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Focused on capacity utilization

Improving Capacity Utilization

Internal initiatives at Caraustar included reductions in both operating and fixed costs over the past two years. The company combined volume increases through new product development and growth through acquisitions to partially offset the substantial impact of volatile fiber costs and declining sales prices. At the Sprague, CT mill for example, new product development increased capacity utilization by 25 percent and contributed $8 million of improved operating income in 2002.

Despite declines in industrial production, an oversupplied industry and expanded offshore capacity, at year end Caraustar posted an almost nine percent increase in mill and converting plant volume, compared to an industry average loss of two percent.

Mill Operating Rates

Source: American Forest and Paper Association

Growing Our Business

Caraustar's acquisition of Smurfit-Stone Container Corporation's Industrial Packaging Division (SIPD), completed on September 30, 2002, represented a tactical expansion of complementary businesses and customers for its growth strategy. Immediately accretive, it added $.05 per share to Caraustar's fourth quarter 2002 financial results.

The 17 acquired SIPD tube and core business facilities expanded the presence of Caraustar for these products in the Midwest and West Coast and has already substantially improved the company's ability to serve customers throughout those regions. In addition, we expect that SIPD's three uncoated paperboard mills will add $6 million in synergies through sourcing from the Caraustar mill system.

On an annualized basis, the acquired SIPD converting facilities consume approximately 125 thousand tons of uncoated recycled boxboard. Prior to the acquisition by Caraustar, about 55 thousand tons were supplied by the three SIPD mills, with the balance purchased from outside sources.
click chart to enlarge

Upon completion of the acquisition, Caraustar began supplying SIPD uncoated recycled boxboard that previously had been supplied by third parties. Since the SIPD business consumes more tonnage than it manufactures, the acquired operations will contribute to the increase of Caraustar's mill capacity utilization in 2003.

The addition of three partition plants in the SIPD acquisition (Frenchtown, NJ, Litchfield, IL, Covington, GA) was a strategic complement to the vertical integration that is key to Caraustar's success. The ability to buy paperboard from within our own mill system versus buying on the open market and converting it to partitions at these facilities, improves our opportunity for growth in this market.

The primary end users for the solid fiber interlocking partitions are the glass industry for food and beverage, as well as the cosmetics, pharmaceuticals and electronics industries.

Our position in this market improves our opportunities for cross-business applications and common customer relationships within Caraustar's other business groups.

During the fourth quarter of 2002, the acquired SIPD mill operations produced a total of 27.5 thousand tons. Based on current operating rates, it is expected that the additional production from the acquired SIPD operations will contribute 110 thousand tons annually and further improve the Caraustar mill system capacity utilization.

Caraustar supplies
approximately
14 percent of the
North American
gypsum facing paper
market.

Focusing on Capacity Utilization

To achieve the optimum blend of products and services, plans call for the consolidation of a number of Caraustar and SIPD converting operations. As a result of the rationalization of Caraustar and acquired SIPD tube and core operations, a projected $4 million contribution to earnings is expected in 2003 and $6 million in 2004.

Combined with SIPD's newly acquired facilities' normalized annual return of $12 million in cash flow, the additional $12 million from vertical integration in the mill system and consolidation activities in converting are expected to generate a total of approximately $24 million in cash flow from operations.

Adding Capabilities Through New Product Development

The Sprague mill increased its capacity utilization from 140 thousand tons in 2001 to 175 thousand tons in 2002. This was primarily the result of market demand increase for the facility's two new products, InverFreez and InverTop. As market demand continues for these innovative cost-effective products, Caraustar expects to further enhance capacity utilization at Sprague in 2003.

At PBL, Caraustar's joint venture with Inland Paperboard, the majority of the paperboard production consisted of corrugated medium used for corrugated containers. The balance of the production, lightweight gypsum facing paper, increased by 44 percent this past year. This lightweight gypsum facing paper has enabled Caraustar to capture share in a higher value market. As only one of four mills in the U.S. that can produce the lightweight gypsum facing paper, Caraustar expects to further balance and improve the product mix at this facility.

At Standard Gypsum, a joint venture with Temple-Inland, production of gypsum wallboard grew by 15 percent. This group continued to do well, particularly as a result of record housing starts in 2002. Other business demand drivers that bolstered both the gypsum facing paper and gypsum wallboard businesses in 2002 were commercial construction, repair and remodeling.
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Caraustar Industries, Inc.