.24 per share impact. The Company continues to expect that Lydney and Chillicothe acquisition integration costs will be approximately $3.0 million to $4.0 million in 2007, of which approximately $0.6 million has been incurred to date.

The Company expects to achieve its previously provided accretion target for Chillicothe of $0.45 to $0.50 per year in 2008. The Company continues to expect Lydney to add, on an annualized basis by the fourth quarter of 2007, approximately $9 million of operating income, including $2 million of depreciation and amortization.

Commenting on the Company's outlook Mr. Glatfelter said, "We are seeing improving market conditions in Specialty Papers and we expect continued solid performance from our Composite Fibers Business Unit. We are aggressively focused on improving the cost structure and operations at Chillicothe and expect to begin to see the benefit from these actions in the second half of the year. Although progress toward achieving our goals has been slower than anticipated we continue to be excited about the Chillicothe acquisition. We are convinced Chillicothe will ultimately deliver the level of accretion we originally projected."

SOURCE: Glatfelter