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Containerboard, Packaging and Recycling HOW WE DID IN 2007 We report sales volume and annual production data for our Containerboard Packaging and Recycling business segment in Our Business/What We Do/Containerboard, Packaging and Recycling. Here is a comparison of net sales and revenues and contribution to earnings for the last three years: Net Sales and Revenues and Contribution to Earnings for Containerboard, Packaging and Recycling  COMPARING 2007 WITH 2006 In 2007: • Net sales and revenues increased by $256 million, or 5 percent. • Contribution to earnings increased by $119 million or 45 percent. Net Sales and Revenues Net sales and revenues increased primarily due to the following: • Containerboard price realizations increased 8 percent, or $37 per ton, as a result of a price increase for containerboard implemented in the first half of 2006 and another increase during the third quarter 2007. • Containerboard shipments increased 12 percent, or 101,000 tons, due to an increase in export demand, and reduced internal consumption by the company’s packaging plants. • Packaging price realizations increased 4 percent, or $2.13 per thousand square feet, due to increases in containerboard prices during the second quarter of 2006 and the third quarter of 2007 and from improvements in our product mix and the termination of low-margin business during 2007. • Price realizations for recycled materials increased 34 percent, or $40 per ton, as a result of higher prices for recycled materials due to increased demand from China. The increase in net sales and revenues was partially offset by the following: • Packaging shipments decreased 2 percent, or 1.3 billion square feet. First-quarter shipments were adversely affected by poor weather in California and the residual effect from the outbreak of E. coli during the fourth quarter of 2006. The combination of these issues had a substantial impact on produce markets. • Shipments of recycled materials declined 10 percent, or 296,000 tons. The supply of recycled materials available in the U.S. declined, mainly due to increased demand in export markets, primarily China. Average weekly packaging shipments in the U.S. decreased 2.1 percent in 2007 in comparison with 2006, according to the Fibre Box Association. Contribution to Earnings Contribution to earnings increased primarily due to the following: • Higher price realizations resulted in increased contribution of $192 million – $157 million from corrugated packaging and $35 million from containerboard sales. • The net effect of closures, restructuring activities and asset sales was an increase in earnings of $51 million in 2007 compared with 2006. 2007 included a $29 million gain from the sale of a previously closed packaging facility in Cerritos, California and charges of $13 million related to a fire and subsequent closure of the packaging facility in Closter, New Jersey, and other from post-closure activities. During 2006, the segment recognized charges of $35 million related to restructuring and facility closures. • Selling, general and administrative expenses decreased by $41 million, mostly due to lower variable compensation expense and position eliminations stemming from facility closures and restructuring activities. • Nonfiber manufacturing costs decreased by $46 million. This reflects reduced costs for containerboard mill chemicals, a decrease in mill and packaging plant maintenance costs and lower packaging labor costs as a result of the closure of nine plants and the sale of two plants during 2006 and early 2007. Partially offsetting these cost reductions were higher costs for energy and price increases for corn starch and wax. The increases in starch and wax, used in the manufacture of corrugated packaging, were driven by higher demand for ethanol, a corn derivative in the U.S. and higher petroleum prices, respectively. Partially offsetting the earnings improvements above were: • Raw material costs increased $196 million. OCC increased $41 per ton as a result of strong demand from China, and the price paid for wood chips increased by $9 per ton as a result of continued production curtailments in wood-related manufacturing plants due to reduced housing starts. COMPARING 2006 WITH 2005 In 2006: • Net sales and revenues increased by $205 million, or 4 percent. • Contribution to earnings increased by $268 million to $263 million in 2006 compared with a loss of $5 million in 2005. Net Sales and Revenues Net sales and revenues increased primarily due to the following: • containerboard price realizations increased 17 percent, or $62 per ton; • a decline in shipments of 18 percent, or 190,000 tons, of containerboard, due primarily to the permanent closure of a containerboard machine in Plymouth, North Carolina in the first quarter of 2006; • corrugated packaging price realizations 4 percent, or $2.12 per thousand square feet; and • corrugated packaging shipments increased 2 percent, or 1.2 billion square feet. Prices for domestic containerboard and corrugated packaging increased during the first three quarters of 2006 and flattened in the fourth quarter of 2006. Containerboard prices in export markets continued to increase through the fourth quarter. Corrugated packaging shipments increased during the first half of the year and began to decrease during the second half of 2006. The decrease was primarily due to the effect of closing corrugated packaging plants and discontinuing sales to low-margin customers. Overall, packaging shipments in the U.S. increased 0.9 percent in 2006 compared with 2005 according to the Fibre Box Association. Partially offsetting these increases was a decline in containerboard shipments of 18 percent, or 190,000 tons, due primarily to the permanent closure of a containerboard machine in Plymouth, North Carolina in the first quarter of 2006. Contribution to Earnings Contribution to earnings increased primarily due to the following: • an increase of $212 million due to higher price realizations – $159 million for corrugated packaging and $53 million for containerboard; • a decrease in net pretax charges related to restructuring and facility closures of $102 million – $35 million in 2006 – compared with $137 million in 2005; and • a decrease in charges for litigation 2005 included pretax charges of $50 million for the settlement of the linerboard litigation. Partially offsetting the earnings improvements above were: • an increase of $53 million in nonfiber manufacturing costs – mostly from higher costs for nonfiber raw materials and supplies, chemicals, energy and labor; • a net increase of $15 million in raw material costs – which included a $4-per-ton cost decrease for OCC and a $6-per-ton increase in the price paid for wood chips; and • an increase of $29 million in transportation costs resulting primarily from higher fuel costs and increases in rail rates. Prices for West Coast wood chips increased rapidly during the fourth quarter of 2006, due to the production curtailments at wood products manufacturing facilities caused by the slowdown in the housing market. OCC costs also increased rapidly at the end of 2006, as a result of strong demand from China. During the fourth quarter of 2006, we decreased our operating rates to better match our production to customer demand, increasing nonfiber manufacturing costs for ongoing operations. OUR OUTLOOK We expect first-quarter earnings to decrease from fourth quarter 2007 results. Average packaging price realizations are expected to increase in the first quarter due to a seasonal mix improvement, including an increase in produce shipments. Packaging shipments are expected to decline mainly due to terminating low-margin business and seasonally lower demand. On a per-unit basis, mill nonfiber and energy manufacturing costs are expected to decline, primarily due to increased production. Prices for OCC and wood chips are expected to increase from fourth-quarter levels. Higher energy costs are anticipated due to seasonally higher prices and consumption. Prices for corn starch and wax also are expected to increase due to market pressure from the ethanol and petroleum markets. Strategic Review On May 4, 2007 we announced that our board of directors had authorized a process to consider a broad range of strategic alternatives for our Containerboard, Packaging and Recycling business. Alternatives range from continuing to hold and operate the assets to a possible sale or business combination. As of the date of this filing, this strategic review is ongoing. |