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Article by DailyStocks_admin    (09-16-08 05:49 AM)

Filed with the SEC from Sep 04 to Sep 10:

Chesapeake (CSK)
Germany's Edelmann reported owning 1.57 million shares (7.6%). It may seek representation on Chesapeake's board.

BUSINESS OVERVIEW

Business History and Overview

Chesapeake was founded in 1918 in West Point, Virginia, where we operated a kraft pulp and paper mill. Through the years, we expanded into several commodity paper products, forest products and corrugated packaging operations located primarily in the United States. Chesapeake is a Virginia corporation, and our common stock has been listed on the New York Stock Exchange since 1944.

In the mid-1990s, our management and board of directors recognized that our commodity-based businesses were competing in increasingly consolidating, capital intensive and cyclical markets. Seeking to increase shareholder value, we implemented a strategic transformation. Beginning with the sale of the West Point pulp and paper mill in 1997, we divested our commodity paper products, forest products and corrugated packaging businesses, and invested the sale proceeds in several acquisitions that have transformed our company into a value-added paperboard and plastic packaging products business.

Today Chesapeake is a leading supplier of specialty paperboard packaging products in Europe, with growing interests in North America and Asia. We are also a leading international supplier of plastic packaging products to niche end-use markets. We focus on specific end-use markets where our multinational customers demand creative packaging designs and desire broad geographic coverage from their packaging supplier. We operate in two core business segments:

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Paperboard Packaging . Our Paperboard Packaging segment designs and manufactures folding cartons, spirally wound composite tubes, leaflets, labels and other paper and paperboard packaging products. Our primary end-use markets are pharmaceutical and healthcare and branded products (such as alcoholic drinks, confectioneries, foods and tobacco). We are one of the leading European suppliers of paperboard packaging products within several of our end-use markets, including pharmaceutical and healthcare, alcoholic drinks and confectioneries. For the fiscal year ended December 30, 2007, our Paperboard Packaging segment produced revenues and operating income (as defined in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Review of Consolidated Results of Operations”) of $879.7 million and $36.9 million, respectively, and accounted for 83% of our net sales.

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Plastic Packaging . Our Plastic Packaging segment designs and manufactures plastic containers, bottles, and preforms. Our primary end-use markets are agrochemicals, other specialty chemicals, and food and beverages. We believe that our Plastic Packaging segment holds leadership positions within several sectors of our end-use markets, including HDPE fluorinated barrier containers for agrochemicals and other specialty chemicals markets, primarily in Europe and China, HDPE bottles for the Irish dairy market and PET bottles and preforms for soft drink markets in South Africa. For the fiscal year ended December 30, 2007, our Plastic Packaging segment produced revenues and operating income (as defined in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Review of Consolidated Results of Operations”) of $179.9 million and $20.4 million, respectively, and accounted for 17% of our net sales.

We focus on specific end-use packaging markets—such as pharmaceutical and healthcare, branded products (including alcoholic drinks, confectioneries and tobacco), specialty chemicals and food and beverages—where customers demand:

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creative packaging designs to position their brands with consumers and differentiate those brands on the retail shelf;

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technical expertise and production capabilities to address their special packaging requirements and desire for innovative packaging solutions;

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a broad range of printing processes and a one-stop-shop approach to their specialty packaging needs;

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suppliers able and willing to provide innovative solutions beyond their core product offering; and

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broad geographic coverage and effective supply chain offerings.

Many of these markets are characterized by higher growth prospects and lower cyclicality than commodity packaging markets.

In September 2005, we completed the acquisition of Impaxx Pharmaceutical Packaging Group, Inc., which now trades as Chesapeake Pharmaceutical and Healthcare Packaging-North America (“CPHPNA”). CPHPNA is the leading supplier of printed pharmaceutical leaflets in North America. The transaction strengthened our presence in North America and provides a platform to expand our global pharmaceutical and healthcare packaging business. We are a leading European supplier of leaflets, labels and cartons to the pharmaceutical market, and CPHPNA’s U.S. pharmaceutical customer base and manufacturing capabilities complement our existing business.

Also, in December 2005, we purchased the outstanding minority interest of our South African plastic packaging operations. This was designed to provide us with greater flexibility to strengthen our strategic position in this market.

In November 2005, we announced plans for a global cost savings program which targeted combined pre-tax savings of $25 million on an annualized basis to be implemented over a two-year period. The program included the closure or consolidation of facilities, workforce and overhead reductions, and cost savings from improvements to operating processes. Over the course of fiscal years 2006 and 2007 we realized cost savings in excess of our $25 million goal and we are now focused on exploring opportunities for additional cost savings and dispositions of non-core or redundant assets to improve our operating results and reduce debt.

In February 2007, we formed a joint venture with Chemark Termelõ és Kereskedõ Kft., a pesticide formulating company in Hungary, to serve existing and prospective specialty chemical packaging customers in Eastern Europe. This joint venture is focused on exploiting our leading position in the in-mold fluorination of specialty containers.

In October 2007, we opened a new pharmaceutical paperboard packaging plant in Kunshan, China. The new facility will offer carton, label and leaflet making capabilities to complement our existing pharmaceutical plastic bottle operation, also in Kunshan.

Financial information with respect to our business segments and geographic data is presented in “Note 15 — Business Segment Information” of Item 8, which is incorporated herein by reference. Information regarding our anticipated capital spending is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Cash Flows” of Item 7, which is incorporated herein by reference. See “Note 2 — Discontinued Operations” and “Note 3 — (Gain) Loss on Divestitures” of Item 8, incorporated herein by reference.

Business Strategy

Our strategy is to focus our financial, capital and human resources in the markets in which customers have special packaging requirements and desire innovative packaging solutions. While we did not forego longer-term strategic initiatives, our primary objective over the course of fiscal years 2006 and 2007 was the successful implementation of our cost savings program. In 2008, we will continue to focus on restructuring and cost savings opportunities, which may include the disposal or closure of facilities so that we can sharpen our focus on our more profitable core businesses, and we will continue with our long-term strategy to pursue organic and non-organic growth opportunities in the pharmaceutical and healthcare packaging market and in selected plastic packaging markets, while looking for disciplined organic growth opportunities in our other businesses.

Chesapeake’s $25-Million Cost Savings Program

While we routinely evaluate our operations for improvement and rationalization opportunities, in 2005 this evaluation developed into a comprehensive program that we believed would significantly improve our competitive position and enhance value for our shareholders by focusing on three goals:

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increasing our focus on business operations that are aligned with our global strategic vision and that possess what we believe are the driving forces that will enable us to achieve improved performance in the market;

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improving our operational processes; and

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reducing our overall company-wide cost structure.

The $25-million cost savings program was launched at the end of fiscal 2005 and concluded in fiscal 2007. During fiscal 2006 we completed the closure of our Birmingham facility in the United Kingdom. We also largely completed the closure of our Bedford facility in the United Kingdom, with the only remaining matter outstanding being the completion of the sale of the land and buildings, which is expected to occur in fiscal 2008. In March 2006 we completed the sale of our plastic packaging operation in Lurgan, Northern Ireland (“Lurgan”). Part of the Lurgan sale proceeds was in the form of a promissory note, which is still outstanding. This promissory note was fully provided for at the time of the sale but during the fourth quarter of fiscal 2007 we re-evaluated the collectibility of the subordinated loan note, and based on this evaluation we reversed the provision against it. In July 2006 we also completed the sale of our French luxury packaging business (“CLP”). In addition to the closures and sales we also undertook a wide range of cost cutting and efficiency measures in fiscal 2006 and fiscal 2007, including overhead cost reduction programs, workforce reductions, improvements to working practices and other rationalization measures.

Since the inception of the global cost savings program we have recorded net charges for divestitures and restructuring, asset impairments and other exit costs of approximately $32.7 million, of which $7.7 million has been recorded in discontinued operations. Cash payments in relation to these program initiatives since inception of the program total approximately $32.0 million. In addition we have recovered approximately $26.7 million in cash sale proceeds on sales of operations, land and other assets under the program. During fiscal years 2006 and 2007 we have realized annualized cost savings in excess of our $25-million goal, and we are now focused on exploring opportunities for additional cost savings and dispositions of non-core or redundant assets to improve our operating results and reduce debt.

Organic Growth

We are focusing our growth in markets where we believe we possess and can sustain competitive strengths through our ability to deliver creative packaging designs, and where the services and process capabilities we offer enable us to satisfy our customers’ specialty packaging requirements. These markets include:

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Markets that offer higher growth potential — pharmaceutical and healthcare . We believe that global demand for pharmaceutical and healthcare products packaging will grow significantly over the next decade as a result of global population growth, an aging population in industrialized countries, new drug technology and new regulatory requirements. As a leading supplier of pharmaceutical and healthcare paperboard packaging in Europe, and as a supplier of plastic packaging for pharmaceutical and healthcare products, we expect to benefit from this market growth. We also intend to increase our share of this market by looking for opportunities to expand our offerings beyond an already comprehensive range of paperboard packaging, leaflets and labels.

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Markets where brand positioning and differentiation are important—branded products; over-the-counter pharmaceutical and healthcare . Brand leaders in these markets value our ability to provide sophisticated creative and structural designs, intricate graphic and embossed details, and value-added service enhancements. These process capabilities have led several international •

manufacturers of branded products to designate us as their primary paperboard packaging supplier. Many manufacturers of branded products also rely on us to create and supply the packaging for their product range extensions or geographic market expansions, which we believe will continue to generate additional growth opportunities for us.

•

Markets that have special packaging requirements . We are a market leader in several end-use markets that have special packaging requirements. In our Paperboard Packaging segment, our pharmaceutical packaging plants comply with the Pharmaceutical Supplier Code of Practice, and individual plants are accredited by their respective pharmaceutical customers, reflecting our ability to consistently satisfy the stringent quality standards of our customers. As a result of our ability to provide innovative packaging solutions (such as special features designed to prevent counterfeiting of prescription drugs and custom dose “patient packs”), together with leaflets and labels, often in multiple languages, we are one of the largest suppliers of paper-based pharmaceutical and healthcare packaging in Europe. In our Plastic Packaging segment, our proprietary process for blow molding of fluorinated HDPE barrier containers has helped us to achieve a significant position in the European market for such containers. Also in our Plastic Packaging segment, our South African operation has pioneered the use of multi-layer technology in PET bottles to prolong the shelf-life of carbonated products. This technology is particularly beneficial in environments with high temperatures and under-developed distribution channels.

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Markets where packaging and packaging procurement play an important role in supply chain management – pharmaceuticals; milk; carbonated soft drinks; specialty chemicals . We are currently a market leader in the supply of packaging materials to these markets. We also have several product and service offerings in development to help customers reduce their total cost of supply. These include system-wide monitoring management tools, anti-counterfeiting developments, and consumer-friendly packaging innovations.

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Geographic markets that offer the opportunity to leverage a product or market niche. As an example, the developing nature of the South African market offers the opportunity to be a leader by introducing technology and products that are commonplace in more developed markets. By being a leading presence, we can take advantage of the growth opportunities we believe this market provides.

We continue to invest in new equipment to maintain our leadership positions and competitive advantages and grow with our customers.

Non-organic Growth

Over the next few years, we plan to expand our network of pharmaceutical and healthcare packaging facilities and further develop our leadership position in selected plastic packaging markets. To do this, we intend to pursue acquisitions, new facilities, joint ventures or alliances involving complementary businesses in both developed and emerging markets. We believe this expansion and acquisition strategy will improve our geographic and product-line balance, satisfy our multinational customers’ desire for broad geographic coverage from their packaging supplier, and permit us to leverage two of our greatest competitive strengths — our sophisticated design and manufacturing capabilities and our long-term customer relationships.

Competitive Strengths

We believe that our competitive strengths include:

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Sophisticated design and manufacturing capabilities . Our sophisticated structural and creative package design skills, and our experience in printing and manufacturing complex package designs, are important competitive strengths. For example, our pharmaceutical and healthcare customers rely on our ability to provide both regulatory and marketing information in attractive and functional paperboard packaging, while meeting stringent standards for quality and text integrity. To support the multifaceted needs of these customers, we have a packaging design center •

dedicated solely to the pharmaceutical and healthcare industries. Similarly, we are a leading European designer and supplier of creative paperboard packaging that supports the brand images of internationally recognized branded products. For these customers, our design skills and ability to print and manufacture packaging that incorporates design and construction features with intricate graphic and embossed detailing are important to successfully marketing their products. In our Plastic Packaging segment, our technical expertise and experience relating to in-mold fluorinated blow-molding of HDPE barrier containers is an important competitive strength. Additionally, we have recently installed capacity to produce multilayer PET barrier preforms in South Africa. New and existing customers are looking for solutions like multilayer PET barrier bottles that will extend the shelf life of fruit juice and various carbonated beverages in Africa where temperatures are elevated and refrigeration is not widespread. We have plans to introduce this new product in several sub-Saharan African markets.

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Understanding of how our products and services impact our customers’ supply chains. In our pharmaceutical and healthcare and branded products paperboard packaging markets, we have developed a sophisticated, web-based, system solution to enable our customers to manage and optimize their packaging supply chain. This system takes customer demand information and converts it into amalgamated raw material requirements. These requirements can then be cross-checked against strategically-placed inventories, increasing the speed of paperboard sourcing and reducing lead times at our factories. The system also interfaces with the paperboard making cycle data from our own approved suppliers. This type of capability positions us with our customers as more than simply a manufacturer of paperboard packaging.

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Strong customer relationships . We have long standing customer relationships with many of the world’s largest branded products and pharmaceutical and healthcare products companies. Our major customers include operating units of 3M Company; Diageo plc; Japan Tobacco International; GlaxoSmithKline plc; Nestlé S.A.; Pernod Ricard S.A.; Schering-Plough Corporation; Storck KG; and Syngenta AG. These long-term relationships, together with our global manufacturing footprint, enhance our competitive position.

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Broad geographic manufacturing network including pan-European service . We supply specialty paperboard and plastic packaging products throughout the world from a strategically located network of 36 paperboard packaging facilities in Europe, North America and Asia, and eight plastic packaging facilities in Europe, Africa and Asia. Our facilities are generally located in close proximity to our largest customers. Our strategic manufacturing footprint meets our customers’ needs for reduced delivery times and flexibility in both order size and geography.

Both of our core business segments also compete based on their established reputations for quality and innovation. We continue to invest in our manufacturing plants and design centers to enhance our ability to serve and grow with our customers. Our highly skilled, experienced management team has developed an operating model focused on expertise in design, manufacturing and customer support, coordinated with a motivated, knowledgeable sales team.

Paperboard Packaging

Industry Overview

The paperboard packaging industry manufactures and sells corrugated products, folding cartons and rigid fiber boxes. Our Paperboard Packaging segment competes primarily in the folding carton segment of the industry.

Folding carton packaging is used to package various consumer products such as pharmaceuticals, personal care products, cosmetics, tobacco products, confectioneries, alcoholic drinks and food products. Folding cartons do not include corrugated “brown boxes,” which are typically used for shipping and transportation of products in bulk. Folding cartons generally serve the dual purpose of protecting non-durable goods during shipping and distribution, and attracting consumer attention to the product at retail. As printing technologies have continued to improve, the marketing function of folding cartons has become increasingly important as consumer products companies rely more heavily on the retail promotional value of product packaging.

Folding cartons are made from several grades of paperboard, including folding boxboard. The paperboard used in folding cartons must meet specific quality and technical standards for: bending, creasing, scoring and folding without breaking or cracking; stiffness and resistance to bulging; ink absorption; and surface smoothness for printing, embossing or laminating. Historically, folding boxboard has been one of the paperboard grades used most frequently by the folding carton industry because of its superior strength and appearance and because it provides one of the best surfaces for high-quality printing. The paperboard used in folding cartons is typically die-cut, printed, glued and shipped flat from folding carton plants to manufacturing customers, where the cartons are then erected and filled on production lines.

Vertical integration is less common in the European folding carton industry than in other paper-based packaging markets, such as corrugated containers. In part, this reflects the lower-volume, higher value-added nature of the folding carton business, but also the need of most folding carton producers to utilize various grades of paperboard. As a result, many of the largest folding carton companies in Europe do not manufacture the paperboard they use as raw materials.

Our folding carton operations are located primarily in Europe. The European folding carton industry is a market composed of several types of suppliers: pan-European companies serving global customers; regional firms addressing select products at the country level; and local businesses specializing in niche product categories. None of the major European packaging suppliers commands a dominant pan-European market position, although certain competitors may dominate particular geographic areas or market niches. The European folding carton market is fragmented and highly competitive. Suppliers generally differentiate their products and services based on design capabilities, print quality and, increasingly, the ability to service pan-European requirements. The end-use markets served by most folding carton suppliers vary widely in terms of technical requirements, product pricing and, to a lesser extent, growth rates.

Operations

Our Paperboard Packaging segment consists primarily of operations acquired as part of our strategic transformation in 1999 and 2000. These operations have been consolidated for accounting purposes since their respective acquisition dates.

We continue to consolidate the sales, marketing and administrative functions of many of these businesses, which has resulted in overhead reductions, purchasing synergies and a more effective sales and marketing effort. We continue to evaluate our manufacturing capacity in light of our customers’ demands and growth strategies and expect to continue to rationalize manufacturing facilities in this segment by closing redundant or underutilized facilities. See “Note 5 — Restructuring Charges” of Item 8, incorporated herein by reference.

Products and Markets

We specialize in the design and production of folding cartons, spirally wound composite tubes, printed leaflets, labels and other paper and paperboard packaging products. We focus on specific end-use markets where our multinational customers demand creative packaging designs and desire a broad geographic presence from their packaging supplier. We compete in the high end of these markets, where value-added services and creative packaging solutions are required by our customers.

Our primary end-use markets are:

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pharmaceutical and healthcare; and

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branded products, such as alcoholic drinks, confectioneries, foods and tobacco.

Pharmaceutical and Healthcare . We are a leading supplier of pharmaceutical and healthcare paperboard packaging in Europe and a leading supplier of leaflets to the pharmaceutical market in North America. Our network of 21 dedicated pharmaceutical and healthcare packaging plants in nine European countries, three plants in the United States and one plant in Asia offer broad-based manufacturing and distribution of folding cartons, labels, booklets and leaflets for a wide range of products, including: prescription medicines; over-the-counter medicines; healthcare products, such as vitamins and contact lens solutions; quasi-medicinal products, such as cold cures; and toiletries, such as toothpaste, deodorants, soaps and fragrances. In this sector, manufacturers utilize a variety of packaging materials, many of which incorporate folding cartons, leaflets and labels in a complete package for retail sale. For example, pills may be packaged in blister packs or in glass or plastic bottles, which may be placed with a leaflet in a folding carton, while toothpaste may be packaged in a collapsible tube inside a folding carton.

Pharmaceutical manufacturers are increasingly demanding more comprehensive design services, reduced delivery times, more flexibility in order size and broader geographic coverage from their packaging suppliers. Historically, we have responded to these trends by providing pan-European service through a network of dedicated pharmaceutical and healthcare packaging plants, many of which are located in close proximity to their principal customers. Our acquisition in 2005 of CPHPNA, the leading supplier of printed pharmaceutical leaflets in North America, and construction of a state-of-the-art pharmaceutical and healthcare paperboard packaging facility in China demonstrate our commitment to our customers’ packaging needs on a global scale.

We believe that we have substantial competitive strengths in the pharmaceutical and healthcare packaging market. Our ability to satisfy stringent quality standards and to offer a single-source global solution for pharmaceutical packaging, as well as leaflets and labels, should be increasingly attractive to drug companies. We believe our ability to satisfy all of the folding carton, leaflet and label needs of our pharmaceutical customers will also become increasingly important as governmental agencies in Europe and the United States require increasing amounts of information on leaflets and labels in multiple languages. In addition, our design and manufacturing capabilities and experience should assist pharmaceutical companies in responding to requirements that consumer-friendly packaging, such as custom dose “patient packs,” be used for pharmaceutical products.

We work closely with drug manufacturers to design special packaging features to assist in the prevention of counterfeiting of prescription drugs and have a design studio dedicated to the pharmaceutical and healthcare packaging market. Our experience in designing high-graphic content packaging for branded products provides us with a competitive advantage when we work with drug manufacturers to design new packaging for prescription drugs that are moving “off patent” to the over-the-counter market.

Pharmaceutical packaging is produced on segregated production lines under strict security because of the possibility of serious damage to health if pharmaceutical products are contaminated or incorrectly labeled. A majority of our pharmaceutical packaging facilities have ISO 9000 Series quality certification and, where appropriate, comply with PS9000 (Pharmaceutical Packaging Materials).

Growth in the pharmaceutical and healthcare packaging market is primarily driven by new product launches, an increasing use of lifestyle drugs, such as Viagra® and Botox®, an aging population and an increased focus on total patient costs which are increasing government budgets for home delivery of drugs. Growth is also influenced by legislation regarding more extensive patient information (such as leaflets, booklets and labels, and anti-counterfeiting measures), increased over-the-counter drug sales, more pre-packaged dispensing and an increase in the variety of available drugs.

Products of our pharmaceutical and healthcare division are distributed to the manufacturing plants of our customers, for ultimate sale throughout the world. Our principal pharmaceutical and healthcare customers include operating units of Bristol-Myers Squibb Company; GlaxoSmithKline plc; Merck & Co.; Pfizer; Reckitt Benckiser plc; Sanofi-aventis; Schering-Plough Corporation; and 3M Company.

Branded Products . We are a leading European supplier of the creative paperboard packaging desired by multinational, branded consumer products companies in end-use markets such as alcoholic drinks, confectioneries, foods and tobacco. Brand leaders for these products value our ability to provide sophisticated creative and structural design, intricate graphic and embossed detail, and value-added service enhancements to differentiate and position their products for retail sale at particular price points. Our customers frequently use packaging to emphasize a high-quality brand image, to attract retail customers and to protect against counterfeiting. In addition, increasing competition between premium brands results in our customers utilizing new designs, offering a broader range of products and package sizes within brands, and revamping packaging to appeal to local consumer preferences.

The primary categories of branded products for which we design and manufacture paperboard packaging include:

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Alcoholic Drinks —We are the leading supplier of paperboard packaging to alcoholic drinks manufacturers in Europe. Our packaging products for the drinks sector include folding cartons, spirally wound composite tubes, and self-adhesive or wet applied labels, and are generally complex, higher-value-added products involving special finishes such as gold blocking and embossing. Our competitive strengths in this market include our experience in designing and manufacturing high graphic content packaging with a broad range of finishes and effects, and our one-stop shop approach to supplying labels to complement the principal packaging application. Our principal alcoholic drinks customers include operating units of Diageo plc, William Grant & Sons Inc. and Pernod Ricard S.A. Products for which we manufacture and design packaging include international brands such as Johnnie Walker™, J&B®, Chivas Regal®, Ballentine’s®, Glenfiddich®, Beefeater® and Baileys®. These products are distributed by our customers to global retail markets.

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Confectioneries —We are a leading supplier of paperboard packaging to the European confectioneries industry. A key feature of this market is the demand for innovative packaging designs for year-end holiday and Easter products. Our competitive strengths in this market include internationally recognized creative and structural design resources and process controls designed to prevent taint and odor problems that could affect confectionery products. Our principal confectioneries customers include operating units of Nestlé S.A.; Storck KG; Mars, Incorporated; Cadbury Schweppes plc; and Chocoladefabriken Lindt & Sprüngli AG, for their brands which include After Eight®, Mars® Celebrations®, Merci® and Cadbury’s® Milk Tray®. These products are distributed by our customers primarily to European retail markets and, more recently, in the United States.

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Tobacco Products —We are also a supplier of paperboard packaging for the tobacco industry, including offset and gravure cartons, carton outers, printed paper and film, and inner frame board. Our customers, including operating units of JT International S.A.; Imperial Tobacco Group plc; British American Tobacco plc; and Altadis, S.A., use our packaging for brands that are marketed globally. Our competitive strengths include in-line high speed gravure printing, embossing and gold leaf processes. Chesapeake can supply the full range of tobacco printed packaging as well as an innovative approach to design and service. Brands which use our packaging include Benson & Hedges® , Silk Cut®, Embassy® and Fortuna®. Product packaging has become one of the leading promotional vehicles for tobacco products because of stringent limitations on other forms of marketing tobacco products in many countries.

Product Design, Manufacturing and Distribution

Our Paperboard Packaging segment generally manufactures packaging from specifications, artwork or film supplied by customers. However, we also design, develop and manufacture new packaging concepts and structures when requested by customers. Many of the cartons we manufacture incorporate sophisticated construction techniques and include high graphic content, and special finishes and effects. We believe our commitment to technological leadership in structural and graphic design and its integration with manufacturing processes is a significant competitive strength.

We work closely with customers to develop new packaging and to refine existing packaging designs. This involves working with external design agencies employed by customers and using our in-house technical and design capabilities. Our packaging design centers are also used by our customers to develop and test innovative packaging designs and graphics. Elements of the design are usually retained electronically and updated as required, enabling design work to be undertaken at the factory and subsequently reviewed at the customer’s location. We have also established an electronic network for design data interchange between our factories and with certain customers. The availability of sophisticated in-house design services enhances our high quality image and improves our response time to customer requests, particularly for new product launches.

CEO BACKGROUND

Sir David Fell, 65
Chairman of the Board of the Corporation (since 2005); Director, National Australia Group Europe Ltd., a banking and financial services company (since 1998); Director, Clydesdale Bank plc, a banking and financial services company (since 2004); former Chairman and Director, Northern Bank Limited, a banking and financial services company (1998-2005).

John W. Rosenblum, 64
Management Consultant (since 2001) and Dean Emeritus, Darden Graduate School of Business Administration, University of Virginia; Director of Grantham, Mayo, Van Otterloo & Co. LLC.

Beverly L. Thelander, 52
Management Consultant (since 2004); former Senior Vice President, Strategic Planning & Operations, AECOM Technology Corporation, an engineering and architectural professional services firm (2002-2004).

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview of Business

Chesapeake is a leading European supplier of specialty paperboard packaging products and a leading international supplier of plastic packaging products to niche end-use markets. We focus on specific end-use packaging markets, where customers demand creative designs, technical expertise and production capabilities that include broad geographic coverage and appropriate supply chain offerings.

Chesapeake has two reportable business segments, Paperboard Packaging and Plastic Packaging. In July 2007 we announced a reorganization that included the realignment of our operating segments. As of September 30, 2007 we conduct our business in three operating segments: Plastic Packaging, Pharmaceutical and Healthcare Packaging ("Pharma"), and Branded Products Packaging ("Branded Products"). The Branded Products operating segment now includes our former Tobacco operating segment. The Pharma and Branded Products operating segments are aggregated into the Paperboard Packaging reportable segment.

Paperboard Packaging

The Paperboard Packaging segment designs and manufactures folding cartons, spirally wound composite tubes, leaflets, labels and other paper and paperboard packaging products. Our primary end-use markets are pharmaceutical and healthcare and branded products (such as alcoholic drinks, confectioneries, foods and tobacco).

Plastic Packaging

The Plastic Packaging segment designs and manufactures plastic containers, bottles, and preforms. The primary end-use markets are agrochemicals and other specialty chemicals, and food and beverages.

Summary of 2007

Our operating income for fiscal 2007 was $26.7 million, and included gains or losses on divestitures and restructuring expenses, asset impairments and other exit costs of $14.3 million. Our operating income for fiscal 2006 was $0.3 million, and included goodwill impairments, gains or losses on divestitures and restructuring expenses, asset impairments and other exit costs of $44.6 million.

Compared to fiscal 2006, operating income in fiscal 2007 decreased due to the decreased sales of tobacco packaging, start-up problems with the multi-shaped tubes for U.K. drinks packaging, and reduced operating margins in pharmaceutical and healthcare packaging. This was partially offset by increased sales of specialty chemicals packaging, reduced pension expense and favorable effects of changes in foreign currency exchange rates.

During the fourth quarter of fiscal 2005, we announced plans for a two-year global cost savings program which targeted combined pre-tax savings of $25 million on an annualized basis. The scope of this program was extensive, and the cost of these initiatives was expected to range from $30 million to $40 million on a pre-tax basis, with the cash flow impact being less due to the sale of related real estate and assets. Under this program, we have closed three locations and sold two operations. We have also implemented broad-based workforce reductions and general overhead cost savings initiatives throughout the company. We have now completed the $25-million cost savings program and over the course of fiscal years 2006 and 2007 we achieved cost savings in excess of our $25-million goal. However, these savings have been masked in 2007 due to the loss of tobacco volumes, start up costs associated with the multi-shaped tube products, and pricing pressures primarily in the Paperboard Packaging segment. We are now evaluating potential additional restructuring and cost savings actions.

Review of Consolidated Results of Operations

The following consolidated results from continuing operations highlight major year-to-year changes in our consolidated statements of operations. More detail regarding these changes is found under the caption “—Review of Segment Results” and information regarding discontinued operations is found under the caption “­­—Discontinued Operations.” All per share amounts included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are presented on a diluted basis.

The consolidated financial statements were prepared in conformity with United States generally accepted accounting principles (“GAAP”) and require management to make extensive use of estimates and assumptions that affect the reported amounts and disclosures (see discussion of Critical Accounting Policies). Actual results could differ from these estimates.

The consolidated statement of operations for fiscal 2007 includes adjustments from prior periods that were recorded in the first quarter and fourth quarter of fiscal 2007. The net impact of the adjustments recorded in the first quarter of fiscal 2007 reduced net income from continuing operations before taxes by $0.1 million, income from continuing operations by $0.7 million and net income by $0.5 million. These adjustments included (1) an understatement of taxable income in a non-U.S. tax jurisdiction related to shared expenses of subsidiaries and (2) balance sheet adjustments on central ledgers related to assets that had been previously disposed of or impaired. The net impact of the adjustment recorded in the fourth quarter of fiscal 2007 reduced net income from continuing operations before taxes, income from continuing operations, and net income by $0.3 million. This adjustment was related to depreciation of assets that were acquired in September 2005 with the purchase of CPHPNA. These adjustments from prior periods that were recorded in the first quarter and fourth quarter of fiscal 2007 were deemed immaterial to the current and prior periods.

Our 52–53 week fiscal year ends on the Sunday nearest to December 31. Fiscal years 2007, 2006 and 2005 each contain 52 weeks.

Segment operating income excludes any goodwill impairment charges, restructuring expenses, asset impairments and other exit costs and gains (losses) on divestitures. Excluding these amounts from our calculation of segment operating income is consistent with how our management reviews segment performance and, we believe, affords the reader consistent measures of our operating performance. Segment operating income is not, however, intended as an alternative measure of operating results as determined in accordance with U.S. GAAP. Our definition of segment operating income is not necessarily comparable to similarly titled measures for other companies.

2007 vs. 2006

Net sales : Chesapeake’s fiscal 2007 net sales of $1,059.6 million were up $64.2 million, or 6.4 percent, compared to net sales in fiscal 2006 of $995.4 million. Reduced sales volumes, especially of tobacco products packaging, were more than offset by the positive effects of changes in foreign currency exchange rates which increased net sales by $72.7 million.

Gross margin : Gross margin, which is defined as net sales less cost of products sold, was $179.2 million in fiscal 2007, compared to $175.3 million in fiscal 2006. Gross margin as a percentage of net sales for fiscal 2007 decreased from 17.6 percent in fiscal 2006 to 16.9 percent in fiscal 2007, primarily due to pricing pressure especially within the Paperboard Packaging segment.

Selling, general and administrative (“SG&A”) expenses : SG&A expenses as a percentage of net sales were 13.4 percent in fiscal 2007 compared to 13.5 percent in fiscal 2006. Decreases in pension costs as well as cost savings under the Company’s global cost savings program were offset by costs incurred in connection with strategic initiatives.

Goodwill impairment charge: In fiscal 2006, we recorded a non-cash charge of $14.3 million ($14.3 million after tax), or $0.74 per share, related to impairment of goodwill in our former tobacco reporting unit of the Paperboard Packaging segment. The impairment resulted from an expectation of a significant decline in tobacco packaging sales.

Restructuring expenses, asset impairments and other exit costs: In fiscal 2007, we recorded losses of $15.8 million ($13.4 million after tax) for restructuring expenses, asset impairments and other exit costs. These charges were primarily related to general workforce reductions across our operations as part of our $25-million global cost savings program, as well as the closure of our tobacco manufacturing facility in Bremen, Germany. In fiscal 2006, we recorded losses of $33.4 million ($27.4 million after tax) for restructuring expenses, asset impairments and other exit costs. This included an asset impairment charge of $24.9 million ($21.1 million after tax) related to our former tobacco reporting unit of the Paperboard Packaging segment. The remaining expenses of $8.5 million ($6.3 million after tax) related to our $25-million global cost savings program. The charges related to our cost savings program included the closure of our facilities in Birmingham, England in 2005 and Bedford, England in 2006, as well as other employee-related expenses for workforce reductions in both years. More detail regarding these charges is found under the caption “—Chesapeake’s $25-Million Cost Savings Program.”

Gains/Losses on divestitures : In fiscal 2007 we recorded a net gain on divestiture of $1.5 million ($1.5 million after tax) resulting from the reversal of a provision against a loan note received in connection with our sale of our plastic packaging operation in Northern Ireland in 2006. In fiscal 2006, we recorded a net gain on divestitures of $3.1 million ($2.9 million after tax) also resulting from the sale of this plastic packaging operation in Northern Ireland.

Other income, net : Other income, net was $4.2 million for fiscal 2007 compared to $3.7 million for fiscal 2006, and includes gain/loss on sale of fixed assets and foreign currency translation gain/loss.

Operating income (loss) : Operating income was $26.7 million for fiscal 2007 compared to operating income of $0.3 million for fiscal 2006. The increase in operating income in fiscal 2007 was primarily due to the net impact of the goodwill impairment charges, losses on divestitures, and restructuring expenses, asset impairments and other exit costs discussed above. Changes in foreign currency exchange rates increased operating income for fiscal 2007 by $2.8 million compared to fiscal 2006. More detail regarding segment operating income is found under the caption “—Review of Segment Results.”

Interest expense, net : Net interest expense for fiscal 2007 was $44.6 million, compared to net interest expense of $39.8 million for fiscal 2006. The increase in net interest expense in fiscal 2007 was primarily due to increased borrowing levels during fiscal 2007 as well as higher average interest rates on borrowings under our lines of credit during fiscal 2007. Our borrowings include amounts denominated in the local currencies of the countries in which we conduct substantial business, and serve as a partial natural hedge against currency fluctuations affecting our earnings. Changes in foreign currency exchange rates increased net interest expense in fiscal 2007 by $2.3 million.

Loss on extinguishment of debt : In fiscal 2006, we recorded a pre-tax and after-tax loss of $0.6 million on the early redemption of ÂŁ5.0 million principal amount of our 10.375% senior subordinated notes due 2011.

Tax expense : The effective income tax rate from continuing operations for fiscal 2007 was 22.9 percent compared to an effective income tax rate of approximately 19.2 percent in fiscal 2006. The comparability of our effective tax rate is affected by the goodwill impairment charges, substantially all of which are not deductible for income tax purposes, the inability to fully recognize a benefit from our U.S. tax losses and the inability to recognize the benefit of losses in certain non-U.S. tax jurisdictions. Additionally, the tax rate is influenced by management’s expectations as to the recovery of our U.S. and certain non-U.S. jurisdiction deferred income tax assets and any settlements of income tax contingencies with U.K. tax authorities. We recorded income tax benefits of approximately $3.8 million in fiscal 2007 and $3.4 million in fiscal 2006 related to the resolution of income tax contingencies. In fiscal 2007 we also recorded an income tax benefit of $1.2 million resulting from a re-evaluation of our deferred taxes for changes in U.K. tax law and changes in statutory tax rates for the U.K. and Germany.

Loss from continuing operations : The loss from continuing operations for fiscal 2007 was $13.8 million, or $0.71 per diluted share, while the loss from continuing operations for fiscal 2006 was $32.4 million, or $1.67 per diluted share.
MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview


The 2008 consolidated statements of operations include adjustments from prior periods, which were recorded in the first and second quarters of fiscal 2008. The net impact of the adjustments recorded in the first quarter of fiscal 2008 increased net loss from continuing operations before taxes by $0.6 million, decreased loss from continuing operations by $0.3 million and decreased net loss by $0.3 million. These adjustments included (1) an overstatement of revenue due to invoicing errors for a particular customer; (2) incorrect capitalization of expenses associated with an inter-company fixed asset transfer; and (3) an understatement of deferred tax assets associated with the sale of one of our U.K. manufacturing facilities. The net impact of the adjustment recorded in the second quarter of fiscal 2008 increased net loss from continuing operations before taxes and loss from continuing operations by $0.2 million. This adjustment was related to an error in the calculation of an accrued expense. These adjustments from prior periods, which were recorded in the first and second quarters of fiscal 2008, were deemed immaterial to the current and prior periods.

As of the end of the second quarter of 2008, we have changed our application of SFAS 87 “Employers' Accounting for Pensions” related to our methodology for calculating the expected return on plan assets component of net periodic pension cost. Our new method employs actual fair market value of plan assets, which we believe is a preferred method, rather than a market-related value. This change in accounting policy has been reflected retrospectively to all periods presented. See Note 11 – Employee Retirement and Postretirement Benefits.

Consistent with our segment reporting in Note 13 to the Consolidated Financial Statements, operating income by segment excludes any goodwill impairments, gains or losses related to divestitures and restructuring expenses, asset impairments and other exit costs. Excluding these amounts from our calculation of segment operating income is consistent with how our management reviews segment performance and, we believe, affords the reader consistent measures of our operating performance.

Net sales from continuing operations for the second quarter of fiscal 2008 were $251.4 million, an increase of $0.5 million from the comparable period in fiscal 2007. Excluding changes in foreign currency exchange rates, which increased sales by $14.3 million, sales were down 5 percent for the second quarter of fiscal 2008 compared to the second quarter fiscal 2007. Net sales from continuing operations for the first six months of fiscal 2008 were $504.3 million, a decrease of $18.6 million, or 4 percent, over the comparable period in fiscal 2007. Excluding changes in foreign currency exchange rates, which increased net sales by $30.3 million, sales were down 9 percent for the first six months of the year. For the second quarter and first six months of fiscal 2008 the reduction in sales was primarily due to reduced sales of both branded products packaging and pharmaceutical products packaging within our Paperboard segment.

Gross margin, which is defined as net sales less cost of products sold, for the second quarter of fiscal 2008 was $38.1 million, a decrease of $4.9 million, or 11 percent, compared to gross margin of $43.0 million for the second quarter of fiscal 2007. As a percentage of sales, gross margin decreased from 17 percent to 15 percent for the second quarter of fiscal 2008 versus fiscal 2007. Gross margin was $72.9 million for the first six months of 2008 compared to gross margin of $92.6 for the same period in 2007. As a percentage of sales, gross margin decreased from 18 percent to 14 percent for the first six months of fiscal 2008 versus fiscal 2007. For the second quarter and first six months of fiscal 2008 the decrease in gross margin was due to the significantly lower sales volume, as well as pricing pressures and increased material costs.

Selling, general and administrative expenses ("SG&A") as a percentage of net sales for the second quarter of fiscal 2008 increased from 13 percent to 14 percent compared to SG&A for the second quarter of fiscal 2007, and increased from 13 percent to 14 percent for the first six months of fiscal 2008 compared to the first six months of fiscal 2007. The increase in SG&A as a percentage of net sales for the second quarter and first six months of fiscal 2008 compared to fiscal 2007 reflects increased professional fees and travel associated with strategic initiatives and process improvement activities, partially offset by decreases in pension costs.

In the second quarter of fiscal 2008 we recorded a non-cash charge of $215.5 million related to impairment of goodwill within the reporting units of our Paperboard Packaging segment. In conjunction with the ongoing discussions with our current lenders under our Credit Facility and our continued efforts to refinance the Credit Facility, during the second quarter of fiscal 2008 we accelerated our annual review of our strategic business plan. This review resulted in a decline in our expectations of the operating performance of our Paperboard Packaging reporting segment as a result of competitive pricing pressure and general economic conditions within this segment. We do not expect the impairment charges to affect compliance with covenants under our borrowing arrangements.

During the second quarter and first six months of fiscal 2008 we recorded restructuring costs, asset impairments and other exit costs of approximately $4.0 million and $4.6 million, respectively. These expenses were primarily related to broad-based workforce and overhead reductions as well as costs associated with the potential closure or disposal of underperforming assets. During the second quarter and first six months of fiscal 2007 we recorded restructuring costs, asset impairments and other exit costs of approximately $10.9 million and $11.7 million, respectively. These expenses primarily related to the Company’s cost savings program and other employee-related costs for workforce reductions within the tobacco packaging business. During the first six months of fiscal 2008 and fiscal 2007 the company made cash payments of approximately $3.2 million and $4.2 million, respectively, related to restructuring activities. (See Note 6 to the Consolidated Financial Statements.)

The operating loss for the second quarter of fiscal 2008 was $216.2 million compared to operating loss of $1.1 million for the second quarter of fiscal 2007. The operating loss for the second quarter of fiscal 2008 included a goodwill impairment charge of $215.5 million and restructuring expenses and other exit costs of $4.0 million. The operating loss for the second quarter of fiscal 2007 included restructuring expenses and other exit costs of $10.9 million. Changes in foreign currency exchange rates decreased operating loss by approximately $2.7 million for the second quarter of fiscal 2008.

The operating loss for the first six months of fiscal 2008 was $215.3 million compared to income of $15.6 million for the first six months of fiscal 2007. The operating loss for the first six months of fiscal 2008 included a goodwill impairment charge of $215.5 million and restructuring expenses and other exit costs of $4.6 million. The operating loss for the first six months of fiscal 2007 included restructuring expenses and other exit costs of $11.7 million. Changes in foreign currency exchange rates decreased operating loss by approximately $3.7 million for the first half of 2008.

Net interest expense was $12.3 million for the second quarter of fiscal 2008, an increase of $1.5 million compared to the second quarter of fiscal 2007. Net interest expense was $23.8 million for the first six months of fiscal 2008 compared to $21.5 million for the first six months of fiscal 2007. The increase in net interest expense for both the second quarter and first six months of fiscal 2008 was primarily due to increased borrowing levels during fiscal 2008 and changes in foreign currency exchange rates, which increased interest expense approximately $0.3 million and $0.7 million, respectively.

The effective income tax rates for continuing operations for the second quarter and first six months of fiscal 2008 were 0.4 percent and 2 percent, respectively. The effective income tax rates for continuing operations for the second quarter and first six months of fiscal 2007 were 11 percent and 47 percent, respectively. The comparability of our effective income tax rates is heavily affected by our inability to fully recognize a benefit from our U.S. tax losses, the inability to recognize the benefit of losses in certain non-U.S. tax jurisdictions and the goodwill impairment charge recorded in the second quarter of fiscal 2008, none of which is deductible for income tax purposes. Additionally, the tax rates are influenced by management’s expectations as to the recovery of our U.S. and certain non-U.S. jurisdiction deferred income tax assets and any settlements of income tax contingencies with non-U.S. tax authorities.

Loss from continuing operations for the second quarter of fiscal 2008 was $227.7 million, or $11.67 per diluted share, compared to a loss from continuing operations of $10.6 million, or $0.54 per diluted share, for the second quarter of fiscal 2007. Loss from continuing operations for the first half of fiscal 2008 was $235.1 million, or $12.05 per diluted share, compared to a loss from continuing operations of $8.7 million, or $0.45 per diluted share, in the first half of fiscal 2007.

Loss from discontinued operations for the second quarter of fiscal 2008 was $33.3 million compared to $0.9 million for the second quarter of fiscal 2007. Loss from discontinued operations for the first six months of 2008 was $33.7 million compared to $1.1 million for the first six months of 2007. For the second quarter and first six months of 2008, expense recorded in discontinued operations primarily related to the environmental indemnification resulting from the acquisition of WT and the subsequent disposition of assets of WT in 1999. In connection with our acquisition of WT from PM USA in 1985, PM USA agreed to indemnify WT and the Company for losses relating to breaches of representations and warranties set forth in the acquisition agreement. The Company identified PCB contamination in the Fox River in Wisconsin as a basis for a claim for indemnification. Beginning in 1994, PM USA has made indemnification payments in excess of $53 million for Fox River losses. In mid-June 2008, PM USA asserted a claim that it did not have an indemnification obligation and refused to continue to indemnify WT and the Company for their losses related to the Fox River. That claim was resolved on June 26, 2008 in a settlement described in a Consent Decree filed with the Circuit Court of Henrico County, Virginia, by which, among other things, (i) PM USA released its claims for recovery of past indemnification payments; (ii) PM USA agreed to cooperate in WT’s recovery under certain general liability insurance policies; and (iii) PM USA’s maximum liability for future indemnification under the 1985 acquisition agreement was capped to $36 million. The cap placed on the future indemnification resulted in a reduction in the receivable from PM USA previously recorded related to the Fox River environmental liability. We intend to seek recovery for the Fox River losses under certain general liability insurance policies and believe that the insurance recoveries, together with the indemnification from PM USA, will provide funds to substantially cover our reasonably probable cost related to the Fox River matter. However, there are risks related to the anticipated recovery under the general liability insurance policies, including certain coverage defenses which may be asserted by the insurance carriers. Expense recorded in the second quarter and first six months of fiscal 2007 principally relate to the tax treatment of the disposition of assets of Wisconsin Tissue Mills Inc. in 1999.

Restructuring Expenses, Asset Impairments and Other Exit Costs

During the fourth quarter of fiscal 2005 Chesapeake announced plans for a two-year global cost savings program, the scope of which was extensive and involved a number of locations being sold, closed or downsized. The program also involved broad-based workforce reductions and a general reduction in overhead costs throughout the Company. This program was completed at the end of fiscal 2007 and over the course of fiscal years 2006 and 2007 annualized cost savings in excess of the $25-million goal were achieved. We have identified additional restructuring and cost savings actions that could result in broad-based workforce reductions, general reductions in overhead costs, and locations being sold, closed or downsized. The ultimate costs and timing of these actions could be dependent on consultation and, in certain circumstances, negotiation with European works councils or other employee representatives. Costs associated with these actions have been recorded in "restructuring expenses, asset impairments and other exit costs” in the accompanying consolidated statements of operations.

Net sales for the Paperboard Packaging segment were $205.2 million for the second quarter of 2008, a decrease of $2.0 million, or 1 percent, from the comparable period in 2007. Excluding changes in foreign currency exchange rates, which increased net sales by $11.0 million, net sales were down 6 percent for the second quarter of fiscal 2008. For the second quarter of fiscal 2008 the decrease in net sales was due to reduced volumes in both branded and pharmaceutical and healthcare products packaging. The sales decline in branded products was primarily due to decreased sales of tobacco packaging related to the previously announced loss of business with British American Tobacco, slightly offset by increased sales of U.K. drinks packaging and German confectionery packaging. The decline in pharmaceutical and healthcare packaging sales was primarily a result of lower customer demand and a competitive price environment.

Net sales for the Paperboard Packaging segment for the first six months of fiscal 2008 were $405.5 million, a decrease of $27.0 million, or 6 percent, compared to the first six months of fiscal 2007. Excluding changes in foreign currency exchange rates, which increased net sales by $22.9 million, net sales were down 11 percent for the first six months of fiscal 2008. For the first six months of fiscal 2008 the decrease in net sales was due to reduced volumes in both branded and pharmaceutical and healthcare products packaging. The sales decline in branded products was primarily due to decreased sales of tobacco and U.K. food and confectionery packaging slightly offset by increased sales of German confectionery packaging. The decline in pharmaceutical and healthcare packaging sales was primarily a result of lower customer demand and a competitive price environment.

Operating income for the Paperboard Packaging segment for the second quarter of fiscal 2008 was $4.2 million, a decrease of $4.2 million, or 50 percent, versus the comparable period in fiscal 2007. Excluding changes in foreign currency exchange rates, which increased operating income by $0.3 million, operating income was down 54 percent for the second quarter of fiscal 2008.

Operating income for the first six months of fiscal 2008 was $4.5 million, a decrease of $18.0 million, or 80 percent, from the first half of fiscal 2007. Excluding changes in foreign currency exchange rates, which increased operating income by $0.5 million, operating income was down 82 percent for the first six months of fiscal 2008. The decrease in operating income for the second quarter and first six months of fiscal 2008 was primarily due to decreased sales volumes, competitive pricing, start-up costs associated with new products and rising energy an related costs.

Net sales for the Plastic Packaging segment for the second quarter of fiscal 2008 were $46.2 million, an increase of $2.5 million, or 6 percent, from the comparable period in fiscal 2007. Excluding changes in foreign currency exchange rates, which increased net sales by $3.3 million, net sales were down 2 percent for the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007. For the second quarter of fiscal 2008 the decrease in net sales was due primarily to decreased sales in our South African beverage operations, partially offset by increased sales of specialty chemical packaging in the U.K. and Hungary.

Net sales for the Plastic Packaging segment were $98.8 million for the first six months of fiscal 2008, an increase of $8.4 million, or 9 percent, over the comparable period in fiscal 2007. Excluding changes in foreign currency exchange rates, which increased net sales by $7.4 million, sales were up 1% for the first six months of fiscal 2008 compared to the first six months of fiscal 2007. For the first six months of fiscal 2008 the slight increase in net sales relative to the prior year was due primarily to increased sales of specialty chemical packaging in the U.K. and Hungary, offset by decreased sales in the remainder of the segment.

Operating income for the Plastic Packaging segment for the second quarter of fiscal 2008 was $3.4 million, a decrease of $2.6 million, or 43 percent, from the comparable period in fiscal 2007. Excluding changes in foreign currency exchange rates, which increased operating income by $0.6 million, operating income was down 53% for the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007.

Operating income for the first six months of fiscal 2008 was $8.4 million, a decrease of $4.6 million, or 35 percent, compared to the first six months of fiscal 2007. Excluding changes in foreign currency exchange rates, which increased operating income by $1.3 million, operating income was down 45% for the first six months of fiscal 2008 compared to fiscal 2007. The decrease in operating income for the second quarter and first six months of fiscal 2008 was primarily due to competitive market conditions and increased raw material costs throughout the Plastic Packaging segment.

CONF CALL

Joel Mostrom

Good morning and welcome to Chesapeake Corporation's second quarter conference call. I am Joel Mostrom, and joining me today is Andy Kohut, our President and Chief Executive Officer.

Andy will begin with some overall comments on our business. I will then provide a financial review of the results for the second quarter. After that, we'll be available for questions.

Before we get started, I want to advise all participants that this call is being recorded by Chesapeake Corporation and is copyrighted material. It cannot be recorded or rebroadcast without Chesapeake's express permission.

Furthermore, the comments on this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act. The accuracy of such forward-looking statements is subject to a number of risks, uncertainties and assumptions that may cause Chesapeake's actual results to differ materially from those expressed in the forward-looking statements.

Certain of those risks, uncertainties and assumptions are set forth in the summary of this conference call, which will be posted on the company's website at the conclusion of this call.

Additionally, during this call there may be references to certain non-GAAP financial information. This information has been reconciled to GAAP in the company's earnings release, and will also be posted on the company's website.

Now, I'll turn the call over to Andy.

Andy Kohut

Thanks Joel and good morning. While the operating results for the second quarter were disappointing, we have improved over the first quarter results and we expect to improvement to continue into the third and fourth quarters of the year. We are approaching the seasonal peak in many of our businesses and in addition we should start to realize the benefits of significant new business wins in the second half of the year. We have also made good progress in rolling out a comprehensive process improvement program from which we expect to begin to realize benefits in the second half of the year.

In addition to significant new business and process improvement initiatives, we recently announced a general price increase of approximately 10% to recover rising raw material and energy-related cost. We remain committed to meeting our customers needs and in order to provide the level of service they expect, it is no longer possible for us to absorb rising input cost and maintain an innovative service oriented business.

This has been a difficult period for us as unexpected issues have caused delays in the refinancing of our senior credit facility. Today we announced a comprehensive refinancing plan to provide us with the necessary financial flexibility to meet our business needs. Just as we have successfully reached agreement with our largest pension group in the UK and settled an unexpected lawsuit from Philip Morris, I am confident we will be successful in this more comprehensive approach to our refinancing needs.

While we continue to work on the sale of non-core assets, we are increasingly concerned that in the current credit market we may not be able to achieve reasonable value through the assets today. If we conclude reasonable values cannot be achieved, we will delay the sale of these non core assets until such time that we can complete our refinancing and the broader credit markets improve and buyers are willing to pay reasonable prices for these assets.

We remain confident the second half of the year will continue to show improving trends in the operating performance of our business, however, we are very much aware of the current headwinds facing the economies around the world and expect improvement in our full year operating results over last year’s to be challenging. Although we expect the general economic conditions will remain difficult, we continue to believe that our primary end use markets pharmaceutical and healthcare, agrochemicals, and alcoholic drinks will be more resilient than many other markets during these unsettled economic times.

I will now turn the call back over to Joel.

Joel Mostrom

Thanks, Andy. This morning we reported a second quarter net loss from continuing operations of $227.7 million compared to a net loss from continuing operations of $10.6 million for the second quarter of 2007.

We incurred charges for special items in both of these periods, including a goodwill impairment charge of $215.5 million in the Paperboard Packaging segment in the second quarter of 2008.

Special items include goodwill impairments, restructuring expenses, asset impairments, and gains or losses related to divestitures.

Our operating income, exclusive of special items, for the second quarter of 2008 was $3.3 million compared to $9.8 million for the second quarter of 2007. Changes in foreign currency exchange rates increased operating income exclusive of special items approximately $900,000 for the second quarter of 2008 when compared to the second quarter of 2007.

Also during the quarter, we changed our accounting policy to record pension expense using the actual fair market value of pension assets in our actuarial calculations, which is a preferred method of accounting for pension expense. The change in accounting decreased pension expense before the effect of income taxes for the second quarter of 2008 by $.1.3 million and decreased pension expense for the second quarter of 2007 by $.1.5 million.

During the second quarter we recorded a $33 million loss in discontinued operations following the settlement of a lawsuit from Philip Morris. The loss related to a lower cap be in place on the environmental indemnification we are entitled to related to the Fox River environmental liability. This resulted in a reduction in the previously recorded receivables from Philip Morris USA related to the Fox River liability.

I'll now review our operating results starting with the Paperboard Packaging segment. My discussion of segment operating income excludes the effects of special items. Second quarter net sales of $205 million for the Paperboard Packaging segment were down 1% compared to net sales for the second quarter of 2007.

Excluding changes in foreign currency exchange rates, net sales were down 6% for the quarter. Sales in both branded products and pharmaceutical and healthcare packaging were down in the second quarter of 2008.

Excluding changes in foreign currency exchange rates, sales of branded products packaging were down about 9% for the second quarter. The decline was due to a 46% decline in tobacco packaging sales partially offset by 14% increase in alcoholic drinks packaging and German confectionary packaging.

Excluding changes in foreign currency exchange rates, sales of pharmaceutical and healthcare packaging were down about 5% for the second quarter. The decline in sales was primarily the result of lower customer demand and a competitive price environment. We expect our sales volumes to improve in the second half of 2008 based on new business we have secured in this area.

The Paperboard Packaging segment's operating income for the second quarter of 2008 was $4.2 million, which was a decrease of $4.2 million compared to the second quarter of 2007.

Changes in foreign currency exchange rates increased segment-operating income by $300,000 for the quarter. The decrease in operating income for the second quarter was largely due to the decreased sales of tobacco packaging that accounted for over 50% of the operating income decline for the quarter. The remaining decline was primarily due to expenses related to multi-shaped tubes production for alcoholic drinks packaging, cost associated with recent process improvement initiatives, and increased energy and transport cost as well as the decreased sales of pharmaceutical and healthcare packaging.

The Plastic Packaging segment had sales of $46 million in the second quarter of 2008, up 6% from the second quarter of 2007. Excluding changes in foreign currency exchange rates, net sales were down 2% for the quarter. The decrease in net sales for the second quarter was primarily due to decreased volume of food and beverage packaging in South Africa partially offset by increased sales of specialty chemical packaging in the UK and Hungary.

The Plastic Packaging segment's operating income was $3.4 million for the second quarter of 2008, a decrease of $2.6 million from the second quarter of 2007.

Changes in foreign currency exchange rates increased segment operating income $600,000 for the quarter. The decrease in operating income for the second quarter was primarily due to competitive market conditions and increased raw material costs throughout the segment. Increased transportation and energy costs accounted for about 30% of the decline for the quarter.

Turning back now to our consolidated results. Net cash used in operating activities was $28.8 million for the first six months of 2008 compared to net cash provided by operating activities of $15.4 million for the first six months of 2007. The decrease in operating cash flow was primarily due to the decrease in operating income in 2008 and increased working capital requirements.

Total debt at the end of the second quarter of 2008 was $574 million compared to $515 million at the end of 2007. Changes in foreign currency exchange rates increased total debt by approximately $11.6 million at the end of the first six months of 2008 compared to the end of 2007.

Likewise, foreign exchange rates increased interest expense approximately $300,000 for the second quarter of 2008 when compared to 2007. Before we open the call up for questions, I would like to expand on a few points that Andy mentioned in his opening remarks.

On July 15, 2008, one of our UK subsidiaries agreed with the trustee of its defined benefit pension plan on an amended recovery plan. Under the terms of the amended recovery plan the trustee agreed to accept annual supplemental payments of 6 million pounds sterling over those needed to cover benefits in expenses until the earlier of 2021 with the plan obtaining 100% funding after 2014 and has waived the requirement for the additional cash payment due on July 15, 2008, to achieve an interim funding level of 90%. The UK subsidiary has also agreed to grant to the pension plan fixed and floating charges on assets of the UK subsidiary in the UK and Ireland securing an amount not to exceed the pension plan funding deficit. The security granted will be subordinated to the security provided to the lenders under the company’s senior revolving credit facility.

Also on July 15, 2008, the company obtained an agreement from a majority of the lenders under the senior revolving credit facility to increase the total leverage and senior leverage ratios and provide for an intercreditor agreement among the senior revolving credit facility lenders, the company, and the trustee of the UK pension plan.

Today, we announced a comprehensive refinancing plan to address our upcoming debt maturities and general liquidity needs. We expect that upon completion this proposed refinancing plan will address our short and long-term capital needs. The proposed refinancing plan is expected to include new senior secured credit facilities to be used to fully repay the company’s existing $250 million senior secured credit facility and provide incremental liquidity and an offer to exchange the company’s outstanding 10.375 sterling denominated senior subordinated notes due in 2011 and the 7% Euro-denominated senior subordinated notes due in 2014 for new debt and equity securities.

We expect to continue to work with GE Commercial Finance Limited and General Electric Capital Corporation to participate in elements of the new senior secured credit facilities. We anticipate commencing the exchange offer and marketing for the new senior secured credit facilities in September 2008.

Furthermore, we have engaged Alvarez and Marsal to provide consulting services including evaluating the company’s business plan.

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