KapStone Paper and Packaging Corp. Rating: Buy

Transcription

1 SPECIAL SITUATIONS Michael French Company Update April 9, 2008 Key Metrics KPPC - NASDAQ $6.96 Pricing Date 04/08/2008 Price Target $ Week Range $8.15-$6.01 Shares Outstanding (mm) 25.3 Market Capitalization ($mm) $ Mo Average Daily Volume 36,293 Institutional Ownership 76% Debt/Total Capital 18.9% ROE 6.6% Book Value/Share $5.74 Price/Book 1.2x EPS($) FY: December Prior Curr. Prior Curr. 2007A 2008E 2008E 2009E 2009E 1Q-Mar E E 2Q-Jun E E 3Q-Sep E E 4Q-Dec E E FY E E P/E 9.3x 8.7x 8.0x Revenue($mm) Prior Curr. Prior Curr. 2007A 2008E 2008E 2009E 2009E 1Q-Mar E E 2Q-Jun E E 3Q-Sep E E 4Q-Dec E E FY E E 1 Year Price History for KPPC Q1 Q2 Q3 Q Created by BlueMatrix Company Description: KapStone Paper and Packaging Corp., through its Roanoke Rapids, NC, paper mill, is the largest producer of unbleached kraft paper in North America and a small but growing player in lightweight linerboard. KapStone's Ride Rite Converting business (Fordyce, AK) accounts for about 13% of total revenues and is the largest producer of dunnage bags (prevent load slippage on trailers). Management intends for KapStone to serve as a platform for future complementary acquisitions KapStone Paper and Packaging Corp. Rating: Buy Consolidation Play in Paper; Transitioning Coverage at Buy Investment Highlights: We are transitioning coverage of KapStone Paper and Packaging Corp., a large manufacturer of unbleached kraft paper products and dunnage bags, with a Buy rating. Price increases in kraft paper should counter the impact of reduced demand for dunnage bags. We expect the $40 per ton increase in kraft paper pricing announced in January to largely contribute to our 7% revenue growth forecast for the company in Higher kraft exports are also anticipated to mitigate lower revenue in the US freight industry. The company's growth prospects, in our view, are largely dependent upon an experienced management team. Roger Stone, Chairman and CEO, and Matthew Kaplan, President, have over 50 years of combined experience in the paper and paper products industry. We expect that the success of planned and future acquisitions relies heavily on the experience of KapStone's management team. KapStone has agreed to purchase MeadWestvaco's kraft paper business for $485mm. The acquisition is expected to close by the end of 3Q08 if regulators approve it. The new business in Charleston, SC, would add significant saturating kraft paper capabilities, among other things. Our 2008 forecasts, which do not include MeadWestvaco business, call for sales of $273.7mm, gross profit of $77.6mm, EBITDA of $62.7mm, operating income of $49.4mm, and net income of $30.0mm or $0.80 per diluted share. For 2009, we estimate total sales of $294.3mm, gross profit of $83.4mm, EBITDA of $69.0mm, operating income of $54.1mm, and net income of $33.3mm or $0.87 per diluted share. We think a general slowdown in economic activity is a near-term risk to KPPC shares since the paper business is cyclical. The company also has 40mm warrants that could be dilutive to EPS if exercised before they expire in August Shares of KapStone are trading at a discount to its peer group of mostly larger paper companies, which currently trade at 2008 median multiples of 14.9x P/E and 6.3x EV/EBITDA. KPPC is presently trading at 8.7x our 2008E EPS of $0.80 and 4.0x our 2008E EBITDA of $62.7mm. Expect KPPC to trade at higher levels, more in-line with peer group. We believe the market should value KPPC shares at a multiple closer to that attracted by the group. We have set a 12-month price target of $10.00, which is based on 12.5x our 2008E EPS of $0.80. The Disclosure section may be found on pages of this report. The Valuation section may be found on page 11 of this report.

2 Investment Thesis KapStone Paper & Packaging is a well-managed, but small company operating in a competitive environment. Management intends to grow the company in the near-term with acquisitions, the key theme for KPPC shareholders. Some investors had been expecting a transaction valued at between $400mm-$600mm in 2008 and were probably not surprised by the announcement this week of an agreement to purchase MeadWestvaco's kraft paper business for $485mm in cash. We think management has the proven track record and necessary resources to make successful acquisitions. Its strategy has not been focused on either vertical or horizontal targets; however, management has been looking for similar operating activities. While we do not expect any more announcements in the near-term, other deals could be considered later. For instance, International Paper (IP) recently acquired Weyerhaeuser's (WY) packaging business for $6bn, and IP is believed to be considering disposing of units that may fit better elsewhere. We believe KapStone could look at opportunities in the former WY packaging business and elsewhere for a business that generates solid cash flow. Price, as usual, is the primary consideration, with KPPC management holding out for attractive targets that can be acquired for about 5x-8x EBITDA. Company Overview KapStone Paper and Packaging Corp. was formed on April 15, 2005, as a special purpose acquisition corporation. The company was established for the purpose of effecting mergers, capital stock exchange, asset acquisitions or other similar combinations with an unidentified operating business in the paper, packaging, and forest products and related industries. On January 2, 2007, KapStone purchased the assets of the Kraft Paper Business from International Paper Company for $155mm, plus $60mm in earnouts. The purchased assets included an unbleached kraft paper manufacturing facility in Roanoke Rapids, North Carolina, and a dunnage bag manufacturer, Ride Rite Converting, from Fordyce, Arkansas. Roanoke Rapids Business The Roanoke Rapids facility consists of an integrated pulp and paper mill that produces kraft paper and lightweight linerboard. The facility has an annual production capacity of about 440,000 tons of unbleached kraft paper and lightweight linerboard. The Roanoke facility offers a variety of paper grades that can be converted into a number of products such as multiwall bags for agricultural products, pet food, cement and chemicals, and grocery bags. The linerboard grades are mainly produced for corrugated container manufacturers of packaging products. The kraft paper and linerboard are made with unbleached softwood pulp, which is processed using two unbleached kraft paper machines: Paper Machine #3 (PM3) and Paper Machine #4 (PM4). The PM3 and PM4 annually produce approximately 195,000 tons of kraft and 210,000 tons of kraft and linerboard, respectively. Management can monitor the equipment's efficiency and productivity on a real-time basis to track production values versus targets using online reporting tools. Ride Rite Converting Business KapStone's Ride Rite business was the first to introduce the disposable inflatable paper dunnage bag in The bags are used to secure freight to minimize movement and potential damage of goods during transport. The dunnage bags have multiple layers of encased high strength kraft paper or linerboard, where two-thirds of the dunnage bags' supply of kraft paper comes from the Roanoke Rapids facility. The products from Ride Rite are sold to manufacturers, less-than-trailer-load distributors, and retail regional distribution centers. Ride Rite 2 MORGAN JOSEPH & CO. INC.

3 produces over 230 different types of inflatable dunnage bags, and in 2007, the segment sold 8.7mm bags. Acquisition of MeadWestvaco's Kraft Paper Division KapStone (this week) announced the strategic acquisition of MeadWestvaco's Charleston, SC-based kraft paper division for $485mm in cash. The acquisition includes three paper machines with the capacity to produce over 882,000 tons of saturating kraft, Kraftpak, and linerboard products with production in 2007 of 833,000 tons. The acquisition also includes a 100 megawatt electric cogeneration facility, an integrated lumber mill, and five chip mills. The deal, priced at 6.0x adjusted 2007 EBITDA, is expected to close prior to 3Q08, pending a Justice Department review. The unit had approximately $521mm in revenue and $81.2mm in adjusted EBITDA in We view the acquisition as a strategic move to diversify KapStone's business away from a primarily kraft driven business to a more equally weighted product portfolio in which cost synergies could be realized. Synergies are expected as excess chemicals (black liquor) not needed from Roanoke Rapids recovery boiler can be used as an energy source at the Charleston division while improving capacity rates at Roanoke Rapids. The new division is also expected to improve margins through a more efficient production process and improved supply chain. The Charleston segment is the current market leader in saturating kraft products. The segment has a 40% global market share in saturating kraft, and 60% domestic share. Saturating kraft products are used to manufacture high pressure laminates, which include kitchen counter tops, laminate floors, and other surface applications. The acquisition price includes an immaterial proportion of intangible assets and is largely expected to be comprised of PP&E. Capital expenditures for maintenance of the new division are expected to be between $10-12mm per year with an additional $8-10mm used for expansion into promising areas. Management expects the Charleston plant to be accretive to KapStone's earnings within the first year and create $2.5mm in synergies. The acquisition is expected to be funded by a $485mm senior term loan. The interest rate has not been disclosed since it is in the process of being syndicated. KapStone also secured a $100mm revolving credit line that we feel should ensure sufficient liquidity until free cash flow is generated from the acquisition. Industry Overview Industry estimates report that the US unbleached kraft paper market consumed 1.55 million tons in 2007, with the US producing 1.36 million tons, importing 360,000 tons, and exporting 170,000 tons. KapStone's Roanoke Rapids facility produced 408,000 tons of kraft paper in 2007 or approximately 30% of the US industry's estimated total for KapStone operates in several markets within the paper and forest products industry including US unbleached kraft paper, linerboard, and dunnage bags. KapStone's largest operating segment, Roanoke Rapids, produces linerboard and kraft paper products comprised of three general types: 1) Multiwall bags; 2) Specialty converting; and 3) Grocery bag and sack. The company's Ride Rite Converting business is a provider to the dunnage bag market. The course paper used in multiwall bags helps to contain heavy bagged products such as cement, flour, pet food, and charcoal. Specialty converting products include rollwrap, shingle wrap, dunnage bags, lawn and leaf bags, and trash compactor bags. Rollwrap provides protection against moisture and outer layer protection for 3 MORGAN JOSEPH & CO. INC.

4 shipping paper rolls like uncoated free sheet paper, high-value specialty industrial papers, coated papers, newsprint and bleached board rolls. The largest segment of the unbleached kraft paper market is the kraft paper grocery bag market. The unbleached kraft paper grocery bag market, however, has been declining since 2001 as plastics and alternative grocery bags have gained popularity. Corrugated containers, like boxes, for packaging products are the primary use of linerboard. Domestic demand for linerboard largely originates from demand for industrials, processed food, and other nondurable goods. US linerboard production was up 1% to 25.1 million tons in 2007 according to industry estimates. Unbleached linerboard capacity is also expected to grow 1% in 2008, driven by the conversion of uncoated paper machines to linerboard machines in Dunnage bags, which are used to protect products during transportation, are highly correlated to the general freight transportation industry. In turn, the freight industry is highly correlated with prevailing economic conditions in the US, thus contributing to our forecast of declining revenue in KapStone's dunnage bag segment for KapStone's dunnage bag segment experienced an 8% decline in revenue during 2007 as less-than-truck-load market demand weakened in the last half of the year. Competitors Within the Roanoke Rapids business segment for unbleached kraft paper, companies compete for supply reliability, delivery, price, and product quality. We believe the long-term relationships and two-year contracts that KapStone has with many customers provide a competitive advantage for the company over other firms. The Roanoke segment's competitors include Longview Fibre Company, Smurfit-Stone Container Corporation, Georgia-Pacific Corporation, Delta Natural Kraft, and Premium One. The Ride Rite business operates in a virtual duopoly within the North American inflatable dunnage bag market. Ride Rite shares the market with Shippers Paper, a division of Illinois Tool Works (ITW). Customers KapStone has many leading world class customers who are converters of kraft paper, distributors of shipping and packing materials, manufacturers, less-than-truckload carriers, or retail regional distribution centers. Roanoke Rapids Business The Roanoke Rapids business caters to converters of kraft paper and has over 70 customers. The kraft paper unit has three customers making up 41%, or $92.9mm, of the segment's revenue. Significant to Roanoke's success, in our view, are the long-term relationships the business unit has established with customers. The average relationship with Roanoke's customers extends beyond 25 years. This segment historically uses more than half of its production capacity for contracted business. In 2007, the Roanoke segment helped improve sales visibility as 76% of the segment's production capacity was contracted, compared to only 64% in Ride Rite Converting Business Ride Rite customers are primarily distributors of shipping and packing materials, manufacturers, less-than-truckload carriers, and retail regional distribution centers. Sunrise Arkansas, Inc., one of the company's largest customers in 2006, was recently acquired by ITW, who competes directly with Ride Rite Converting; however, ITW management has expressed intentions to continue purchasing from KapStone. Another group of Ride Rite's largest customers consists of International Paper's paper mills and converting facilities. Upon the acquisition of Ride Rite in January 2007, International Paper agreed to continue purchasing 4 MORGAN JOSEPH & CO. INC.

5 dunnage products from Ride Rite Converting for a period of five years. The segment's top ten customers accounted for 61.8%, or $20.3mm, of Ride Rite's total revenue for Management Roger Stone, Chairman and Chief Executive Officer. Mr. Stone has been Chairman of the Board since the company's inception and Manager of Stone-Kaplan Investments, LLC, a private investment company, since July Before selling in July 2004, Mr. Stone was Chairman and CEO of Box USA Holdings, Inc., a corrugated box manufacturer. From 1987 to 1998, Mr. Stone was the Chairman and CEO of Stone Container Corporation, a multinational paper company, until it merged with Jefferson Smurfit Corporation. Subsequent to the merger, Mr. Stone became President and CEO of Smurfit-Stone Container Corporation until March Matthew Kaplan, President. Mr. Kaplan has been KapStone's President and on the Board of Directors since inception. He is the son-in-law of Roger Stone and, like Mr. Stone, Mr. Kaplan has also been Manager of Stone-Kaplan Investments, LLC since July From July 2000 until its sale in July 2004, Mr. Kaplan was President, COO, and a Director of Box USA Holdings, Inc. Mr. Kaplan has worked with Stone Container Corporation since 1979 and served as Vice President/General Manager of the Container Division with Smurfit-Stone Container Corporation after the November 1998 merger with Jefferson Smurfit Corporation. Andrea Tarbox, Chief Financial Officer. Ms. Tarbox has served as Vice President and CFO since January Prior to her current position, Ms. Tarbox served as a financial consultant to KapStone since April Ms. Tarbox played a key role in the acquisition of the Kraft Paper Business from International Paper Company and from 2003 to 2006, she served as CFO of Uniscribe Professional Services, Inc. From 1994 to 2003, Ms. Tarbox held the position of Group Vice-President of Finance and Treasurer for Gartner Inc. Ms. Tarbox began her career with Ernst & Young LLP, and is a CPA. Financial Highlights KapStone reported 4Q07 sales up 14% to $64.9mm from $57.0mm a year ago, driven by higher prices in unbleached kraft paper and strong export demand. The unbleached kraft paper segment increased sales 16% to $58.0mm from $50.1mm a year ago while dunnage bag sales declined 1% to $8.1mm from $8.2mm in the same period. A decline in demand, primarily from the less-than-truck-load market, accounted for the decrease in dunnage bag sales. Gross profit for the December quarter was $20.1mm, up from $17.0mm (+ 18% Y/Y) as higher prices in unbleached kraft paper widened margins. EBITDA for 4Q07 was $16.5mm versus $14.6mm (+ 13% Y/Y) and operating income increased to $13.5mm from $10.0mm (+ 35% Y/Y). Higher prices, volume increases, and lower depreciation charges helped improve operating margins. Despite a strong year-over-year quarter, several short unplanned outages negatively impacted operating income in 4Q07 by $1.9mm. The company reported 4Q07 net income of $8.6mm, or $0.23 per diluted share, up from $5.9mm (+ 46% Y/Y) a year ago. (Note: There is no share count available for 4Q06 because the predecessor, Kraft Paper Business, was a division of International Paper Company.) For 2008, we expect moderate revenue growth as higher kraft prices and export demand mitigate the negative impact of the slowing US economy. We expect 2008 revenue to be $273.7mm with diluted EPS of $0.80, 5 MORGAN JOSEPH & CO. INC.

6 excluding any impact from the recently announced agreement to acquire MeadWestvaco's Charleston business. The kraft pricing increase announced in January of $40 per ton is expected to improve gross margins 70 basis points in 2008 to 28.3% from 27.6%, bringing us to our gross profit forecast of $77.6mm. We expect EBITDA of $62.7mm, operating income of $49.4mm, and net income of $30.0mm as we believe the company's new Enterprise Resource Planning (ERP) software should improve operating margins. We forecast 2009 sales of $294.3mm, gross profit of $83.4mm, EBITDA of $69.0mm, operating income of $54.1mm, and net income of $33.3mm or $0.87 per diluted share. The company's balance sheet remains strong with $56.6mm in cash at the end of 4Q07, after paying down $7.5mm in debt for the year. KapStone's cash balance exceeds its total long-term debt balance of $52.5mm. If the MeadWestvaco acquisition is approved by regulators, the company intends to use its cash on hand to pay off its existing debt. It would be left with a $485mm term loan and $600,000 in cash. In the event that capital is required, management has access to a $100mm revolver. We do not envision any liquidity concerns. Investment Risks KapStone faces the risks of failing to optimally integrate future acquisitions. We believe the company intends to pursue future acquisitions given many companies appear to fall within the company's budget. Although we have confidence in management's deep-rooted experience in integrating companies, the standard risks of acquiring a company apply. Concentration of revenue from large customers poses risks should these large customers halt, or reduce orders. The top 10 customers in each segment account for more than 35% of the total revenue from each respective segment. We believe a risk KapStone faces is that the company's revenue may be materially impacted should any of these large customers cease or reduce orders to the company. We think a key risk that KapStone faces is a departure of the company's President and/or CEO. Matthew Kaplan and Roger KapStone are deeply experienced executives in the paper products industry, each with a proven track record. Though we feel it is unlikely, should either of them depart, the company could experience a negative material impact and lose the ability to attract talented management or hire new key employees. A stronger US dollar could pare export demand. The company has benefited from the weak US dollar as higher demand for exports has contributed to low inventories and high operating rates in the company's kraft paper segment. We feel that an appreciation of the dollar could sway demand to foreign producers in geographies such as Europe and Canada. Valuation KPPC shares appear to be trading at a discount to its peer group (see chart below). We think there are several reasons for this, including its relative small size and short operating history. We expect the gap in valuations to close since KapStone is likely to gain scale from the MeadWestvaco acquisition. We have established at 12-month price target multiple of 12.5x our 2008E EPS of $0.80, which yields a share price of $ MORGAN JOSEPH & CO. INC.

7 Company Ticker Price P/E EV/EBITDA Market Cap Weyerhaeuser Company WY $ x 13.6x $13.6bn International Paper Company IP $ x 6.1x $12.4bn MeadWestvaco Corp. MWV $ x 7.2x $4.9bn Greif, Inc. GEF $ x 9.2x $3.3bn Packaging Corp. of America PKG $ x 5.9x $2.3bn Smurfit-Stone Container Corp. SSCC $ x 6.0x $1.8bn Temple-Inland, Inc. TIN $ x 5.7x $1.5bn Neenah Paper, Inc. NP $ x 6.4x $393mm Median: 14.9x 6.3x $2.8bn Kapstone Paper & Packaging Corp. KPPC $ x 4.0x $453.4mm Sources: Thomson First Call, Morgan Joseph estimates Note: Peer companies not covered. Public companies mentioned in this report: International Paper Company (IP - $ NYSE) Weyerhaeuser Company (WY - $ NYSE) Smurfit-Stone Container Corporation (SSCC - $ NASDAQ) Illinois Tool Works Inc. (ITW - $ NYSE) MeadWestvaco Corp. (MWV - $ NYSE) 7 MORGAN JOSEPH & CO. INC.

8 KAPSTONE PAPER & PACKAGING CORP (KPPC) Morgan Joseph& Co. fiscal year ends December 31 in $ '000s 1Q07A 2Q07A 3Q07A 4Q07A FY 2007A 1Q08E 2Q08E 3Q08E 4Q08E FY 2008E FY 1Q09E FY 2Q09E FY 3Q09E FY 4Q09E FY 2009E Unbleached Kraft 58,481 52,519 58,967 57, ,920 60,271 62,682 60,175 66, ,621 67,490 68,503 65,420 68, ,105 Dunnage Bags 7,768 8,684 8,254 8,095 32,801 7,447 7,150 7,007 7,077 28,680 7,147 7,272 7,200 7,326 28,945 Elimination of intersegment sales from unbleached kraft (822) (961) (1,033) (1,110) (3,926) (1,122) (1,133) (1,144) (1,156) (4,554) (1,167) (1,179) (1,191) (1,202) (4,739) Total Revenue 65,427 60,242 66,188 64, ,795 66,597 68,699 66,037 72, ,747 73,471 74,596 71,429 74, ,311 Cost of Goods Sold by Segment 48,125 47,029 46,026 44, ,010 47,884 49,283 48,072 50, ,147 52,316 53,328 52,224 53, ,947 Gross Profit 17,302 13,213 20,162 20,108 70,785 18,713 19,415 17,965 21,507 77,600 21,155 21,269 19,205 21,735 83,364 Selling General and Administrative Expenses 3,728 4,295 4,529 3,930 16,482 4,391 4,216 4,047 3,885 16,539 3,936 3,987 4,039 4,091 16,052 Depreciation and Amortization 2,170 2,924 3,178 3,055 11,327 2,787 3,206 3,319 3,994 13,306 3,581 3,635 3,605 4,126 14,947 Other Operating Income , , ,720 EBITDA 14,035 9,045 16,032 16,515 55,627 14,729 15,611 14,333 18,041 62,713 17,643 17,710 15,599 18,081 69,031 Total Operating Expenses 5,437 7,092 7,308 6,648 26,485 6,771 7,010 6,951 7,460 28,192 7,093 7,194 7,211 7,781 29,279 EBIT 11,865 6,121 12,854 13,460 44,300 11,942 12,405 11,013 14,047 49,408 14,062 14,075 11,994 13,955 54,085 Interest Income , , ,755 Interest Expense 1,156 1,117 1, , , ,500 Total Non Operating Income (Expense) (759) (632) (459) (349) (2,199) (399) (345) (314) (264) (1,321) (275) (214) (169) (88) (745) EBT 11,106 5,489 12,395 13,111 42,101 11,544 12,060 10,700 13,783 48,087 13,787 13,861 11,825 13,867 53,340 Income Tax Provision 4,028 2,040 4,593 4,477 15,138 4,340 4,535 4,023 5,183 18,081 5,184 5,212 4,446 5,214 20,056 Income After Povision for Income Taxes 7,078 3,449 7,802 8,633 26,962 7,203 7,526 6,676 8,601 30,006 8,603 8,649 7,379 8,653 33,284 Net Income 7,078 3,449 7,802 8,633 26,962 7,203 7,526 6,676 8,601 30,006 8,603 8,649 7,379 8,653 33,284 Net Income 7,078 3,449 7,802 8,633 26,962 7,203 7,526 6,676 8,601 30,006 8,603 8,649 7,379 8,653 33,284 Diluted EPS (GAAP) Basic EPS Sources: Company data, Morgan Joseph estimates 8 MORGAN JOSEPH & CO. INC.

9 KAPSTONE PAPER & PACKAGING CORP (KPPC) Morgan Joseph& Co. fiscal year ends December 31 in $ '000s FY 1Q07A FY 2Q07A FY 3Q07A FY 4Q07A FY 2007A FY 1Q08E FY 2Q08E FY 3Q08E FY 4Q08E FY 2008E FY 1Q09E FY 2Q09E FY 3Q09E FY 4Q09E FY 2009E Current Assets Cash and short term investments 35,233 42,930 9,942 56,635 56,635 60,634 65,083 70,913 75,257 75,257 81,347 87,451 94,201 99,850 99,850 Short term investments , Accounts receivable less allowances 31,753 26,952 31,586 30,208 30,208 30,980 31,958 30,719 33,686 33,686 34,177 34,701 33,228 34,803 34,803 Inventories 21,953 21,329 20,333 16,358 16,358 16,776 17,305 16,635 18,241 18,241 18,508 18,791 17,993 18,846 18,846 Inventories consigned to third parties ,488 3,488 3,577 3,690 3,547 3,890 3,890 3,946 4,007 3,837 4,019 4,019 Deferred Income taxes ,263 1,263 1,295 1,336 1,284 1,408 1,408 1,429 1,451 1,389 1,455 1,455 Prepaid Expenses and other 1,920 2,337 1, Total Current Assets 90,859 93,548 99, , , , , , , , , , , , ,819 Property, Plant, and Equipment 110, , , , , , , , , , , , , , ,829 Deferred Acquisition Costs 187 1,197 1, Deferred Income Tax 1,491 1, Intangible Assets, net - - 5,925 5,875 5,875 5,875 5,875 5,875 5,875 5,875 5,875 5,875 5,875 5,875 5,875 Goodwill ,295 2,295 2,295 2,295 2,295 2,295 2,295 2,295 2,295 2,295 2,295 2,295 Other Assets 3,326 3,156 2,086 3,735 3,735 3,735 3,735 3,735 3,735 3,735 3,735 3,735 3,735 3,735 3,735 Total Assets 207, , , , , , , , , , , , , , ,553 Current Liabilities Accounts Payable 10,243 11,864 10,623 11,050 11,050 11,332 11,690 11,237 12,322 12,322 12,502 12,694 12,155 12,731 12,731 Accrued Expenses 2,096 4,435 3,397 4,867 4,867 4,991 5,149 4,949 5,427 5,427 5,507 5,591 5,354 5,607 5,607 Accrued compensation costs 4,893 5,632 5,609 6,625 6,625 6,794 7,009 6,737 7,388 7,388 7,496 7,610 7,287 7,633 7,633 Accrued income taxes 2,976-1,947 1,477 1,477 1,515 1,563 1,502 1,647 1,647 1,671 1,697 1,625 1,702 1,702 Accrued taxes other than income 705 1, Deferred Income taxes Current portion of long-term debt 9,500 9,625 9,750 19,578 19,578 19,703 19,828 19,953 20,078 20,078 20,203 20,328 20,453 20,578 20,578 Total Current Liabilities 30,979 32,819 31,326 43,597 43,597 44,336 45,238 44,379 46,862 46,862 47,378 47,920 46,873 48,250 48,250 Long term debt 50,500 48,500 46,500 32,922 32,922 30,922 28,922 26,922 24,922 24,922 22,922 20,922 18,922 16,922 16,922 Asset retirement obligations Deferred income taxes ,047 1,047 1,074 1,108 1,065 1,168 1,168 1,185 1,203 1,152 1,206 1,206 Pension and post retirement benefits 3,397 3,362 3,188 3,420 3,420 3,420 3,420 3,420 3,420 3,420 3,420 3,420 3,420 3,420 3,420 Total Liabilities 85,144 84,953 81,289 81,265 81,265 80,031 78,967 76,064 76,651 76,651 75,184 73,743 70,646 70,077 70,077 Stockholder's Equity: Common stock Additional Paid-in Capital 112, , , , , , , , , , , , , , ,002 Common stock held in treasury (230) (230) (230) Accumulated other comprehensive income Retained Earnings 9,216 12,665 20,467 29,101 29,101 36,304 43,830 50,506 59,107 59,107 67,710 76,359 83,738 92,391 92,391 Total Stockholders' Equity 121, , , , , , , , , , , , , , ,475 Total Liabilities and Stockholders' Equity 207, , , , , , , , , , , , , , ,553 Sources: Company data, Morgan Joseph estimates 9 MORGAN JOSEPH & CO. INC.

10 KAPSTONE PAPER & PACKAGING CORP (KPPC) Morgan Joseph& Co. fiscal year ends December 31 in $ '000s FY 1Q07A FY 2Q07A FY 3Q07A FY 4Q07A FY 2007A FY 1Q08E FY 2Q08E FY 3Q08E FY 4Q08E FY 2008E FY 1Q09E FY 2Q09E FY 3Q09E FY 4Q09E FY 2009E Operating Activities Net Income 7,078 3,449 7,802 8,633 26,962 7,203 7,526 6,676 8,601 30,006 8,603 8,649 7,379 8,653 33,284 Reconciliation of net loss to net cash provided by / (used in) operating activities: Depreciation and amortization 2,245 2,865 3,162 3,055 11,327 2,787 3,206 3,319 3,994 13,306 3,581 3,635 3,605 4,126 14,947 Noncash stock compensation expense Amortization of debt issuance costs Loss on disposal of fixed assets Deferred Income taxes Net changes in operating assets and liabilities, net of acquisition: 5,524 6,627 (3,133) 3,514 12,532 (690) (873) 1,106 (2,650) (3,107) (439) (468) 1,316 (1,407) (998) Net cash provided by / (used in) operating activities 14,847 13,293 8,131 15,964 52,235 9,300 9,858 11,102 9,945 40,205 11,745 11,816 12,300 11,372 47,233 Investing Activities Acquisition costs paid (187) (153) (860) 9 (1,191) KPB acquisition, net cash of acquired (150,303) (149,603) Capital expenditures (2,078) (3,587) (3,405) (2,791) (11,861) (3,426) (3,534) (3,397) (3,725) (14,083) (3,780) (3,838) (3,675) (3,849) (15,141) Purchase of short term investments - - (35,000) - (35,000) Proceeds from short term investments ,000 35, Restricted cash and other , , Net cash used in investing activities (152,568) (3,740) (39,265) 148,157 (47,416) (3,426) (3,534) (3,397) (3,725) (14,083) (3,780) (3,838) (3,675) (3,849) (15,141) Financing Activities Proceeds from long term debt 60, , Debt issuance costs paid (855) (855) Repayment of long term debt - (1,875) (1,875) (3,750) (7,500) (1,875) (1,875) (1,875) (1,875) (7,500) (1,875) (1,875) (1,875) (1,875) (7,500) Receipt of funds held in trust 115, (115,239) Redemption of shares (230) (230) Investment banking fee paid (1,200) (1,200) Proceeds from exercise of common stock warrants ,561 1, Other Distributed to International Paper Company Net cash provided by / (used in) financing activities 172,954 (1,856) (1,854) (117,428) 51,816 (1,875) (1,875) (1,875) (1,875) (7,500) (1,875) (1,875) (1,875) (1,875) (7,500) Effect of exchange rate changes on cash and cash equivalents Net Increase/decrease in cash and cash equivalents 35,233 7,697 (32,988) 46,693 56,635 3,999 4,449 5,830 4,344 18,622 6,090 6,104 6,750 5,648 24,592 Cash and cash equivalents, BOP 35,233 42,930 9,942-56,635 60,634 65,083 70,913 56,635 75,257 81,347 87,451 94,201 75,257 Cash and cash equivalents, EOP 35,233 42,930 9,942 56,635 56,635 60,634 65,083 70,913 75,257 75,257 81,347 87,451 94,201 99,850 99,850 Sources: Company data, Morgan Joseph estimates 10 MORGAN JOSEPH & CO. INC.

11 Required Disclosures Rating and Price Target History for: KapStone Paper and Packaging Corp. (KPPC) as of /22/07 Hold:NA 05/11/07 Buy:$ Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q Research Coverage Assumed by Michael French on April 9, Created by BlueMatrix Price Target Our price target is $ Valuation Methodology Our price target of $10.00 is achieved by applying a 12.5x multiple to our 2008E EPS of $0.80. Risk Factors Acquisitions may prove disruptive, and entail increased leverage and integration risks. Limited share float. Warrant "overhang" may restrict price appreciation. Roanoke Rapids facility nearing capacity. Majority of revenues are derived from a single facility. Paper and packaging industry is mature and cyclical. High customer concentration. Competition from larger companies. I, Michael French, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. intends to seek or expects to receive compensation for investment banking services from the subject company within the next three months. Morgan Joseph makes a market in the shares of KPPC. 11 MORGAN JOSEPH & CO. INC.

12 Investment Banking Services/Past 12 Mos. Rating Percent Percent BUY [B] HOLD [H] SELL [S] Meaning of Ratings A) Buy means reasonable outperformance relative to the market over months. B) Hold means market-type risk adjusted performance; potential source of funds. C) Sell means expected to underperform the market. Other Disclosures The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to be all inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securities mentioned herein, and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own accounts or for the accounts of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed are our present opinions only and are subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updates to the opinions or information provided herein. Additional information is available upon request. Copyright 2008 by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. 600 Fifth Avenue, 19th Fl New York, NY Tel Fax Sales and Trading New York Tel Fax Pittsford Tel Fax MORGAN JOSEPH & CO. INC.