Caraustar Industries (CSAR)

Company Products/Services/Markets:

Caraustar is a major manufacturer of 100% recycled paperboard and converted paperboard products, primarily from recovered fiber, which is derived from recycled paper. The company operates in four business segments: Paperboard; Recovered fiber; Tube, core and composite container; and, carton and custom packaging.

Operations and Products  

Paperboard. The company’s principal manufacturing activity is the production of uncoated recycled paperboard, but they do have one manufacturing facility that is used solely for the production of clay-coated recycled paperboard. In this manufacturing process, recovered fiber is reduced to pulp, cleaned and refined, and then is processed into various grades of paperboard for internal consumption by Caraustar’s own converting facilities or sale in the following four end-use markets: Tube, core and composite containers; Folding cartons; Gypsum wallboard facing paper; and , Specialty paperboard products. 

The company currently operates a total of 11 paperboard mills, including a 50% owned Premier Boxboard Limited, LLC joint venture (“Premier Boxboard”). These mills are located in the following states: Georgia, Indiana, Iowa, North Carolina, Ohio, South Carolina, Tennessee, Washington and Virginia.

In 2006, approximately 45% of the recycled paperboard sold by the paperboard mills was consumed internally by Caraustar’s converting facilities; the remaining 55% was sold to external customers and represented 27% of 2006 sales of $989.9 million. Sales of unconverted paperboard to external customers as a percentage of total sales are as follows (excludes sales from the Premier Boxboard joint venture):

Three of Caraustar’s paperboard mills operate specialty converting facilities that supply specialty converted and laminated products to the bookbinding, game, printing and furniture industries. The company also operates a specialty converting facility that supplies die cut and foam laminated products and manufactures specialty paperboard products.

Recovered Fiber. The company operates seven stand-alone recovered fiber recycling and brokerage facilities that collect, sell and broker recovered fiber to external customers and to the company’s own mills. The recovered fiber recycling and processing facilities sort and bale recovered fiber and then either transfer it to internal mills for processing or sell it to third parties. Sales of recovered fiber to external customers accounted for 9%, 9% and 12% of sales in 2004, 2005 and 2006, respectively.

Tube, Core and Composite Container. The company’s largest integrated converting operation is the production of tubes and cores. The principal applications of these products are textile cores, paper mill cores, yarn carriers, carpet cores and film, foil and metal cores. Caraustar’s 31 tube and core converting plants obtain approximately 86% of their paperboard needs from internal paperboard mills and the remaining 14% from other manufacturers. Paper tubes are designed to provide specific physical strength properties, resistance to moisture and abrasion, and resistance to delamination at extremely high rotational speeds. Because of the relatively high cost of shipping tubes and cores, these facilities generally serve customers within a relatively small geographic area. Accordingly, most of the tube and core converting plants are located close to concentrations of customers.

The company is looking to expand in the markets for more innovative tubes and cores, which require stronger paper grades, higher manufacturing skill and new converting technology. These markets include the yarn carrier and plastic film markets, cores used in certain segments of the paper industry and applications for the construction industry. The company believe these markets offer growth potential, as well as potentially higher operating margins.

In addition to tube and core converting facilities, the tube, core and composite container division operates four facilities that produce specialty converted products used in industrial packaging protection applications (edge protectors). Tube, core and related sales to external customers accounted for 32%, 32% and 31% of total sales in 2004, 2005 and 2006, respectively.

The tube, core and composite container segment also operates four facilities that produce composite containers used in the adhesive, sealant, food and food service markets, as well as grease cans, tubes, cartridges and other components. Composite container sales accounted for 5% of sales to external customers in 2004, 2005 and 2006.

Folding Carton and Custom Packaging. The company manufactures folding cartons and rigid set-up boxes at nine plants. During 2006, these plants obtained approximately 41% of their paperboard needs from internal paperboard mills and the remaining 59% from other manufacturers. The paperboard purchased from other manufacturers is primarily paperboard grades not manufactured by the company’s mill system. Caraustar’s folding cartons and rigid set-up boxes are used principally as containers for paper goods, hardware, candy, sporting goods, frozen foods, dry food, film and various other industrial applications, including textile and apparel.

Folding carton and custom packaging sales accounted for 24% of sales in 2004, 2005 and 2006, respectively.

Sales by Segment. Consolidated sales for the year ended December 31, 2006 were $989.9 million. The four business segments accounted for the following percentages of sales for that period:

            •                       Paperboard — 27%

            •                       Recovered fiber — 12%

            •                       Tube, core and composite container — 37%

            •                       Folding carton and custom packaging — 24%

Joint Ventures. The company currently operates one joint venture with Temple-Inland, Inc. (“Temple-Inland”), Premier Boxboard, in which it owns a 50% interest and manages the day-to-day operations. Premier Boxboard produces a lightweight gypsum facing paper along with containerboard grades.

As of January 1, 2006, the company had a 50% interest in Standard Gypsum, L.P. (“Standard Gypsum”), another joint venture with Temple-Inland that manufactured gypsum wallboard. Effective January 17, 2006, the company sold its 50% interest in Standard Gypsum to Temple-Inland.  

Raw Materials.

Recovered fiber, derived from recycled paperstock, is the most significant raw material used in mill operations. Paper board mills purchased approximately 96% of their recovered fiber requirements from the company’s recovered fiber segment, and obtained the balance from a combination of other sources such as small waste collectors and waste collection businesses. The recovered fiber segment sorts and bales recovered fiber, and then either transfers it to internal mills for processing or sells it to third parties. The company also obtains recovered fiber from customers of its converting operations and from waste handlers and collectors who deliver loose recovered fiber to mill sites for direct use without baling. The company obtains another portion of its requirements from its small baler program, in which the company leases, sells or furnishes small baling machines to businesses that bale their own recovered fiber for periodic collection.

The company monitors its recovered fiber costs, which can fluctuate significantly and can materially affect its operating results due both to time lags in implementing responsive price increases and uncertainties regarding its ability to fully implement price increases in response to rising recovered fiber and other operating costs. The paperboard mills pursue operational methods and alternative fiber sources to minimize recovered fiber costs. One of these initiatives was to consolidate procurement of recovered fiber in order to maximize efficiency and leverage the company’s scale. This initiative was completed during 2006, and the company is now purchasing approximately 96% of its recovered fiber requirements from its recovered fiber segment, as compared to 76% in 2005.

Energy Costs.

Excluding raw materials and labor, energy is the most significant manufacturing cost. The company uses energy, including electricity, natural gas, fuel oil and coal, to generate steam used in the paper making process and to operate its paperboard machines and other converting machinery. It purchases energy from local suppliers at market rates. In 2005, the average energy cost in its mill system was approximately $73 per ton and in 2006 it was $74 per ton, a 1.4% increase. Until the last several years, the business had not been significantly affected by fluctuating energy costs, and the company historically has not passed energy cost increases through to its customers. Although it has responded to recent energy cost increases by raising selling prices, its ability to realize the full benefit of these price increases is limited by dynamics such as pricing strategies of its competitors and contractual commitments that affect its ability to raise prices as quickly as our costs increase.   

Product Distribution.

Some of the manufacturing and converting facilities have their own sales staff and maintain direct sales relationships with customers while other facilities use a centralized sales staff. The company also employs divisional and corporate level sales personnel who support and coordinate the sales activities of individual facilities. Divisional and corporate sales personnel also provide sales management, marketing and product development assistance in markets where customers are served by more than one facility. Approximately 160 employees are devoted exclusively to sales and customer service activities. The Company generally does not sell products through independent sales representatives. Advertising is limited to trade publications.

Customers.

While the company manufactures most of its converted products pursuant to customers’ orders, it does maintain minimal inventory levels of certain products. The business generally is not dependent on any single customer or upon a small number of customers, so the loss of any one customer would not have a material adverse effect. Sales to external customers located in foreign countries accounted for approximately 6.4%, 7.1% and 6.7% of sales for 2004, 2005 and 2006, respectively.

Competitors:

Caraustar’s competitive position varies greatly by geographic area and within the various product markets of the recycled paperboard industry. They compete in on the basis of price, quality and service.  

Tube, core and composite containers. In the southeastern United States, where Caraustar has marketed its tubes and cores, it and Sonoco Products Company are the major competitors. On a national level, Sonoco is the largest competitor in the tube and core market. According to industry data, Sonoco had nearly half of the total tube and core market in the United States in 2006. The company also competes with several regional companies and numerous small local companies in the tube and core market.

Folding Carton and Custom Packaging. The folding carton and custom packaging market in the United States is served by several large national and regional companies and numerous small local companies. Nationally, none of the major competitors is dominant, although some competitors are stronger in particular geographic areas or market niches. In the markets served by Caraustar’s carton plants, the leading competitors are Graphic Packaging Inc., the Rock-Tenn Company and Altivity Packaging.

Gypsum wallboard facing paper. The gypsum wallboard industry is divided into independent gypsum wallboard manufacturers, which either do not produce their own gypsum wallboard facing paper or cannot fill all of their needs internally, and integrated wallboard manufacturers, which supply most of their own gypsum wallboard facing paper requirements internally. The two largest integrated gypsum wallboard manufacturers, USG Corporation and National Gypsum Company, do not have significant sales of gypsum wallboard facing paper to the independent gypsum wallboard manufacturers. Caraustar has the largest market share of the supply of gypsum wallboard facing paper to independent wallboard manufacturers in North America.

Specialty paperboard products. In the sales of specialty products and in sales of recycled paperboard to other manufacturers for the production of tubes, cores and composite containers, folding cartons and boxes and miscellaneous converted products (other than gypsum wallboard facing paper), the company competes with a number of recycled paperboard manufacturers, including the Rock-Tenn Company, Smurfit-Stone Container Corporation and The Newark Group, Inc. None of our competitors are dominant in any of these markets.

Competitive Position.

Recovered fiber costs were slightly lower on average in 2006 as compared to 2005. The company’s average cost for recovered fiber per ton of recycled paperboard produced was approximately $103 during 2006, a 2.8% decrease from $106 per ton in 2005. The company believes that its delivered recovered fiber costs are among the lowest in the recycled paperboard industry. Relative to other competitors, they believe that their lower recovered fiber costs are attributable in part to lower shipping costs resulting from the location of our paperboard mills and recovered fiber facilities near major metropolitan areas that generate substantial supplies of recovered fiber.

The company’s relatively low recovered fiber costs are also in part attributable to its emphasis on certain recovery methods that enable it to avoid baling operations. The competitors rely primarily on off-site, company-owned and operated recovered fiber baling operations that collect and bale recovered fiber for shipment and processing at the mill site. Caraustar also operate such facilities, and its experience is that the baling operation results in $25-$30 per ton higher recovered fiber costs. The company equips most of its paperboard mills to accept unbaled recovered fiber for processing directly into their pulpers. In both 2006 and 2005, unbaled recovered fiber represented approximately 3% of the company’s total recovered fiber purchases. They also use other fiber recovery methods, such as the small baler program, that result in lower recovered fiber costs.

Industry Trends and News:

Profitability is highly dependent on two things - the cost of waste paper (a raw material) and the cost of energy. Waste paper prices are expected to decline after a long period of high prices.

Acquisitions, Divestitures, Major Transactions, Spin-offs :

Restructuring has been a primary component of management’s strategy to address the decrease in demand for products and excess industry capacity. In response to these issues, over the past several years the Company has closed and consolidated facilities within its paperboard; folding carton and custom packaging; and tube, core and composite container segments. These initiatives are designed to enhance the Company’s competitiveness by reducing costs, reducing geographic overlap, and minimizing duplicative capabilities. 

In December 2006, the Company announced the permanent closure of its Vacaville, California tube and core facility. The Company has concluded the process of transitioning this facility’s customers to other facilities and ceased production in March 2007. For the three months ended March 31, 2007, the Company recorded charges of $21 thousand for severance and other termination benefits. The Company paid $37 thousand of severance and other termination benefits, leaving an accrual balance of $12 thousand for severance and other termination benefits. The Company expects to incur additional charges of $12 thousand for severance and other termination benefits and $253 thousand for other exit costs. This facility is leased and the plan will be complete once the Company has vacated the leased facility. 

In December 2006, the Company announced the permanent closure of its Grand Rapids, Michigan tube and core facility. The Company is currently transitioning this facility’s customers to other facilities and the facility will cease operations during the second quarter of 2007. For the three months ended March 31, 2007, the Company recorded charges of $49 thousand for severance and other termination benefits, leaving an accrual balance of $49 thousand for severance and other termination benefits. The Company expects to incur additional charges of $51 thousand for severance and other termination benefits and $91 thousand for other exit costs. The plan will be complete upon the settlement of lease obligations. 

In January 2007, the Company announced the permanent closure of its Lafayette paperboard mill located in Lafayette, Indiana. The mill ceased production in January 2007. For the three months ended March 31, 2007, the Company recorded charges of $1.6 million for severance and other termination benefits and $756 thousand for other exit costs. The Company paid $708 thousand of severance and other termination benefits and $756 thousand for other exit costs, leaving an accrual balance of $906 thousand for severance and other termination benefits. The Company also recorded $904 thousand of additional impairment related to fixed assets. The Company expects to incur additional charges of $1.2 million related to other exit costs. This plan will be complete upon the sale of the real estate, which the Company is currently marketing. 

In January 2007, the Company announced the permanent closure of its Amarillo, Texas tube and core facility. The facility is expected to cease production in June 2007. For the three months ended March 31, 2007, the Company recorded charges of $123 thousand for other exit costs and paid $123 thousand for other exit costs. The Company expects to incur additional charges of $60 thousand of severance and other termination benefits and $250 thousand of other exit costs. This facility is leased and the plan will be complete once the Company has vacated the leased facility and settled the lease obligation. 

In January 2007, the Company announced the permanent closure of its Leyland, England tube and core facility. The facility ceased production in April 2007. For the three months ended March 31, 2007, the Company recorded charges of $290 thousand for severance and other termination benefits and paid $151 thousand of severance and other termination benefits, leaving an accrual balance of $139 thousand for severance and other termination benefits. The Company expects to incur additional charges of $47 thousand of severance and other termination benefits and $81 thousand of other exit costs. This plan will be complete upon the sale of the location’s real estate, which the Company is currently marketing.

On February 27, 2006, the Company completed the sale of its partition business to RTS Packaging LLC, a joint venture between the Rock-Tenn Company and the Sonoco Products Company, for approximately $6.0 million. The Company recorded a loss of approximately $1.9 million associated with this divestiture which is recorded in restructuring and impairment costs of discontinued operations. 

Management – Pros & Cons, Changes:

Enter Management - Pros & Cons, Changes Here