Smurfit-Stone
         J O I N I N G F O R C E S TO


 Re-energize the
     BUSINESS


                        19 9 8 A N N...
How?
COMPANY PROFILE                                                             TABLE OF CONTENTS
Smurfit-Stone Container...
by Creating
                              SHAREHOLDER
                                                                    ...
Jefferson Smurfit Corporation and
Stone Container Corporation have
joined forces to form Smurfit-Stone
Container Corporation...
SMURFIT-STONE AT A GLANCE



 COMPANY OVERVIEW

                                   The merger of Jefferson Smurfit Corporat...
PRODUCTS                               DESCRIPTION                                          CAPABILITIES
    CORRUGATED   ...
PRODUCTION STATISTICS




 PRODUCTS                            INDUSTRY POSITION                 FACILITIES               ...
LETTER TO SHAREHOLDERS




Dear Shareholder,
Jefferson Smurfit Corporation and Stone Container Corporation joined forces in...
“As we succeed, we aim to
                                                   set a new standard for the
                  ...
F I N AN CIAL HIGHLIGHTS




    Dollars in millions, except per share data                     1998         1997        1...
In consumer packaging, the business benefited from a strong performance in lithographic labels
and cost-cutting efforts. Co...
WIDENING THE COMPETITIVE GAP
     Following the divestitures, Smurfit-Stone will possess the industry’s largest network of ...
Create
                        RE-ENERGIZE THE BUSINESS

                     SHAREHOLDER
                                ...
SANTA FE SPRINGS CORRUGA TED CONTAINER PLANT
                                                               The Santa Fe S...
Re-energize the Business                                                              1998




                           ...
Create Shareholder Value

                                                               CONSOLIDATION AND RATIONALIZATION...
MANAGE                   for
RE-ENERGIZE THE BUSINESS


RESULTS                       Managing for results means setting a...
WASTE REDUCTION SERVICES
     Helping customers manage their entire waste
     stream is a value-added benefit provided by...
Cutting capacity substantially
reduces unscheduled market-related
downtime and associated fixed costs,
which will result in...
is likely to continue for up to 18
                                                               months, customer needs a...
Widen the
                               RE-ENERGIZE THE BUSINESS

                            COMPETITIVE
               ...
DISPLAY GROUP
     The Richmond, Virginia, Display Group creates
     custom point-of-purchase displays from concept
     ...
The company plans to leverage past
capital investments in the container
business to take it to a new level of
performance....
Build a Unified,
                                                               Cohesive Organization

                    ...
B u i l d a u n i f i e d,
                           COHESIVE
RE-ENERGIZE THE BUSINESS


   ORGANIZATION               To...
WABASH, INDIANA, BOXBOARD MILL
     Marsha Strickler, a finisher at Smurfit-Stone’s
     Wabash, Indiana, boxboard mill, m...
headquarters in Chicago and, to save
the cost and disruption of a major
relocation, also maintains offices at the
former Je...
SMURFIT-STONE CONTAINER CORPORATION



BOARD OF DIRECTORS                                                               La...
STOCKHOLDERS’ INFORMATION

                                                                                Stockholders’ A...
150 North Michigan Avenue
Chicago, Illinois 60601-7568
(312) 346-6600




SMURFIT- STONE ASPIRES TO BE THE ACKNOWLEDGED

U...
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smurfit stone container 1998_AR

  1. 1. Smurfit-Stone J O I N I N G F O R C E S TO Re-energize the BUSINESS 19 9 8 A N N U A L R E P O R T
  2. 2. How? COMPANY PROFILE TABLE OF CONTENTS Smurfit-Stone Container Corporation (Nasdaq: SSCC) is the industry’s Introduction to Smurfit-Stone 2 premier paper-based packaging company. Headquartered in Chicago, Smurfit-Stone at a Glance 3 with additional corporate functions in St. Louis, Missouri, and Alton, Production Statistics 5 Illinois, the company was formed November 18, 1998, as a result of the Letter to Shareholders 6 merger between Jefferson Smurfit Corporation and Stone Container Financial Highlights 8 Corporation. Core products include corrugated containers, folding Re-energizing the Business 13 cartons, specialty packaging, and bag packaging, which are supported Board of Directors and by an integrated mill system and significant fiber resources. The company Corporate Officers 26 operates more than 300 facilities worldwide. Annual Report on Form 10-K 27 IV SMU RF IT -STONE 1998 A N N UA L R EPOR T
  3. 3. by Creating SHAREHOLDER VALUE Refinancing, aggressively reducing debt, divesting of non-core businesses, and restructuring by Managing for RESULTS Leveraging strengths and achieving full potential by Widening the COMPETITIVE GAP Meeting aggressive targets, encouraging flexibility and autonomy at local levels, and investing in our corporate philosophy, IQS by Building a UNIFIED, COHESIVE ORGANIZATION Establishing strong core values, leadership, staff, and culture 1 RE-ENERGIZE T HE T-STONE 1998 ANNUAL R EPOR T T SMUR FI BUSINESS 1998 ANNUAL R EPOR
  4. 4. Jefferson Smurfit Corporation and Stone Container Corporation have joined forces to form Smurfit-Stone Container Corporation (SSCC ), the world’s largest integrated producer of paperboard and paper-based packaging products. As a result of the merger, Smurfit- Stone is refocusing on its core busi- nesses by utilizing and controlling processes that add customer and shareholder value. 2 1998 A N N U A L REP OR T SMUR FIT -STONE AT A GLANCE
  5. 5. SMURFIT-STONE AT A GLANCE COMPANY OVERVIEW The merger of Jefferson Smurfit Corporation and Stone SIZE AND SCOPE Container Corporation has created the leading paper and paper-based packaging company in North America. The new company’s strategy emphasizes innovation, service, margins, and market position. The company has a national network of more than 300 packaging plants that enables it to provide paper-based packaging solutions for any customer, large or small, anywhere in the country. Smurfit-Stone is a pioneer in the development of several CREATIVITY AND concepts. Among them are using “just enough” packaging INNOVATION material to produce a total-performance packaging system. This system creates multiple packaging products that work together to address all customer packaging needs. The company also furnishes teams of technical and design specialists to devise packaging solutions to customers’ problems. Smurfit-Stone’s R&D, creative, and technical capabilities apply new thinking and technology from around the world to its own products and processes. In an industry where retailers are dominating the shape of SERVICE packaging, Smurfit-Stone has the graphic, structural packaging, CAPABILITIES and converting capabilities to address this increasingly compet- itive market. By working collaboratively, not only with the company’s direct customers but also with their customers, experts in various disciplines have dramatically reduced the cycle time from concept to completion of packaging solutions, as well as increasing value to customers. Smurfit-Stone is the leading North American producer of NORTH AMERICAN corrugated containers, containerboard, folding cartons, and LEADERSHIP industrial bags. It also has the largest recycling business in the industry. Together with its international operations and those of its affiliate, Jefferson Smurfit Group, the company can provide global capabilities to its customers. Smurfit-Stone and Jefferson Smurfit Group supply about 11 percent of the world container- board market. 3 1 9 9 RF N -STONE 1998 N N UA L R EP OR T SMU8 AITN U A L REP OR T ASMUR FIT -STONE AT A G LA NCE
  6. 6. PRODUCTS DESCRIPTION CAPABILITIES CORRUGATED Corrugated containers represent Smurfit-Stone’s Full range of high-quality Graphic capabilities include s s largest business segment, with 61 percent of the corrugated containers flexo, preprint, post-print, CONTAINERS company’s sales. The division supplies hundreds s Innovative packaging labels, and substrates ® of national and international manufacturers, as solutions and high-quality s Cordeck corrugated pallets CONTAINERBOARD well as thousands of local and regional customers. graphics s Full range of domestic and s Complete line of retail-ready, export-specific liners, includ- Smurfit-Stone is the leading supplier of point-of-purchase displays ing mottled white and high- containerboard to domestic and export markets. s Full line of specialty performance grades. Full products and custom, range of semi-chemical and die-cut boxes to display recycled medium, including packaged merchandise high-performance grades FOLDING CARTONS Smurfit-Stone offers a wide range of styles Full line of folding cartons packaging, engineering s appropriate to nearly all carton end uses. and claycoated and uncoated services, electronic data AND BOXBOARD MILLS These cartons are used by consumer-goods recycled boxboard in interchange, research producers to package foods, beverages, newsback, kraftback, and and development fast food, soap, paper, pharmaceuticals whiteback grades s High-quality, preprinted and cosmetics. Printing capabilities include s Extensive converting E-flute and F-flute corrugated sheet and web, lithographic, rotogravure, and capabilities and support packaging in a full flexographic. services in structural and range of grades in calipers, graphic design, mechanical from .014 to .040 S P E C I A LT Y PA C K A G I N G The specialty packaging business comprises Paper tubes and cores Specialized products, s s industrial and consumer packaging. Industrial Labels for decorative including furniture forms, s produces tubes and cores, partitions, and a packaging applications construction forms, number of specialized products. Consumer meets s Solid fiber and paperboard industrial storage tubes, the product needs of a wide variety of marketing, partitions and electrostatic disapative board (PROTECH®) manufacturing, and consumer companies. s Flexible-packaging operations with specialized lamination BAG PACKAGING Multiwall, consumer, specialty, and flexible bags Multiwall, industrial, Packaging equipment and s s are used to ship, store, protect, and promote a consumer, specialty, systems that fill, seal, convey, KRAFT PAPER wide range of products. Smurfit-Stone offers a and flexible bags and palletize bag products coordinated approach to analyzing customer s Full line of flexible, inter- s Technical, graphics, and needs and providing both the bag packaging and mediate bulk containers marketing expertise packaging equipment system that best suits the s Custom-designed bag s Full range of kraft paper product, production, and protection requirements packaging grades include grocery bag of its customers. and multiwall sack kraft Smurfit-Stone is the leading supplier of kraft paper to domestic and export markets. RESOURCES RECYCLED FIBER Smurfit-Stone is unique in the paper and packaging Recycling business handles Waste Reduction Services s s industry in that it has a strong position in both recovered paper generated provides waste-management virgin and recycled fiber. The company has built by industrial, commercial, solutions to businesses. the largest reclamation business in the industry and residential sources. and now collects and processes approximately s Collected material includes 7 million tons of recycled paper every year. old corrugated containers, newspapers, magazines, aluminum cans, glass, and plastics. MIST-WITE® II with superior Wide range of unbleached PAPERBOARD, PAPER, The containerboard mill segment produces a full s s kraft linerboard grades graphics capability and line of commodity and specialty paperboards AND PULP MILLS s Medium, available in printability for conversion into corrugated containers, bags, semi-chemical and s Solid bleached sulfate (SBS) and related packaging products. The company recycled grades s Bleached hardwood pulp produces unbleached kraft linerboard grades and corrugating medium. This group also supplies bleached hardwood market pulp for printing and writing papers, bleached paperboard, and photographic paper. 4 1 9 9 8 A N N U A L REP ORT SMU R F IT-STONE AT A G LA NCE
  7. 7. PRODUCTION STATISTICS PRODUCTS INDUSTRY POSITION FACILITIES HIGHLIGHTS CORRUGATED Largest supplier of Approximately 120 Capable of producing s s s corrugated containers corrugated container 92 billion square feet of CONTAINERS s Industry’s most complete plants in North America corrugated containers line of graphic capabilities s Marketing and Technical and specialty products CONTAINERBOARD s Major domestic export Center (MTC) in Westmont, s Capable of converting supplier of containerboard Illinois 6 million tons of s See paper and paperboard containerboard mills below. s More than 1 million tons s More than 30 plants in of linerboard medium and Europe, Asia, Australia, kraft paper sold to global and South America markets and affiliates FOLDING CARTONS Nation’s largest supplier of 19 folding carton plants Produced 630,000 tons s s s folding cartons and clay- 4 clay-coated, recycled of clay-coated board and s AND BOXBOARD MILLS coated, recycled boxboard boxboard mills uncoated recycled boxboard s Provider of broadest range in 1998 of support services in the s Sold 536,000 tons of folding industry cartons in 1998 S P E C I A LT Y PA C K A G I N G Leading producer of paper 3 uncoated, recycled 129,000 tons of recycled s s s tubes and cores boxboard mills boxboard produced in 1998 s One of the largest contract s 17 tube and core plants s 138,000 tons converted to packagers and suppliers of s 3 partition plants industrial products in 1998 labels for decorative packag- s 10 consumer-packaging ing applications in the U.S. manufacturing facilities s Industry leader in litho and heat-transfer labels, flexible films, and contract packaging BAG PACKAGING Industry’s largest manufac- 245,000 tons of kraft paper s s 13 bag plants in the U.S. s turer of multiwall industrial converted in 1998 Technical and Graphics s KRAFT PAPER and consumer bags s 1.1 billion multiwall bags Center in Cantonment, s Leading industry manufac- produced in 1998 Florida turer of flexible, intermedi- s More than 1 million tons s Bag Packaging Equipment ate bulk containers of kraft paper, linerboard, Group in Salt Lake City, Utah and medium sold to global s See paperboard, paper, and markets and affiliates pulp mills below. RESOURCES RECYCLED FIBER Largest reclamation 32 U.S. collection centers 5.6 million tons of paper s s s business in the industry 12 U.S. brokerage offices collected in 1998 s s 1 brokerage office in s Approximately 45 percent Shanghai, China of paper collected used by Smurfit-Stone mills s Major fiber supplier to Asia, Europe, and Latin America PAPERBOARD, PAPER, World’s largest producer 4 linerboard mills 4.3 million tons of s s s of containerboard 9 medium mills linerboard capacity s AND PULP MILLS s Nation’s leading producer s 1 bag-paper and s 1.7 million tons of corru- of recycled medium linerboard mill gating medium capacity s Industry’s largest producer s 1 mottled white machine s 192,000 tons of solid of MIST-WITE® II at Brewton, Alabama, mill bleached sulfate capacity s Major producer of hardwood s Majority owner of semi-chem- s 520,000 tons of bleached pulp ical mill in Groveton, N.H. hardwood pulp s 1 bleached pulp and linerboard mill s 1 bleached pulp mill 5 PRODUCT ION STAT IST ICS 1998 ANNUAL R EPOR T
  8. 8. LETTER TO SHAREHOLDERS Dear Shareholder, Jefferson Smurfit Corporation and Stone Container Corporation joined forces in 1998 to become not only the largest paper-based packaging company in North America, but the industry leader in creating value. The combined company, Smurfit-Stone Container Corporation, is now the largest U.S. producer of corrugated containers and containerboard, folding cartons and boxboard, and industrial bags. It is also a major producer of other industrial and consumer packaging products, as well as the largest U.S. collector and processor of recovered fiber, a key raw material for its paperboard mills. More important than the size and scale of the new company are its strategic goals. Smurfit- Stone intends to focus its combined operations on our core packaging businesses. We will build a financially strong company by divesting non-core assets, reducing debt, and achieving significant synergies. As we succeed, we aim to set a new standard for the way paper and packaging companies manage their resources to deliver unmatched quality and service to their customers, while earning impressive returns for investors. 1 9 9 8 R E S U LT S A N D 1 9 9 9 O U T LO O K The merger, announced in May and completed in the fourth quarter of 1998, generated significant accounting charges, which should be viewed separately from the operating results of the company. As discussed in greater detail later in the report, the company recorded charges of $310 million ($187 million after tax). These included charges related to the restructuring of the company’s mill system, to the transaction itself, and to the settlement of litigation. Including these charges, the company reported a loss — before extraordinary item and the cumulative effect of an accounting change for 1998 — of $184 million, or $1.48 per diluted share, compared to net income of $1 million, or $.01 per diluted share, in 1997. The net loss for the year was $200 million, or $1.61 per diluted share, compared to net income of $1 million, or $.01 per diluted share, in 1997. Sales for the full year were $3.5 billion, compared to $2.9 billion in 1997. Smurfit-Stone’s 1998 results include the results of Jefferson Smurfit Corporation for the full year and of Stone Container Corporation from November 18, 1998, the date of the merger, through the end of the year and reflect the Newsprint Division as a discontinued operation. Excluding the charges, the company would have reported income from continuing operations of $3 million, or $.02 per diluted share, for 1998, before extraordinary item and the cumulative effect of an accounting change. From an operational standpoint, the primary negative factors during the year were discounted prices in containerboard and market pulp, driven mainly by declining demand in export markets, especially those in Asia. The company’s immediate response to this declining demand was to take significant downtime in our mill system in order to manage invento- ries. Unfortunately, this downtime also had a negative impact on operating results. On the positive side, domestic demand for packaging remained healthy, consistent with a strong U.S. economy. Our core packaging businesses performed reasonably well in this environment, in spite of pressures generated by discounting in board and fiber prices. In corrugated containers, average prices were higher by about 10 percent, compared to 1997. In our folding carton/boxboard business, profits and volume improved over 1997 as a result of new business gains and cost-takeout efforts. For the full year, carton shipments increased by about 10 percent over 1997. In the industrial packaging business, recovered fiber prices have been a double-edged sword. Declining fiber prices led to discounting for the uncoated boxboard used to make tubes and cores. On the other hand, lower fiber costs and increased volume partly offset the impact of lower prices. 6 1998 A N N U A L REP OR T LET T ER TO SHAREHOLDERS
  9. 9. “As we succeed, we aim to set a new standard for the way paper and packaging companies manage their resources to deliver unmatched quality and service to their customers, while, at the same time, earning impressive returns for investors.” MICHAEL W. J. SMURFIT, Chairman of the Board RAYMOND M.CURRAN, President and Chief Executive Officer “We believe 1998 likely will be viewed as a watershed year not only for our company, but for the packaging industry as well.” 7 LET T ER TO SHAREHOLDERS 1998 ANNUAL R EPOR T
  10. 10. F I N AN CIAL HIGHLIGHTS Dollars in millions, except per share data 1998 1997 1996 Net sales $ 3,469 $2,936 $3,087 Income (loss) from operations (64) 175 332 Interest expense, net (247) (196) (198) Income (loss) before extraordinary item and cumulative effect of accounting change (184) 1 117 Basic earnings per share Income (loss) before extraordinary item and cumulative effect of accounting change $ (1.48) $ .01 $ 1.05 Net income (loss) (1.61) .01 1.01 Weighted average shares outstanding (in millions) 124 111 111 Diluted earnings per share Income (loss) before extraordinary item and cumulative effect of accounting change $ (1.48) $ .01 $ 1.04 Net income (loss) (1.61) .01 1.00 Weighted average shares outstanding (in millions) 124 111 112 Net cash from operating activities $ 129 $ 88 $ 380 Capital investments and acquisitions 287 191 129 Financial position at year-end Net working capital $ 635 $ 71 $ 34 Property, plant, equipment, and timberland, net 5,772 1,788 1,720 Total assets 11,631 2,771 2,688 Long-term debt, less current maturities 6,428 2,025 1,934 Stockholders’ equity (deficit) 1,634 (374) (375) Number of employees 38,000 15,800 15,800 8 1 9 9 8 A N N U A L REP OR T FI N A NCIA L HIG HLIG HTS
  11. 11. In consumer packaging, the business benefited from a strong performance in lithographic labels and cost-cutting efforts. Combined, the industrial and consumer businesses posted a slight improvement in profits. In newsprint, average prices were up about 8 percent, resulting in profit gains for the full year. Finally, recovered fiber prices remained depressed due to the mill downtime in the industry. As the new year began, the outlook brightened. Declining containerboard inventories, partly as a result of shutdowns of inefficient capacity, significantly tightened supply. We advised our customers of price increases for linerboard and medium, as well as for corrugated containers, effective during the first quarter. Given continued economic growth in the U.S., we foresee an improved supply/demand balance and improving markets. We are optimistic that the overall market environment for packaging will improve, permitting our management to focus on new opportunities as it implements the strategic agenda. CREATING VALUE One of the most important objectives of the merger was to capture the full synergy potential inherent in combining two leading packaging companies. That will result, in part, from optimizing the combined manufacturing systems of the two companies. The optimization process is complex and will take many months to complete. However, we took the first and most difficult step shortly after closing the merger by shutting down four less-efficient containerboard mills, which annually produced 1.1 million tons, or 3 percent of industry capacity. This shutdown, unprecedented in the paper industry, cut the company’s exposure to the volatile open market for containerboard in half and significantly increased the internal integration level of the containerboard/corrugated container system. We also expect to achieve significant savings by reducing corporate overhead and overlap- ping functions. The merger serves as a catalyst for focusing all of our resources on our core packaging busi- nesses, working aggressively to divest non-core businesses, and applying the proceeds of divestitures to debt reduction. The businesses targeted for divestiture include valuable assets, such as our woodland holdings in the Southeast and newsprint interests in the Northwest, as well as a pulp mill in Canada. M A N A G I N G F O R R E S U LT S We will manage the company toward aggressive targets, including achievement of $350 million in synergies by year-end 2000. The largest portion — more than $180 million — will come from optimizing our manufacturing system. Another $50 million will accrue by reducing administrative expenses. Purchasing and logistical leverage should produce another $80 million over the next two years. Finally, we should obtain approximately $30 million in interest expense savings related to working capital reductions, as we put our financial disciplines in place. By divesting our non-core business holdings, we expect to raise approximately $2 billion over time, all of which will be applied to reducing the debt of the combined company. We have already begun the process of selling assets and are using the proceeds for debt repayment. These include the sale of a Snowflake, Arizona, newsprint facility, which generated $267 million in net proceeds; part of our stake in Abitibi-Consolidated, which generated $80 million in net proceeds; and other small non-core businesses. We will continue to invest capital in our fixed assets, but at a level below the projected depreci- ation and amortization of about $360 million. Interest expense, as well as total debt, should begin to trend down in 1999 as we apply the proceeds of asset sales. If we complete our asset sales on schedule, interest expense will decline substantially in 1999. 9 LET T ER TO SHAREHOLDERS 1998 ANNUAL R EPOR T
  12. 12. WIDENING THE COMPETITIVE GAP Following the divestitures, Smurfit-Stone will possess the industry’s largest network of paper- based packaging plants; a nationwide mill system; and full design, technical, and graphic capabilities. To leverage our competitive advantage in the marketplace, the company intends to achieve excel- lence in innovation, quality, and service, known as the IQS process. This process requires hands-on management that stays close to customers. To that end, we will actively solicit feedback and ideas and continue to provide customers with customized, cost- effective packaging solutions. Above all, we will strive to understand the needs of our customers’ customer, especially in the all-important retail sector, and meet those needs through innovative vehicles, such as our packaging solutions centers. UNIFYING THE ORGANIZATION To carry out our agenda as effectively as possible, we must build a unified, cohesive organization that incorporates and respects the financial disciplines and marketing strengths that defined the two companies before they joined forces. To achieve that goal, transition teams for our operating units and staff functions have worked to identify and adopt the best management practices of each company. To retain the best people and reduce costs, we have established a core group of senior officers at the Chicago headquarters and St. Louis offices. We are maintaining administrative functions in both cities as well, where these operations can most efficiently be carried out. Since finalizing the merger, we have formed a new management team. Richard W. Graham, president and chief executive officer of Jefferson Smurfit Corporation, who played a key role in the transition process, retired on March 31, following 41 years of service. Mr. Graham will remain a member of the Smurfit-Stone board. Roger W. Stone, former chairman, president, and chief executive officer of Stone Container Corporation, took over as chief executive officer of Smurfit-Stone and managed the company through the initial stages of the merger. Mr. Stone elected to retire at the end of March. At the same time, Matthew S. Kaplan, vice president and general manager of Smurfit-Stone’s corrugated container operations, resigned from the company. The company owes a debt of gratitude to our employees, whose patience and cooperation have helped to make the merger process as smooth as possible. While downsizing and mill closures were necessary to meet important financial goals, we regret the disruption they have caused in the lives of many of our people. We also recognize the impact that moving our headquarters to Chicago has had on the St. Louis community, but hope that maintaining a sizable presence in St. Louis, Missouri, and Alton, Illinois, will mitigate that loss. Mergers are often unsettling at the outset; but, ultimately, they are intended to produce great benefits for the newly-formed organization. Smurfit-Stone is already reaping some of those benefits. We are optimistic about the future. Michael W. J. Smurfit Raymond M. Curran Chairman of the Board President and Chief Executive Officer April 1, 1999 10 1998 A N N U A L REP OR T LET T ER TO SHAREHOLDERS
  13. 13. Create RE-ENERGIZE THE BUSINESS SHAREHOLDER VALUE Smurfit-Stone will create value by reducing debt through divestiture of non-core assets; rationaliz- ing its manufacturing system; restructuring its corrugated container and containerboard busi- nesses; eliminating redundancy, while continuing to serve its markets; leveraging its combined purchasing power; lessening exposure to low- margin businesses; reducing expenses; and refinancing debt.
  14. 14. SANTA FE SPRINGS CORRUGA TED CONTAINER PLANT The Santa Fe Springs, California, corrugated container plant is a model of efficiency, quality, and top-notch service. Catering primarily to the consumer electronics market, the plant prides itself on speedy production and its ability to exceed the exacting demands of its customers. RE-ENERGIZE THE BUSINESS SANTA CLARA BOXBOARD MILL Innovations, such as using office waste instead of pulp substitutes to produce topliner, contribute to Smurfit- Stone’s Santa Clara, California, boxboard mill opera- tions, saving more than $1 million a year. Liner operator Gary Smith feeds office waste paper into a hydrapulper to mix with water and eventually make topliner for recycled rolls of boxboard. 1 2 1 2 SMU RF IT - STONE 1 9 98 A N N UA L R EP OR T
  15. 15. Re-energize the Business 1998 LAST YEAR, SMURFIT-STONE PRODUCED 77 BILLION LINEAR FEET OF OF BOXES PLACED, END-TO-END, AROUND THE WORLD 233 TIMES. CORRUGATED CONTAINERBOARD. THIS IS ENOUGH TO WRAP A LINE Smurfit-Stone Container Corporation begins 1999 with optimism and a strong sense of purpose. With the merger completed and a new management team in place, the company will focus on strengthening its position as the industry leader in paper and paper-based packaging — known for its financial discipline, marketing expertise, and creative approach to solving customers’ packaging problems. 13 RE-ENERGIZE T HE BUSINESS 1998 ANNUAL R EPOR T
  16. 16. Create Shareholder Value CONSOLIDATION AND RATIONALIZATION The merger creates a new company The key to re-energizing the business able to run its integrated corrugated is a four-point strategy that will lead container/containerboard business the company into the next decade. more profitably with a smaller, more That strategy incorporates increasing efficient mill system. The merger is also shareholder value through aggressive an important first step in unlocking debt reduction and improved financial value for Smurfit-Stone shareholders. performance; strengthening our The next step is the rationalization leadership position by staying close of inefficient capacity, a problem that has to customers; managing for results plagued the industry for years. To address by setting and meeting aggressive it, the company has implemented a targets; and establishing a solid, robust major rationalization that includes the organization with a single culture shutdown of four mills which produced and set of values. approximately 1.1 million tons, or about Following the Smurfit-Stone merger, 15 percent, of the company’s North the new company took immediate American containerboard mill capacity. steps, which included restructuring its As a result of the restructuring, manufacturing system by shutting down Smurfit-Stone’s annual U.S. container- overlapping operations for the sake of board production capacity has been trimming the system to the right reduced from approximately 7 million competitive size. It will continue to tons to about 5.9 million tons. This rationalize its container plant operations. move increases the company’s level Ultimately, all of these actions will of integration in containerboard from produce a new, invigorated, more cost- about 70 percent to 90 percent. The efficient organization with a singular rationalization plan is a key element in focus and a stronger balance sheet. generating expected annual synergies This will be accomplished by setting, of at least $350 million. pursuing, and achieving very precise financial targets in terms of debt reduction, divesting assets, and timing of key strategies. These targets will serve as the linchpin for a new approach to managing the business. 14 1998 A N N U A L REP OR T R E-ENER G IZE T HE BUSINESS
  17. 17. MANAGE for RE-ENERGIZE THE BUSINESS RESULTS Managing for results means setting aggressive financial targets; increasing sales; focusing on profit-margin performance; leveraging strengths and best practices; achieving full potential in every business unit; creating a strong, balanced mill system; investing in operations; and selling the company’s full line of products and services.
  18. 18. WASTE REDUCTION SERVICES Helping customers manage their entire waste stream is a value-added benefit provided by Smurfit-Stone’s Waste Reduction Services. This service saved customers millions of dollars in solid- waste removal costs in 1998. More than one-fifth of the 100,000 tons extracted was tonnage that previously went to landfills. RE-ENERGIZE THE BUSINESS C O R D E C K® C O R R U G A T E D PA L L E T S Smurfit-Stone’s Cordeck® corrugated pallets have proven to be the sound choice for the environment. Competing directly with insect- prone wood pallets, the corrugated pallet is quickly becoming the acceptable alternative to wood. With recent government regulations and the Asian Longhorn Beetle outbreak, the growth potential for this business is promising. 16
  19. 19. Cutting capacity substantially reduces unscheduled market-related downtime and associated fixed costs, which will result in considerable savings. The rationalization has significantly Following the rationalization, Smurfit- 1998 reduced the company’s exposure to Stone will have a lower-cost, more S M U R F I T - STO N E ’ S ST. LO U I S R E C YC L I N G FA C I L I T Y P R O C E S S E S ABOUT 9,000 TONS OF FIBER PER MONTH — ENOUGH TO CREATE A STACK TWICE AS HIGH AS THE GATEWAY ARCH. market pulp, a non-core business. The efficient mill system; improved freight shutdown of one of the kraft linerboard costs; and better margins through mills, at Port Wentworth, Georgia, also grade-mix rationalization. included 235,000 tons of market pulp. At the mill level, the company will In addition, about 90,000 tons of market reduce its open-market sales position in pulp were shut down at the company’s containerboard and kraft paper in the Bathurst, New Brunswick, mill in Canada. domestic and export markets, though That mill will continue to produce it will continue to be a player in both containerboard. The shutdowns were in of these arenas. Several other strategic addition to Stone’s exit last summer initiatives are planned. They include from its Celgar mill, a joint venture in more efficient scheduling of paper British Columbia, which had production machines by combining grades and capacity of almost 600,000 tons. Taking measuring customers’ needs against those shutdowns into account, just under the company’s capabilities. 600,000 tons of pulp capacity remain. In order to improve price realization This includes the specialty pulp mill at and profitability on open-market sales Pontiac, Quebec, and pulp production of containerboard, Smurfit-Stone is in Panama City, Florida. analyzing its customer base and At the packaging level, Smurfit- evaluating customers against a number Stone will create value for packaging of factors. Our future customer mix customers by fully utilizing its resources will be based on meeting long-term, — plants, people, and creative services strategic objectives, including margin, — and widening the competitive gap potential, contracts, and good fit between itself and its competitors. It between customers and the company. will achieve this in part through the development of new products to meet customers’ changing needs. The company has already begun evaluating the plant resources required by its corrugated container system. 17 RE-ENERGIZE T HE BUSINESS 1998 ANNUAL R EPOR T
  20. 20. is likely to continue for up to 18 months, customer needs and future business potential will be key factors in all decisions. The company has begun the process DIVESTITURE of selling a number of other assets, By divesting non-core assets, including its West Coast newsprint Smurfit-Stone will significantly reduce operations. It also intends to divest debt. The company is aggressively its woodlands. Smurfit-Stone owns or pursuing that strategy with a focused, leases 1 million acres of woodlands disciplined restructuring effort and is in Florida, Georgia, and Alabama. projecting proceeds of approximately $2 billion from asset sales. The sale of Manage for Results Stone’s Snowflake, Arizona, newsprint facility and part of the stake in Abititi- Consolidated have already raised In order to manage the company for approximately $350 million that has results, Smurfit-Stone will leverage its been applied to debt reduction. strengths and best practices and seek In line with mill rationalizations, to realize the full potential of every 325,000 tons of unprofitable North business unit. Operations will improve American market-pulp operations profitability by developing sales and have been shut down. Additionally, marketing strategies to enhance mix the specialty-pulp facility in Pontiac, and margins; improving processes and Quebec, is expected to be sold in 1999. efficiencies to reduce costs; and taking The remaining pulp line is a 350,000- advantage of the size and combined ton plant in Panama City, Florida. scale of the new company. Some of the pulp from Panama City Capacity issues are already being may be used to expand the company’s addressed. The mill closures and plant production of mottled white linerboard, consolidation will enable the company to a higher-value product. focus its capital-expenditure program and The company will continue to thereby limit future capital expenditures. tighten its focus, gradually rationalizing its corrugated container plants. Smurfit- Stone’s intention is to maintain its market leadership in the corrugated container business, while reducing redundant facilities. While this process 18 1998 A N N U A L REP OR T R E-ENER G IZE T HE BUSINESS
  21. 21. Widen the RE-ENERGIZE THE BUSINESS COMPETITIVE GAP To become the best, as well as the market leader, Smurfit-Stone will build stronger relationships with customers through innovation, quality, and service; meet and exceed customer expectations; solicit customer feedback and ideas; provide best-possible, low-cost packaging solutions; and understand and meet the needs of the customers’ customer.
  22. 22. DISPLAY GROUP The Richmond, Virginia, Display Group creates custom point-of-purchase displays from concept through production. With high-end graphics and innovative construction, these displays add value to the line of corrugated products offered to customers. The Display Group enjoys industry-wide recognition, having received numerous awards for its creativity in design, as well as excellence in manufacturing. RE-ENERGIZE THE BUSINESS HENDERSONVILLE TUBE AND CORE FACILITY Quick Grab™ cores are inspected for consistency in catch points by Jason Strickland as they come down the winding line at Smurfit-Stone’s Hendersonville, North Carolina, tube and core facility. Quick Grab™ is a unique core that allows non-woven and spun material to cling easily, thus eliminating the cost and use of tape as an adhesive. 20
  23. 23. The company plans to leverage past capital investments in the container business to take it to a new level of performance. By balancing the $80 million. In addition, Smurfit-Stone container/containerboard side of the 1998 should obtain approximately $30 business, Smurfit-Stone can lead the STONE CORPORATE BUILDING IN CHICAGO MORE THAN 8 TIMES. MORE THAN 3.7 BILLION SSCC MANUFACTURED ENOUGH MICROWAVE POPCORN BAGS IN 1998 TO FILL THE SMURFIT- M U LT I W A L L A N D 6 B I L L I O N C O N S U M E R B A G S W E R E PA C K E D I N T H E U . S . I N 1 9 9 8 . million in interest expense savings industry in a new direction and create related to working capital reductions an attractive investment vehicle. as financial disciplines are redefined Smurfit-Stone has set clear targets and implemented. in three critical financial areas — asset Headcount is expected to be divestitures, synergy achievements, reduced by 3,600 of the 38,000 and debt reduction. These targets are combined employees; it has already viewed by the investment community been decreased by 1,500, including as important to the success of the about 300 redundant corporate and company, which will be singularly administrative positions. focused on achieving them over the next 18-24 months. Widening the Smurfit-Stone is projecting Competitive Gap $350 million in annualized savings. It is seeking $50 million in SG&A savings by eliminating redundant Smurfit-Stone has a two-fold strategy corporate overhead and overlapping for reinforcing its leadership position functions. A portion of those savings in the industry: selling its full line of has been already realized. products and services and widening Manufacturing system optimization the gap between itself and its should yield more than $180 million, competitors. It will accomplish these which will take more time as the objectives through innovation, quality, packaging side of the business is and service, known as IQS. The company rationalized. Purchasing and logistical will support IQS by investing in training leverage should produce another and innovation and providing superior service through such vehicles as the packaging solution centers, directed at servicing major retailers. Smurfit-Stone’s packaging solution centers are unique to the industry. Designed to meet the packaging 21 RE-ENERGIZE T HE BUSINESS 1998 ANNUAL R EPOR T
  24. 24. Build a Unified, Cohesive Organization Smurfit-Stone has an exceptional needs of end-users — such as Wal-Mart opportunity to build a solid identity Supercenters and Sam’s Warehouse and culture, based on the strengths Clubs — these centers have dramatically and best practices of the new partners — reduced the gap between packaging Jefferson Smurfit Corporation and problems and solutions from six weeks Stone Container. This will require to six hours. Superstore packaging a number of initiatives, such as buyers have expressed a need for incorporating financial discipline attractive, functional, stackable in order to manage leverage and packaging in sizes that fulfill their spread cost over a greater number customers’ requirements. By meeting of plants; providing sales incentives, with a team of experts, buyers are able based on retaining high-margin business to leave the center, that same day, and profit-margin performance; and with a mock-up of the new packaging. investing in the maintenance and The success of the IQS program has improvement of operations. led to additional business opportunities One of the most daunting and considerably increased higher- aspects of any merger is combining margin sales. the assets, functions, and corporate In business, where satisfying styles of two distinct organizations customers is the goal, the company in order to create a single, corporate will establish benchmarks, set goals structure. The first step will be to for improvement, measure progress eliminate redundancies and apply against those goals, re-evaluate its corporate resources more efficiently progress in terms of continuous across all divisions. The company improvement, and continue to survey has already embarked on a number customers to validate its actions. of actions to achieve this objective. Soliciting customer feedback, needs, It has established its corporate and ideas will strengthen relationships and further improve margins. The company recently launched another packaging solution center in Seattle, Washington, to serve the pack- aging needs of Costco, a warehouse club. 22 1998 A N N U A L REP OR T R E-ENER G IZE T HE BUSINESS
  25. 25. B u i l d a u n i f i e d, COHESIVE RE-ENERGIZE THE BUSINESS ORGANIZATION To build an integrated company, Smurfit-Stone will optimize its financial discipline and marketing strengths; eliminate redundancies and apply resources across all divisions; create an environ- ment in which people can learn, grow, and succeed; and equip employees with appropriate and timely training and fair compensation.
  26. 26. WABASH, INDIANA, BOXBOARD MILL Marsha Strickler, a finisher at Smurfit-Stone’s Wabash, Indiana, boxboard mill, moves a roll of coated boxboard from storage to be shipped to a converting plant, where it will be made into folding cartons. The roll was produced under the company’s new stock optimization system, which allows the mill to use old newspapers and residen- tial mixed paper to produce coated boxboard — a more economical fiber source than pulp substitutes used in the past. RE-ENERGIZE THE BUSINESS M U LT I W A L L B A G S Across the company, Smurfit- Stone’s strict quality control measures ensure that customers will receive consis- tent, superior products each and every time. At the Kansas City, Missouri, bag packaging plant, a press operator checks the print quality of a multiwall bag to guarantee a flawless image. 24
  27. 27. headquarters in Chicago and, to save the cost and disruption of a major relocation, also maintains offices at the former Jefferson Smurfit Corporation synergies, cost take-out, asset sites in St. Louis, Missouri, and 1998 divestitures, and debt reduction. Alton, Illinois. SMURFIT-STONE MANUFACTURED ENOUGH KITTY LITTER BAGS TO CARE FOR THE NEEDS OF 4.4 MILLION CATS FOR A YEAR. Long-term incentives will be based Merging two distinct cultures is on creating value. another challenge. To that end, the company is committed to building a strong leadership team and to GUIDING STRATEGIES encouraging every person at every Smurfit-Stone’s guiding strategy level of the organization to understand, is to improve the financial performance adopt, and practice the new organiza- of the combined company throughout tion’s core values. Adoption of such the paper cycle by selling non-core values can only be accomplished businesses — newsprint, pulp, and through active engagement in open, woodlands — and focusing on two-way communication, with packaging. Existing businesses tend information flowing up and down to be balanced between those that through easily accessible channels. are influenced by large fluctuations Several programs are already in in price, such as corrugated containers, place to enhance internal and and those that have had a history external communications. of steady earnings, such as folding A third critical focus will be on cartons, industrial bags, and specialty providing appropriate and timely packaging. training and fair compensation, The company now has an based on achievement of corporate opportunity to smooth out the goals. Smurfit-Stone has created instability of earnings by managing new incentive plans for 1999 and the supply side of its business. By beyond. Short-term incentives will strengthening some of the less cyclical be driven by earnings, achievement of businesses, avoiding losses during periods of downturn, and creating a steadier earnings environment through balancing the company’s own supply and demand, Smurfit-Stone should become very attractive to long- term investors. 25 RE-ENERGIZE T HE BUSINESS 1998 ANNUAL R EPOR T
  28. 28. SMURFIT-STONE CONTAINER CORPORATION BOARD OF DIRECTORS Lane W. Hunter John E. Davis William N. Wandmacher Vice President and Vice President, Vice President and General Raymond M. Curran Regional Manager Forest Resources Manager, North American President and CEO, Containerboard Mill and Smurfit-Stone Container Jack B. Malloy Alain Dubuc Forestry Resources Division Corporation Vice President and Vice President, Mill Operations, Regional Manager Northern Region John D. Bence Richard A. Giesen Vice President and Chairman and CEO, James A. McNeill General Manager, Bag Packaging Division Continental Glass & Plastics, Inc. Vice President and European Operations Regional Manager John Moran Alan E. Goldberg Vice President, Lorne Parnell Managing Director, Rodney A. Myers Marketing and Vice President, Morgan Stanley & Co., Inc. Vice President and Specialty Bag Packaging Pacific Operations Regional Manager Richard W. Graham Victor E. Kendall Jose A. Santos Retired President and CEO, Donald A. Petri Vice President and Manager, Vice President, Smurfit-Stone Container Vice President and Corporate Sales Latin American Operations Corporation Regional Manager Jerry Roeske Michael F. Harrington James J. O’Connor Daniel G. Ruth Vice President and Manager, Vice President, Retired, Vice President and Corporate Sales Employee Relations Unicom/Commonwealth Edison Regional Manager James A. Hayssen Jerry K. Pearlman James S. Willis Folding Carton and Vice President, Retired, Vice President and Boxboard Mill Division Information Technology Zenith Electronics Corporation Regional Manager Richard A. Buckman Charles A. Hinrichs Thomas A. Reynolds, III Roger W. Clingerman Retired, Vice President, Vice President and Treasurer Partner, Vice President and General Sales and Marketing Winston & Strawn Manager, Corporate Accounts Craig A. Hunt J. Gregor Doman Vice President, Dermot F. Smurfit William J. Klaisle Vice President, Sales Secretary and General Counsel Joint Deputy Chairman, Vice President and Larry D. Fielder Jefferson Smurfit Group plc Managing Director, Paul K. Kaufmann Vice President and General Smurfit-Stone Global Services Vice President and Controller Dr. Michael W. J. Smurfit Manager, Paper Can Chairman and CEO, Michael S. Rose Allen M. Koleff John E. Straw Jefferson Smurfit Group plc Vice President, Vice President, Vice President and Regional International Sales Development Environmental Affairs General Manager, Eastern Region CORPORATE OFFICERS Jerry D. Suiter Leslie T. Lederer Curtiss M. Komen Vice President, Director Vice President, Strategic Dr. Michael W. J. Smurfit Vice President and Regional of Manufacturing Investment Dispositions Chairman of the Board Manager, Western Region Emil B. Winograd Timothy J.P. McKenna Raymond M. Curran David J. Pietrowicz Vice President, Vice President, Investor President and CEO Vice President and Regional Sales and Marketing Relations and Communications Manager, Central Region Patrick J. Moore Robert A. Guillou Thomas A. Pagano Vice President and CFO Nathan S. Holmes Vice President, Vice President, Planning Vice President and General Corporate Sales Group Peter F. Dages Thomas G. Pavlini Manager, Boxboard Mills Vice President and Vice President, Distribution General Manager, Containerboard and Pulp Corrugated Container Division Specialty Packaging Division Gayle M. Sparapani Sales/Marketing and Vice President, Logistics Division George Q. Langstaff James D. Duncan Compensation and Benefits Vice President, Vice President and Peter Butier, Jr. Converting and Marketing General Manager, John F. Allgood Vice President, Specialty Packaging Division Assistant Secretary Domestic Sales Recycling Division Gordon L. Jones Richard P. Marra Larry L. Burton Vice President and Assistant Treasurer Vice President, James M. Clayton General Manager, Domestic Sales Vice President, Ronald J. Megna Containerboard and Pulp Mill Fiber Procurement Assistant Secretary Jay D. Polen Sales/Marketing and Vice President, Michael R. Oswald Logistics Division Logistics Vice President, Operations DIVISION OFFICERS Jay D. Lamb Hans Maters Vice President and Smurfit Newsprint Corporation Vice President, General Manager, Corrugated Container Division Export Sales Smurfit Newsprint Corporation George R. Lowe, Jr. James P. Davis Vice President and General Richard Kirk Vice President and Area Manager F. Scott Macfarlane Manager, Newberg Mill Vice President, Vice President and William G. Eustice Worldwide Pulp Sales General Manager, Michael A. Siebers Vice President and Area Manager Vice President and General Folding Carton and Manager, Oregon City Mill Boxboard Mill Division Containerboard Mill Division LeRoy R. Crocker Vice President and W.G. Stuart Jon E. Melkerson John M. Riconosciuto Regional Manager Vice President, Vice President, Vice President and Mill Operations, Sales and Marketing General Manager, John J. Curry, Jr. Vice President and Central Region Bag Packaging Division Fran J. Ostlund Regional Manager Controller and Assistant Wayne S. Barlow David C. Stevens Vice President, Secretary Vice President and Stephen P. Folan Vice President and Mill Operations, General Manager, Regional Manager Southern Region Smurfit Recycling Company Research and Development Division James A. Henderson Chuck Timko Vice President and Vice President, Joseph V. LeBlanc Vice President Regional Manager Engineering Services 26 1 9 9 8 A N N U A L REP ORT B OAR D OF D IR ECTOR S A ND CORPORAT E AND DIVISION OFFICERS
  29. 29. STOCKHOLDERS’ INFORMATION Stockholders’ Annual Meeting May 27, 1999 at 1:00 p.m. Renaissance St. Louis Hotel – Airport 9801 Natural Bridge Road St. Louis, Missouri 63134 Registrar and Transfer Agent ChaseMellon Shareholder Services, L.L.C. Overpeck Centre 85 Challenger Road Ridgefield Park, New Jersey 07660 www.chasemellon.com Telephone: 888-213-0965 Common Stock Smurfit-Stone Container Corporation Common Stock is traded on The Nasdaq Stock Market under the symbol: SSCC For Investor Information Contact Investor Relations and Communications Smurfit-Stone Container Corporation 8182 Maryland Avenue St. Louis, Missouri 63105 Telephone: 314-746-1223 Fax: 314-746-1347 Timothy McKenna, Vice President, Investor Relations and Communications 314-746-1254 312-580-4736 Corporate Office Smurfit-Stone Container Corporation 150 North Michigan Avenue Chicago, Illinois 60601-7568 Telephone: 312-346-6600 D E S I G N : P R O W O L F E PA R T N E R S , ST. LO U I S , M I S S O U R I
  30. 30. 150 North Michigan Avenue Chicago, Illinois 60601-7568 (312) 346-6600 SMURFIT- STONE ASPIRES TO BE THE ACKNOWLEDGED U.S. LEADER IN PAPER - BASED THE ACKNOWLEDGED OUR MISSION IS TO BE PACKAGING. AS SUCH, WE STRIVE TO BE A FINANCIALLY SOUND AND DYNAMIC U.S. LEADER IN PAPER-BASED PACKAGING. AS ORGANIZATION KNOWN FOR OUR INNOVATIVE PACKAG- ING SOLUTIONS; SUPERIOR FINANCIALLY SOUND SUCH, WE STRIVE TO BE A PRODUCTS; CUSTOMER RESPONSIVENESS; AND QUALIFIED, COMMITTED PEOPLE. AND DYNAMIC ORGANIZATION, KNOWN FOR OUR INNOVATIVE PACKAGING SOLUTIONS, SUPERIOR PRODUCTS, CUSTOMER RESPONSIVENESS, AND Q UALI F I ED, CO M M I T T E D P E OP L E .

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