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KapStone Reports Rise in Third Quarter Operating Income

Nov. 5, 2007 - KapStone Paper and Packaging Corporation today reported results for the third quarter ended September 30, 2007, and reaffirmed guidance for the full year 2007.

THIRD QUARTER OPERATING HIGHLIGHTS

Third quarter 2007 net sales of $66.2 million were up $1.9 million, or 2.9%, and operating income of $12.9 million was up 25.6% over the same quarter last year.

Unbleached kraft paper net sales rose to $59.0 million, up $3.0 million, or 5.4%, over the prior year. Increased volume, up 5,178 tons, and higher average revenue per ton, up $1.14 per ton, drove the increase while a less favorable mix partially offset the volume and pricing gains. Operating income for the unbleached kraft paper segment was $15.3 million in the third quarter, up $5.4 million, or 54.5% over the prior year. The significant improvement in operating income during the quarter reflects higher volume and selling prices, productivity gains, and lower depreciation charges on the reduced depreciable asset base that resulted from the revaluation of plant and equipment to fair value. In addition, the prior year's quarter was negatively impacted by a $0.9 million unfavorable property tax adjustment.

Dunnage bag net sales were down from the prior year by $1.3 million, or 13.5%, to $8.3 million mainly due to an 11.4% decrease in volume and a 2.7% decrease in average revenue per bag. Dunnage bag operating income of $1.4 million decreased 30.4% for the third quarter of 2007 compared to the same quarter a year ago on lower sales volume and prices.

Corporate expenses of $3.9 million for the third quarter were $2.2 million higher than the comparable quarter in the prior year and reflect expenses for the Company's headquarters while the amount in 2006 reflects an allocation of corporate expenses when KPB was owned by International Paper Company (IP). Included in the 2007 corporate expenses are charges of approximately $0.6 million per quarter for the cost of transitional services provided by IP that will be terminated upon completion of the Company's own ERP system. It is currently projected that the Company's new ERP system will be fully implemented in the first quarter of 2008, reducing quarterly expenses by approximately $0.2 million.

CASH FLOW AND WORKING CAPITAL

Net cash from operating activities for the nine months ended September 30, 2007 totaled $36.3 million, an improvement of $8.9 million, or 32.5%, over the comparable prior year period. Capital expenditures of $9.1 million for the 2007 period were primarily spent on equipment upgrades and replacements for the unbleached kraft facility and the new ERP system. Working capital at September 30, 2007 was $67.7 million including cash and short-term investments of $45.3 million.

Roger Stone, KapStone's chairman and chief executive officer, said, "In late October, we celebrated our mill's one hundredth anniversary of operations. Besides applauding the mill's very successful history, we also celebrate their continuing performance improvements. Acquiring these operations has given KapStone Paper and Packaging a solid platform for future growth."

FINANCIAL GUIDANCE

The Company reiterates its guidance for the year ending December 31, 2007. The Company expects net sales in a range of $260-$264 million, up 6% - 7% over the prior year. Adjusted EBITDA is expected to be in the range of $58 - 60 million, up 11% - 15%, from 2006 EBITDA of $52.2 million. Cash balances at December 31, 2007, therefore, are expected to be in the range of $58 - $63 million. This guidance does not include any benefits from recently implemented industry linerboard price increases of $40 per ton.

This financial guidance is given as of the date hereof and is based on factors and circumstances known to the Company at this time. Such factors and circumstances may change, and such changes may have an impact on the Company's financial outlook. The Company is under no obligation to update its financial guidance.

ABOUT THE COMPANY

On January 2, 2007, KapStone Paper and Packaging Corporation (the Company) completed the acquisition of substantially all of the assets and assumed certain liabilities, of the Kraft Papers Business, or KPB, a division of International Paper Company. The assets include an unbleached kraft paper manufacturing facility in Roanoke Rapids, North Carolina and Ride RiteŽ Converting, an inflatable dunnage bag manufacturer located in Fordyce, Arkansas. Prior to the acquisition of KPB, the Company, a special purpose acquisition corporation or "blank check company", had no operations. For periods prior to the acquisition, KPB is deemed to be the predecessor to the Company. Therefore, in this release, the KapStone results for 2007 are compared to KPB's 2006 results.

Headquartered in Northfield, IL, KapStone Paper and Packaging Corporation, is a leading North American producer of kraft paper and converter of inflatable dunnage bags. The Company is the parent company of KapStone Kraft Paper Corporation which includes a paper mill in Roanoke Rapids, NC, and Ride RiteŽ, an inflatable dunnage bag manufacturer in Fordyce, AR. The business employs approximately 700 people.

SOURCE: KapStone Paper and Packaging Corporation




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