Republic Opens Recycled Board Mill

Republic Group Inc. and its wholly-owned subsidiary, Republic Paperboard Co., announced that commercial production has commenced at its Lawton, Okla., recycled paperboard mill. The mill will ultimately have an annual production capacity of 220,000 tons. In May 1998, the Company announced plans to construct this greenfield mill for the production of lightweight recycled paperboard to be used primarily as facing paper by gypsum wallboard manufacturers. The addition of the Lawton mill will essentially double the company’s paperboard production capacity.

Phil Simpson, chairman and president stated, "When the strategic decision was made two years ago to construct the Lawton mill, our goal was to begin commercial production during the first quarter of calendar year 2000. More importantly, one of our initial objectives was to be the first manufacturer located in North America to produce this significantly lighter weight paperboard utilizing technologies that have recently been successful in Europe. We have now achieved those initiatives. In addition to supplying our own gypsum wallboard plant at Duke, Oklahoma, the Company has a ten-year supply agreement with a large independent gypsum wallboard producer for approximately 50% of the Lawton mill’s output beginning later this year. Recently, we signed agreements with other wallboard manufacturers for a portion of their requirements and are making trial runs of Lawton paperboard at other gypsum wallboard plants. Our marketing plan for the Lawton mill is meeting our goals and interest in the Lawton paper exceeds our expectations."

Doyle Ramsey, executive vice president and CFO added, "We are pleased with the progress to date at the Lawton mill. The mill is now producing gypsum-grade paperboard at the targeted lighter weight and, as planned, is operating at approximately 60-65% of capacity. We expect to gradually increase production to designed capacity during the next six to nine months. The mill is currently producing and selling other paperboard products in addition to gypsum-grade paperboard. During the ramp-up period, we plan to produce more gypsum-grade paperboard each month and less of the other, lower-margined paperboard products as our gypsum wallboard customers shift from their current suppliers when existing supply agreements expire. All gypsum-grade paperboard supply contracts signed to date include periodic, automatic price adjustment mechanisms for most of the major cost components of the product. With those in place, we expect the paper margin—the difference between net selling prices and reclaimed paper fiber costs—of gypsum-grade paperboard to be more stable than other paperboard products."

Since the construction phase at the Lawton mill was concluded during the quarter, the company will cease capitalizing the interest expense as a cost of construction and will begin depreciating the mill and expensing the interest charges. These planned expenses and costs associated with the start-up of the Lawton mill will have a negative impact on the March quarter consolidated results.

Additionally, the Company has experienced a significant rise in the cost of reclaimed paper fiber, the major raw material used in the production of recycled paperboard, and a softening of demand in its gypsum wallboard segment. Several major companies in the recycled paperboard industry have recently announced selling price increases for their products. Republic is also in the process of implementing selling price increases of recycled paperboard to its customers. The Company’s gypsum wallboard segment, which had experienced a softening in demand for gypsum wallboard through February, has seen an improvement in demand during March. The Company expects shipments of gypsum wallboard to be 10-15% below the level attained in the December quarter and expects a 3-5% decrease in gypsum wallboard selling prices.