Aggressive Actions by Paper Company Led to Strong Results in 2009

To counteract the recession the company focused on lean manufacturing

This recession was very personal for Appleton. As our 103-year-old company's first president and CEO chosen from outside the paper industry, it was especially personal for me.

Starting in 2005, we adopted a new mission statement, focused on our technical papers and packaging business, and placed a greater priority on serving international markets. To achieve these goals, we assembled a team of talented executives to deliver on a five-year strategic plan committed to securing or holding the number-one or number-two spot in every market we do business in.

Things were going well... and then the global recession hit.

As the world's largest producer of carbonless paper, we have seen our fair share of ups and downs over the years. But last year was one of the toughest in our century-old history. We entered 2009 facing the extraordinary challenges created by the recession. Like many business people, we were uncertain about the economic outlook for 2009... How far would the economy fall? Where would it bottom-out?

We are a proud and competitive organization and we weren't about to let a recession get in the way of our plans to achieve the goals we set for the company. The executive team rallied our employees by instituting proactive measures to counteract the effects of the recession. We are an employee-owned company, and felt we owed it to the community that is our namesake to put in the good fight.

We took some early, decisive steps to cut costs and reduce debt while staying focused on winning with our customers. Those efforts resulted in Appleton reporting a net income of $25.1 million in 2009, a huge turnaround from a $97.3 million net loss we reported in 2008.

It wasn't easy. We had to make some very tough decisions. To counteract the recession we continued to focus on lean manufacturing. We slowed down, and in some cases shut down, operations to match production to demand. We instituted pay freezes and two-week furloughs for all non-union employees and temporarily suspended company match of employee contributions to 401(k) plan. And, unfortunately, the company was forced to eliminate jobs and say goodbye to talented, loyal employees.

Ultimately, we reduced our selling, general and administrative expenses by 17.7%, lowered inventories by 10% and generated cash from operations of $61.2 million. We completed the sale of the C&H Packaging Company Inc., a non-core asset and used the $16.9 million proceeds to pay down debt.

In September of 2009, we completed a creative, voluntary debt-for-debt bond exchange transaction. We essentially exchanged $92 million of notes payable June of 2011 and $110.3 million of June 2014 notes payable for $158.2 million newly issued second lien notes payable due December of 2015. The transaction resulted in a debt reduction of $44.1 million as well as extended maturities for a majority of the notes payable.

We were more than satisfied with how we ended 2009. In addition to our aggressive cost-cutting activities, our sales and marketing teams delivered impressive results in the face of a global recession. We actually grew shipment volumes in two of our three core paper businesses. Our thermal paper business grew 8% and our security paper business was up more than 10%. In the fourth quarter, our international sales volume was up more than 40% compared the same quarter in 2008. On the new business front, our start-up micro-encapsulation business, Encapsys, more than doubled. Our annual earnings report showed that we delivered a strong performance for the year, up $122.5 million compared to 2008.

Eye to the Future

Last year was all about playing defense. Now we are playing offense. We expect to see continued market volatility and an uneven economic recovery. However, we are optimistic as we look ahead, using our expertise and collective passion to take control of things in 2010.

Our thermal business unit -- paper often used for transaction documents such as gas station and cash register receipts -- is projected to continue its strong growth this year. The positive outlook can be attributed to two things: superior performing, low cost products that are produced on a state-of-the-art thermal coater at West Carrollton, Ohio; and advantaged coating chemistry. Unlike our competitors, we make all of our thermal paper without the controversial chemical BPA, which gives customers who are concerned about the presence of BPA another reason to choose Appleton thermal products.

Our microencapsulation business unit, Encapsys, which uses technology we applied to help introduce the carbonless paper in the 1950s, continues to grow in volume and lead to new product applications from the Procter & Gamble collaboration that began in 2008. We expect to double Encapsys revenue again in 2010.

We continue to focus on reducing debt. Last month, we completed a voluntary refinancing of our debt to extend debt maturities, increase liquidity, eliminate certain financial covenants and increase financial flexibility. The refinancing included the sale of $305 million of 10.5% senior secured notes due June of 2015 and a new five-year, asset-backed $100 million revolving credit facility.

These past 15 months have tested us and made our company more nimble, flexible and resilient. I am proud of the determination and discipline our employees showed in serving our customers and achieving strong results. Building on what we accomplished in 2009, we plan to play offense and continue improving our business results in 2010 and beyond.

Mark Richards is CEO of Appleton (www.appletonideas.com), which creates product solutions through its development and use of coating formulations, coating applications and encapsulation technology. The Company produces carbonless, thermal, security and performance packaging products. Appleton, headquartered in Appleton, Wisc., has manufacturing operations in Wisconsin, Ohio, Pennsylvania, and Massachusetts, employs approximately 2,100 people and is 100% employee-owned www.appletonideas.com.

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