Annual Report


                               Smurfit-Stone Contai...
          We promised.
          We delivered.

      Smurfit-Stone at a Glance 2     Financial Highlights 4     Le...
Building a Strong Foundation

      murfit-Stone Container Corporation began life with an optimistic,
      yet realis...
Smurfit-Stone at a Glance
I n d u s t r y P o s i t i o n / Fa c i l i t i e s   1999 Status                                              2000 Agend...
Financial Highlights

Dollars in millions, except per share data                                    1999         1998  ...
Letter to Shareholders

                                                                                   Michael W.J....
Letter to Shareholders

1999 Results and 2000 Outlook                                                 The primary merge...
$625 million in cash and 25 million shares of Smurfit-
identified an estimated $2 billion in non-core assets — to
1 9 9 9 : We Pr o m i s e d . We D e l i v e r e d .

Building a Strong Foundation

     n May 1998, when we annou...
> Rationalizing Capacity

                   GOAL     Reduce containerboard
                            capacity to mee...
> Integrating Operations

 Achieve full             GOAL
 rationalization of
 mill system in
 24 months

 On schedule  ...
1 9 9 9 : We Pr o m i s e d . We D e l i v e r e d .

    By virtue of the rigorous process we developed for the mill c...
1 9 9 9 : We Pr o m i s e d . We D e l i v e r e d .

         The synergies were primarily driven by containerboard mi...
> Unify the Organization

                              Richard Faltynowski,
                              an operator ...
> Realizing Synergies

 $350 million            GOAL
 steady-state run rate
 by mid-2000

 Ahead of schedule       STAT...
1 9 9 9 : We Pr o m i s e d . We D e l i v e r e d .

     The most time-consuming effort involved the Florida Coast mi...
Setting a new agenda.
We will deliver again.

Attaining Operational Excellence

    n the first half of our 24-month agenda, our focus was on the financial
> Achieve Full Potential

 Develop full             GOAL
 earnings potential
 of all businesses

 In progress          ...
2 0 0 0 : S e t t i n g a N e w A g e n d a . We W i l l D e l i v e r A g a i n .

Attaining Operational Excellence

2 0 0 0 : S e t t i n g a N e w A g e n d a . We W i l l D e l i v e r A g a i n .

Achieving Full Potential of Packagi...
> Full Potential of Synergies

                        GOAL     $350 million in synergies
> Customer Satisfaction

   Exceed customer         GOAL

   In progress             AGENDA

2 0 0 0 : S e t t i n g a N e w A g e n d a . We W i l l D e l i v e r A g a i n .

80 percent of our two-year target o...
2 0 0 0 : S e t t i n g a N e w A g e n d a . We W i l l D e l i v e r A g a i n .

  Caring for our Employees
> Container/Containerboard System Integration

                                                   Structural designers
Smurfit-Stone Container Corporation
Board of Directors and Corporate and Division Officers

Stockholders’ Information


May 18, 2000 at 1:00 pm
The Sheraton Chicago Hotel & Towers
Smurfit-Stone Container Corporation (Nasdaq: SSCC) is the industry’s premier
paper-based packaging company. Headquartered ...
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smurfit stone container 1999_AR

  1. 1. Annual Report Smurfit-Stone Corporation Container 1999 Smurfit-Stone Container Corporation 1999 Annual Report
  2. 2. 1999: We promised. We delivered. Smurfit-Stone at a Glance 2 Financial Highlights 4 Letter to Shareholders 5 1999: We Promised. We Delivered. 8 2000: Setting a New Agenda. We Will Deliver Again. 16 Board of Directors and Corporate Officers 26 Annual Report Form 10-k 27
  3. 3. Building a Strong Foundation S murfit-Stone Container Corporation began life with an optimistic, yet realistic, business plan. Our confidence in our ability to meet the challenges ahead and to achieve our ambitious goals has been more than justified by 1999’s results. We promised to rationalize and integrate our container/containerboard mill system; to divest ourselves of non-core businesses and unprofitable joint ventures; to reduce debt, deliver on synergies, and continue to develop our people. At the end of the first year of a two-year plan, we not only delivered on those promises, we did it ahead of our own projected schedule. GOAL STATUS Rationalize Capacity Reduce containerboard capacity to Achieved meet internal needs and real, open Completed within first market demand month following merger Divest Non-core Assets $2 billion within 24 months Ahead of schedule $1.8 billion within 13 months — 90% of goal Reduce Debt Reduce debt by $2.0 billion from Ahead of schedule $6.8 billion within 24 months $1.8 billion debt reduction to $4.8 billion at year-end Realize Synergies $220 million steady-state run rate Ahead of schedule in 1999; $350 million by mid-year Achieved $284 million 2000 in 1999 Integrate Operations Achieve full rationalization of On schedule the container/containerboard mill system by the end of 24 months Unify Organization Establish strong core values, Ongoing leadership, staff, and culture 1
  4. 4. Smurfit-Stone at a Glance Smurfit-Stone at a Glance Description Capabilities Containerboard and Containerboard and corrugated containers represent Full range of high-quality corrugated containers s Smurfit-Stone’s largest business segment, with 65 percent Innovative packaging solutions and high-quality graphics s Corrugated Containers of the company’s sales. The division s Complete line of retail-ready, point-of-purchase displays supplies hundreds of national and s Full line of specialty products and custom, die-cut boxes international manufacturers, to display packaged merchandise as well as thousands s Graphic capabilities include flexo, preprint, post-print, of local and regional labels, and substrates customers. s Cordeck® corrugated pallets Smurfit-Stone is the leading supplier of s Full range of domestic and export-specific liners, including containerboard to domestic mottled white and high-performance grades. Full range and export markets. of semi-chemical and recycled medium, including high-performance grades Fo l d i n g C a r t o n Smurfit-Stone offers a wide range of styles appropriate Full line of folding cartons and clay-coated and uncoated s and Boxboard to nearly all carton end uses. These cartons are used by recycled boxboard in newsback, kraftback, and consumer-goods producers to package foods, beverages, whiteback grades fast food, soap, paper, pharmaceuticals, and cosmetics. s Extensive converting capabilities and support Printing capabilities include sheet and web, lithographic, services in structural and graphic design, rotogravure, and flexographic. mechanical packaging, engineering services, electronic data interchange, research and development s High-quality, preprinted E-flute and F-flute corrugated packaging in a full range of grades in calipers, from .014 to .040 S p e c i a l t y Pa c k a g i n g The specialty-packaging business comprises Paper tubes and cores s industrial and consumer packaging. s Labels for decorative packaging applications B a g Pa c k a g i n g Industrial produces tubes and cores, s Solid fiber and paperboard partitions partitions, and a number of specialized s Flexible-packaging operations with specialized products. Consumer meets the Recycled Fiber lamination product needs of a wide variety s Specialized products, including of marketing, manufacturing, furniture forms, construction forms, and consumer companies. industrial dissipative storage tubes, and electrostatic board (PROTECH®) Multiwall, consumer, specialty, and flexible bags are used to Multiwall, industrial, consumer, specialty, and flexible bags s ship, store, protect, and promote a wide range of products. Full line of flexible, intermediate bulk containers s Smurfit-Stone offers a coordinated s Custom-designed bag packaging approach to analyzing customer needs s Packaging equipment and systems that fill, and providing both the bag-packaging seal, convey, and palletize bag products and packaging equipment system s Technical, graphics, and marketing that best suits the product, production, expertise and protection requirements of its customers. Smurfit-Stone is unique in the paper and packaging industry Recycling business handles recovered paper generated s in that it has a strong position in recycled fiber. The company by industrial, commercial, and residential sources. has built the largest reclamation business in the industry and s Collected material includes old corrugated containers, now collects and processes approximately 7 million tons of newspapers, magazines, aluminum cans, glass, recycled paper every year. and plastics. s Waste Reduction Services provides waste-management solutions to businesses. 2
  5. 5. I n d u s t r y P o s i t i o n / Fa c i l i t i e s 1999 Status 2000 Agenda Largest supplier of corrugated containers Eliminated 1.5 million tons of inefficient capacity Complete optimization of mill system s s s Industry’s most complete line of graphic Implemented two price increases Continue plant-by-plant, full-potential program s s s capabilities s Improved segment profit by $361 million s Major domestic export supplier of s Initiated a full-potential program containerboard s Approximately 150 container facilities worldwide s 18 paper and paperboard mills s Marketing and Technical Center (MTC) in Westmont, IL A leading supplier of folding cartons and Continued to grow the business Emphasize margin improvement and cost take out s s s clay-coated recycled boxboard Outperformed the industry by fivefold Evaluate acquisition opportunities s s s Provider of broadest range of support s Folding carton side posted record earnings services in the industry s Asitrade machine in Cleveland sold out s 19 folding carton facilities s 4 clay-coated, recycled boxboard mills s 1 paper can plant in Conyers, GA A leading producer of paper tubes and cores Tubes, cores and, partition business close to plan Mill system improvement s s s and ahead of 1998 One of the nation’s largest contract packagers Take advantage of strong outlook for consumer s s and suppliers of labels for decorative packaging s Major consumer business ahead packaging applications of 1998 status and close to s Adding a new product (stand-up pouch) 1999 plan s Industry leader in litho and heat-transfer to flexible packaging business labels, flexible films, and contract packaging s Increased prices on converting s 3 uncoated, recycled boxboard mills business s 17 tube and core plants s 3 partition plants s 9 consumer-packaging plants Industry’s largest manufacturer of multiwall Retained a leading position in marketplace Improve profit margins by managing inventory, s s s industrial and consumer bags lowering waste rates, focusing on quality, and Solidified market share gains in a changing s maximizing efficiency of existing system s A leading industry manufacturer of flexible, industry intermediate bulk containers s Improve safety record through awareness and training s 13 bag plants in the U.S. programs s Technical and Graphics Center in Cantonment, FL s Bag Packaging Equipment Group in Salt Lake City, UT Largest reclamation business in the industry Grew at three times the industry average Continue implementation of productivity- s s s improvement process 26 U.S. collection centers Best safety year on record s s s Evaluate acquisition candidates to support s 11 U.S. brokerage offices s Closed three marginal plants mill system s 1 brokerage office in Shanghai, China s Reduced salaried headcount by 9% 3
  6. 6. Financial Highlights Dollars in millions, except per share data 1999 1998 1997 Summary of operations Net sales $ 7,151 $ 3,485 $2,957 Income (loss) from operations 423 (93) 176 Interest expense, net (563) (247) (196) Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change 163 (211) (19) Net income (loss) 157 (200) 1 Basic earnings per share Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change $ .75 $ (1.70) $ (.17) Net income (loss) .72 (1.61) .01 Weighted average shares outstanding (in millions) 217 124 111 Diluted earnings per share Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change $ .74 $ (1.70) $ (.17) Net income (loss) .71 (1.61) .01 Weighted average shares outstanding (in millions) 220 124 111 Other financial data Net cash provided by operating activities $ 183 $ 129 $ 88 Capital investments and acquisitions 156 287 191 Net working capital 42 635 71 Property, plant, equipment and timberland, net 4,419 5,772 1,788 Total assets 9,859 11,631 2,771 Long-term debt 4,793 6,633 2,040 Stockholders’ equity (deficit) 1,847 1,634 (374) Number of employees 36,300 38,000 15,800 Sales per product segment Containerboard and 18% Corrugated Containers 47% Folding Cartons and Boxboard 12% Other: Bag Packaging 7% Recycled Fiber 4% Specialty Packaging 4% International and Other 8% 4
  7. 7. Letter to Shareholders Michael W.J. Smurfit, Chairman of the Board, left, and Ray M. Curran, President and Chief Executive Officer Dear Shareholder, O ur first full year as Smurfit-Stone was a year of integration, change, and constant challenge. Ultimately, we cleared each hurdle and ended the year with a record of accomplishment. We have achieved our initial objectives — among them, advancing our position as a leader in the industry. We have laid a foundation for future growth and are now building upon it, as we will detail later in this report. At the outset, we outlined an ambitious transition issues created by the merger of two large companies and agenda for the 24-month period following the completion devoted substantial management time to extricating our- of the merger of Jefferson Smurfit Corporation ( JSC) selves from unprofitable joint ventures and investments and Stone Container Corporation. Our goals were clearly that drained resources. defined: divest non-core assets and exit unprofitable No merger process is easy, and ours was no exception. ventures, reduce debt, generate synergy savings, rational- The inevitable headcount reductions, as well as the deci- ize manufacturing capacity, and integrate our operations sion to sell or exit certain businesses, forced us to part — especially the container and containerboard business — company with good employees. We invested time and into one efficient system. We also pledged to follow an money in assisting our employees with the transition operating strategy of producing for demand, rather than in their careers. building inventory, and a capital strategy of managing When Roger Stone opted to retire early in 1999, the investments to real change in demand, rather than Board of Directors elected Ray Curran president and CEO. anticipated demand. By blending existing talent with external recruitment, Now, halfway through the transition period, we are we strengthened our management team. We will continue on schedule. We quickly rationalized major operations, to develop and recruit talent to achieve our ambitious sold assets and businesses that did not fit our focused performance objectives. packaging strategy, improved operating cash flow, and We are fully committed to completing our 24-month strengthened our balance sheet. Despite the heavy debt agenda: building on the achievements of the first year; level at the merger date, we were generating positive improving all our businesses; and continuing to deliver cash flow by the second quarter. We paid attention to on our promises. We will create stockholder value; provide our customers and our operations, as well as to financial a safe and satisfying work environment for our employees; discipline. Operating results improved each quarter, and provide innovation, service, value, and quality for our Smurfit-Stone reported a profit by the final quarter of customers; and commit to the communities in which we the year. We also resolved many complex organizational conduct business. 5
  8. 8. Letter to Shareholders 1999 Results and 2000 Outlook The primary merger-related expenses that impacted profit negatively during the year were severance and Smurfit-Stone posted net income in 1999 of $157 million shutdown costs related to our ongoing rationalization or $.71 per diluted share compared to a net loss of program. In addition, in the second half we recorded $200 million or $1.61 per diluted share in 1998. The charges in excess of $20 million, resulting from mill 1999 results included after-tax gains of $268 million, or downtime related to Hurricane Floyd, as well as downtime $1.22 per diluted share, related to the sale of non-core to manage containerboard mill inventories at year end. assets. Excluding the gains from asset sales, the company Recycled fiber costs, a raw material for the company’s posted a loss of $.48 per diluted share from continuing mills, were, on average, considerably higher than in operations, before extraordinary item. Sales for 1999 were 1998. The impact of higher recycled fiber costs was $7.2 billion, compared to $3.5 billion the previous year. partly offset by more favorable virgin fiber costs. Smurfit-Stone’s results for 1998 included the results The primary drivers of earnings improvement of JSC, the predecessor of Smurfit-Stone, for the full year, through the year were our cost-reduction efforts; our and the results of Stone Container from November 18, divestiture program, which lowered debt and interest 1998, the date of the merger, through the end of the year. expense; and the overall improvement in the container- The best measure of our progress in 1999 was the sequen- board and corrugated container business. Healthy demand tial improvement in earnings, rather than comparisons for corrugated containers, coupled with balanced supply to 1998. We began 1999 with a first-quarter loss from of containerboard, stabilized prices in the beginning of continuing operations of $.43 per diluted share and the year and eventually supported price restoration. narrowed that loss each quarter until we reported a profit Shipment volumes decreased primarily as a result of from continuing operations, excluding asset sale gains, our operating plan to focus on margin improvement and of $.20 per diluted share for the fourth quarter. Our cash a better business mix, following the sizable shutdown in flow improved rapidly. capacity in late 1998. Healthy demand supported price Proceeds from asset sales and refinancing activities increases in boxboard and kraft paper. enabled us to keep our debt reduction program on target. We With little new capacity anticipated in the container- reduced debt from $6.6 billion at year-end 1998 to $4.8 bil- board sector and growing demand for packaging, we hope lion at year-end 1999. Interest expense was $563 million in for continued improvement in the supply/demand balance 1999. EBITDA (earnings before interest, taxes, deprecia- in 2000. Favorable conditions will enable us to further our tion, and amortization) excluding gain on asset sales of strategic agenda of capitalizing on new opportunities and $446 million for the full year was $872 million. In the fourth continuing to improve our operations in 2000. quarter it was $311 million. Capital spending for 1999 was Asset sales and anticipated cash flow from operations $156 million, substantially below depreciation of $352 million. will enable us to achieve substantial debt reduction in 2000. This ongoing debt reduction will continue to reduce our interest expense to more manageable levels. At the start of 2000 we began the process of extending the Stone revolving credit agreements. This extends the side-by- side capital structure of the company, which preserves the company’s two operating entities, Stone and Jefferson Smurfit Corporation (U.S.). This postponement of com- prehensive refinancing of the company saves substantial financing costs. In addition to Michael W.J. Smurfit and Raymond M. Curran, Delivering on Our Promises the company’s Executive Committee includes (from left to right): Peter F. Dages, Vice President and General Manager, Corrugated Our top financial priority has been to reduce debt, thereby Container Division; William N. Wandmacher, Vice President and reducing risk in a historically cyclical business. At the General Manager, North American Containerboard Mill Division; merger date, Smurfit-Stone had $6.8 billion of debt. We and Patrick J. Moore, Vice President and Chief Financial Officer. 6
  9. 9. $625 million in cash and 25 million shares of Smurfit- identified an estimated $2 billion in non-core assets — to Stone common stock. This is a company with high-quality be divested within the first 24 months, with the proceeds assets, and it is a strong fit with two Smurfit-Stone strate- to be applied to debt reduction. By November 1999, we gies: to grow the company through acquisitions and to had achieved approximately $1.8 billion in asset sales, expand our core packaging business, especially in the 90 percent of our original target. The largest asset sale was higher margin areas. A more detailed account of this our timberland holdings, which sold for $710 million in transaction is presented on page 24 in this report. the fourth quarter. Newsprint assets, such as our stake in Abitibi Consolidated and our Newberg, OR, mill, were sold, along with other domestic and foreign assets. Taking a Non-traditional Approach We achieved $284 million in synergies in 1999, Our goal is not only to position the company as an industry surpassing our goal of $220 million. The synergies were leader but eventually to measure Smurfit-Stone against primarily driven by containerboard mill and container the best industrial companies in terms of customer satis- plant rationalization, grade mix optimization, reduction faction, growth, opportunity for employees, and returns to in general and administrative costs, and purchasing sav- shareholders. That will require a non-traditional approach ings. The cash cost to achieve these synergies was $95 mil- to the packaging business, bringing a heavy emphasis on lion, primarily severance, restructuring, and shutdown marketing an array of packaging products and providing costs. The cost to achieve these synergies had an impact innovative ways to solve fulfillment and supply problems on the income statement of $41 million, for a net profit for manufacturers, distributors, and retailers. improvement from the synergy program of $243 million We foresee far greater returns from investing in peo- for 1999. In addition, the synergy program enabled the ple than from buying new machinery. We are committed company to avoid cash payments of $44 million during to training employees under a combined quality manage- 1999. We expect to meet our synergy target of $350 million ment program. We are striving to achieve an accident-free on schedule in 2000. work environment and to retain and recruit the best and brightest employees to help us create and further develop Setting a New Agenda a new business model. We are encouraged and excited about and fulfilling From an operating standpoint, our focus has been on our business plan. While our top priority for 1999 was to retaining customers, as we integrated two large container- reduce debt and integrate the company, the ultimate goal board mill and corrugated container systems. The reduc- for 2000 is to realize the full potential from our operations. tion in containerboard capacity forced us to cut back sales With the company now solidly profitable, we are commit- to the open market. We sacrificed some volume during the ted to building on our accomplishments of the last year. year as we consolidated corrugated container operations and focused on customers who value high levels of service. Having reached our initial goals, we enter the second phase of our transition. Our agenda for 2000 will focus heavily on operations, including: fully realizing synergies; continuing the optimization of the containerboard, con- Michael W. J. Smurfit tainer, and logistics system; developing the full potential Chairman of the Board of all of the company’s packaging businesses; and exceed- ing customer expectations by understanding and antici- pating their needs and effectively marketing a diversified product line. Ray M. Curran St. Laurent Acquisition President and Chief Executive Officer In February 2000, we announced the acquisition of St. Laurent Paperboard Inc., for approximately April 1, 2000 7
  10. 10. 1 9 9 9 : We Pr o m i s e d . We D e l i v e r e d . Building a Strong Foundation I n May 1998, when we announced the merger of JSC and Stone Container, we sketched out two ambitious goals: to re-energize the business and to create new value for share- holders in a flagging industry. In 1999, we implemented our stated business plan — rationalization, divestiture, integration of container/containerboard operations, synergies, and debt reduction — for achieving the initial goals of the merger. We delivered what we promised, and we remain on schedule with our agenda. Rationalized Container and Containerboard Mill System In late 1998, according to plan, we closed four of our 22 containerboard mills. Mill closings were based on a comparative financial analysis of structures and future operating costs. Their tonnage was moved to the remaining 18 mills in order to optimize produc- tion. In the process, we were able to walk away from a substantial amount of unprofitable business, much of which was overseas; run the remaining mill system at a lower cost; and direct more of our output to our own container plants. Our effort at integrating our business enabled us to learn the best practices of each facility and provided good data for improving the operational excellence process. For example, at our Missoula, MT, mill, we realized substantial savings on total cash costs. This was achieved through improved machine speeds and uptime; reduced waste, energy, and maintenance costs; and an improved grade mix of linerboard produced at the mill. One of the key ingredients in the rationalization, from a human resources perspec- tive, was ensuring that we helped employees with the transition in their careers. To that end, we enhanced our severance programs, provided opportunities for outplacement, and encouraged employees to bid on available jobs. While not as extensive as the mill rationalization, roughly half of the box plants targeted for closing over a 24-month period have been shut down. We had two goals: to close duplicate, overlapping, or poor-performing plants; and to retain the business of the closed plants. We have closed 15 plants since the merger. 8
  11. 11. > Rationalizing Capacity GOAL Reduce containerboard capacity to meet internal needs and real, open market demand STATUS Achieved Completed within first month following merger Jose Luis Rivera of Smurfit-Stone’s North Chicago, IL, corrugated plant checks the status of corrugated containers that are ready to be shipped. North Chicago is one of the company’s most productive and efficient facilities, thanks to its creative, hard- working employees.
  12. 12. > Integrating Operations Achieve full GOAL rationalization of mill system in 24 months On schedule STATUS Making good progress Smurfit-Stone’s Florence, SC, con- tainerboard mill is one of the industry’s best-run mills in terms of productivity and use of energy. Lead Operator Wade Conner monitors the flame system from the control desk at the mill’s cogeneration plant. The cogenera- tion plant burns bark and coal to produce electricity.
  13. 13. 1 9 9 9 : We Pr o m i s e d . We D e l i v e r e d . By virtue of the rigorous process we developed for the mill closings, we were able to retain a major portion of the combined company’s revenues. We are on track in terms of time and performance. We have a full slate planned for 2000, with indications that we will achieve all of our rationalization goals by the end of the 24-month period. In deciding which packaging plants to close, we considered profitability, volume, size of markets, number of employees, and customer mix. Equipment from closed plants was transferred within the company, allowing us to reduce capital spending. Delivered on Asset Sales We closed on $1.8 billion in asset sales by November, 1999, 90 percent of our $2 billion target, in about half of our original 24-month time frame. The first asset to be sold was Stone’s Snowflake, AZ, newsprint facility for $267 million in net proceeds; next, our stake in Abitibi Consolidated in two separate transactions totaling $494 million. The sale of other miscellaneous packaging assets, such as Stone Australia, netted an additional $75 million. The largest asset divested was our timberlands, which were sold for $710 million. Finally, we completed the sale of our Newberg, OR, newsprint mill for $211 million in November. We will continue to pursue the sale of the pulp mill in Port Wentworth, GA, as opportunities arise. Achieved Debt-reduction Targets Virtually all of the $1.8 billion in asset sales have been applied to debt reduction, which was the company’s highest financial priority in 1999. Our total debt at year end was $4.8 billion. We will reduce debt in the year 2000, as we continue to sell assets and generate free cash. Given a growing economy and improving prices, we could see further, substantial debt reduction over the next 24 months. Delivered on Synergies Our plan was to achieve a full $350 million in synergies by the end of the first 24 months, and we are well on our way. We achieved $284 million in synergies in 1999, against a tar- get of $220 million. The cash cost to achieve these synergies was $95 million, primarily severance, restructuring, and shutdown costs. The cost to achieve these synergies had an impact on the income statement of $41 million, for a net profit improvement from the synergy program of $243 million for 1999. 11
  14. 14. 1 9 9 9 : We Pr o m i s e d . We D e l i v e r e d . The synergies were primarily driven by containerboard mill and container plant rationalization, as well as administrative and purchasing savings. Manufacturing system rationalization yielded $178 million, while procurement synergies produced $55 million. Synergies achieved in administrative expenses were $51 million. In addition, the synergy program enabled the company to avoid cash payments of $44 million during 1999. These savings improved cash flow but did not affect the income statement. We expect to achieve the original synergy target of $350 million in 2000. To date, we have reduced headcount by about 2,300. This includes about 1,900 manufacturing positions and 400 staff positions. Integrating Remaining Operations Philosophically, JSC and Stone Container approached the packaging business from different perspectives. In order to blend those approaches and run the business as a single, unified organization, we have actively reviewed the compensation systems, manufacturing theory, investment strategy, and sales philosophy of both companies in an effort to adopt best practices throughout the organization. We are making good progress. We adopted a new compensation plan for the container business and rolled it out in 1999. Our major initiative for 2000 is margin improvement — effectively improving profitability. Procurement is a cross-company/cross-divisional endeavor. Much effort has gone into leveraging our size to maximize buying power; improve the procure- ment process; analyze, streamline, and take out costs; and eliminate duplication across all divisions of the company. Graphics Coordinator Dan Walsh, left, and Digital Imaging Manager Chris Martin use Exited Joint Ventures digital files to fine tune a match between a customer’s proof and press output at Smurfit-Stone’s Irvine, CA, folding carton A major management focus of the past year was extri- facility. cating the company from unprofitable and unpromising joint venture operations — both domestic and interna- tional — all of which required the allocation of management time and resources. Having those resolved will free us up to pursue more promising opportunities. 12
  15. 15. > Unify the Organization Richard Faltynowski, an operator at Smurfit- Stone’s bag packaging plant in Kansas City, MO, makes a visual quality check during the manufacturing of Ralston Purina’s O.N.E. metallised bag. Retain leading position GOAL and solidify market share STATUS On schedule Improve profit margin and safety record
  16. 16. > Realizing Synergies $350 million GOAL steady-state run rate by mid-2000 Ahead of schedule STATUS Achieved $284 million in 1999, against first-year goal of $220 million John Kuhn, first press operator, is examining print quality of a Kimberly-Clark “Expressions” sheet. This job is running on the company’s 64” KBA offset press and utilizes the new Hexachrome (6-color process) ink system. Automatic plate changers, scanning densitometers, remote inking capabilities, and onboard system diagnostics allow Irvine to meet the fast turnaround, high-quality needs of its customers.
  17. 17. 1 9 9 9 : We Pr o m i s e d . We D e l i v e r e d . The most time-consuming effort involved the Florida Coast mill, a joint venture between Stone Container and Four M Corporation. Each had 50 percent ownership. This mill was closed prior to the merger and filed for bankruptcy protection. Under the terms of the negotiated settlement, Smurfit-Stone took control of this facility and was released from all obligations under the original agreements, in exchange for a payment to Florida Coast stakeholders. Domestically, we also negotiated an exit from S&G Packaging, a joint venture that produced retail bags. By exiting a business that had been modestly unprofitable, we are optimizing our mill system to substitute containerboard or multiwall bag grades for the retail kraft paper formerly produced. Internationally, we ended our involvement in a timbering operation in Costa Rica, shut down a similar Ralph Blackford, left, a converting business in Venezuela, and sold our share of a folding specialist and instructor at Smurfit-Stone’s Crestwood, IL, Container Division Training carton venture in Europe. We are also reviewing the Center, demonstrates to John Meisner how prospects of Stone’s remaining obligations in Asia and printing plate and mounting specifications influence the finished product. Meisner South America. is a maintenance supervisor at SSCC’s Portland, OR, facility. Reorganized European Management Late in the year, we agreed to integrate the operating management of Smurfit-Stone’s European packaging business with the management of the European business of our affiliate and largest shareholder, Jefferson Smurfit Group plc. Although no ownership change will take place, the plan permits both companies to present a unified face to European customers, expand our services and market presence, and benefit from syner- gies. In unifying the sales and marketing teams for Europe, we eliminate the potential for customer confusion. Smurfit-Stone will retain economic responsibility for the prof- itability of its European operations, as well as capital spending and personnel. Developed People Our primary human resources goals are to align the whole organization, identify talent at every level, and develop tomorrow’s leaders. Internally, we are providing training, ranging from on-the-job skill development to managerial training. We also have recruited executives from other industries. 15
  18. 18. 2000: Setting a new agenda. We will deliver again. 16
  19. 19. Attaining Operational Excellence I n the first half of our 24-month agenda, our focus was on the financial aspects of our business; during the second half, we will turn our atten- tion to operations. With the company favorably positioned for 2000, we began the year with many of the challenges behind us and ambitious plans for the next stage — re-energizing the business. While we will continue the programs begun in 1999, we are now free to redirect our energies toward the fulfillment of two other significant goals: to become a customer-led, market-driven company; and to create a culture that fosters empowerment and provides a safe and healthy working environ- ment for our employees. GOAL AGENDA Full Realization of Synergies $350 million in synergies by end of Continue program with the the first 24 months potential to exceed goal Achieve Full Potential Develop full earnings potential Process gains, marketing of all packaging businesses initiatives, SG&A efficiencies Container/Containerboard System Optimize production, costs, Best practices in Integration and inventories for combined manufacturing and mills and corrugated system supply-chain management Customer Satisfaction Exceed customer expectations Cross-divisional selling, Anticipate marketplace evolution e-commerce, new products, and enhanced sales and marketing Unify the Organization Align the entire organization Succession planning Identify talent at all levels Employee development Develop leaders of tomorrow Diversity training 17
  20. 20. > Achieve Full Potential Develop full GOAL earnings potential of all businesses In progress AGENDA Process gains, marketing initiatives, new products, administrative efficiencies Journeyman Cutter Galaxy Mong Somsavath loads strips of labels into a PMC machine at Smurfit-Stone’s St. Charles, IL, litho label plant. Part of the company’s unique Accu-Sort system, the labels are cut into individual stacks of 1,000. The PMC is capable of cutting up to three strips of labels at once.
  21. 21. 2 0 0 0 : S e t t i n g a N e w A g e n d a . We W i l l D e l i v e r A g a i n . Attaining Operational Excellence W e have favorably positioned the company for 2000 and are now free to focus on our original goal of re-energizing the business. We will continue to optimize the container and containerboard system, achieve full potential of all businesses and functions, and accelerate generation of cash flow. With the rationalization of our mill system in place, we can devote our energies to becoming a customer-focused, market- driven company. With the first-year agenda behind us, we will continue to build the kind of culture that encourages initiative and continues to provide a safe environment for our employees. While we set and achieved aggressive goals in 1999, we still have considerable work to do to fulfill the promises we made in connection with the merger. What follows are our strategies for completing our two-year business plan. Optimization of the Container and Containerboard System The container and containerboard system is the engine that drives much of our growth. In 2000, our primary goal is to be customer-focused. Our second goal is to run our mills at optimum efficiency and cost. The logistical system is the link between marketing and the mills. It provides the raw materials and the service necessary to meet both sets of needs. We will continue to implement best practices of the combined JSC and Stone mill systems across all our facilities and to identify means to achieve the most efficient configuration of grades. If we can successfully move our mills’ blended manufacturing costs from the second-quartile to the first-quartile cost position, we can realize significant savings. We are halfway through the rationalization of our container system. Completing that process will take the remainder of our 24-month transition period. Our goal will be to retain the best business at the plants that are best-equipped to meet our customers’ needs. 19
  22. 22. 2 0 0 0 : S e t t i n g a N e w A g e n d a . We W i l l D e l i v e r A g a i n . Achieving Full Potential of Packaging Businesses Our goals for 2000 include turning our full attention to attaining peak performance from every aspect of our businesses. We expect to achieve significant profit improvement by implementing best practices across all of our packaging operations, as we have begun to do in our corrugated container and containerboard mill operations. This process will comprise three initiatives: 1.) MARKETING INITIATIVES are those that will position Smurfit-Stone as a customer- focused company that knows its customers and provides them with predictability and stability of supply in a cyclical business. 2.) PROCESS INITIATIVES include setting benchmark targets, implementing a philosophy of continuous improvement, and developing natural work teams that are empow- ered to make those improvements to achieve the full potential targets. 3.) CORPORATE INITIATIVES involve utilizing our corporate staff to better support operations and create overall value through process improvement. We will benchmark our staff functions and seek ways to improve them, in order to provide better service and support, at lower cost, to our internal customers. Major targets are to optimize all of our manufacturing systems and to run efficiently with less inventory. Strategically, we produce for existing demand, never for inventory. Our goal is to operate with a tighter supply, reducing inventory and working capital. We see potential in the following actions: 1.) aggressively driving improvement of overall service and delivery performance 2.) reducing operating costs across the supply chain 3.) providing supply-chain value to our customers Key initiatives are to develop best-in-class process capabilities in the areas of demand planning and forecasting, master production scheduling for our plants and mills, inventory management, transportation network optimization, and technology tools and solutions. The supply-chain origination will play a key role in facilitating the implementation of a well-integrated and seamless company. Achieving our Target Synergies In 2000 we will complete our synergy program, which encompasses rationalization, procurement, operations optimization, and administrative efficiencies. We achieved 20
  23. 23. > Full Potential of Synergies GOAL $350 million in synergies by end of 2000 AGENDA In progress Continue program with potential to exceed goal Smurfit-Stone’s blue- lined Smooth Concrete Column Form is unique to the construc- tion industry. Quality Assurance Rep Debbie Choonhaurai uses a micrometer to measure the thickness of the finished form at the company’s Vacaville, CA, plant.
  24. 24. > Customer Satisfaction Exceed customer GOAL expectations In progress AGENDA Enhanced cross- divisional sales/ marketing Andrew De Guzman, an employee at the Wal-Mart store in Oakland, CA, oversees bundling of old corru- gated containers to be shipped to Smurfit- Stone’s recycling plant nearby. New machinery at the plant efficiently separates corrugated from plastic and other recyclable material, creating a much more efficient waste management process for Wal-Mart and other customers.
  25. 25. 2 0 0 0 : S e t t i n g a N e w A g e n d a . We W i l l D e l i v e r A g a i n . 80 percent of our two-year target of $350 million in 1999 and have approximately $70 million remaining. In order to achieve the final 20 percent, we will continue our synergy program, shifting our emphasis where necessary. Here are our priorities: 1.) Last year’s efforts were primarily driven by mill rationalization. RATIONALIZATION: Incremental gains in 2000 will be driven by converting plant rationalization that began in the latter half of 1999 and is continuing in the current year. 2.) In 1999, our primary activity was to use our leverage on existing PROCUREMENT: contracts to lower the unit cost of major chemicals and other commodities needed for production. In 2000, we will expand our corporate procurement resources and review opportunities to reduce purchasing costs in goods and services that traditionally had been bought on a site-specific basis. 3.) In 1999, our emphasis was on optimization of grade mix OPERATIONS OPTIMIZATION: within the mill structure and customer mix within containerboard marketing. We will continue this process in 2000. Becoming a Customer-focused Company As a diversified, customer-focused paper packaging company, we are able to offer a broad portfolio of products to meet our customers’ packaging needs. We are also inves- tigating ways in which to take full advantage of today’s advanced technology to serve our customers through effective utilization of the Internet and e-commerce. In the last couple of years, there has been a changing mentality in our customer base. Customers are seeking continuous innovation. They want packaging that catches the customer’s eye and works effectively with their products. We must now work together to sell a customer’s product. By finding business connec- tions in which we can perform a function more efficiently and cost effectively for the customer, we essentially become an extension of that customer’s marketing resources. We will continue to emphasize high-service business. One example of this philosophy in action is our Packaging Solution Center (PSC), designed to solve customers’ packaging problems on the spot. In the PSC, structural designers, mechanical packaging people, and graphic designers apply a full range of packaging options and creative services to meet each customer’s unique requirements. 23
  26. 26. 2 0 0 0 : S e t t i n g a N e w A g e n d a . We W i l l D e l i v e r A g a i n . Caring for our Employees Caring for our employees means creating a safe environment. Endeavoring to become one of the safest companies in the U.S. sends a powerful message to our employees that they are valuable to us and that we care about their welfare. We have an active safety and safety-awards program. Incentive and recognition systems are tied to safety performance, and we are among the leaders in our industry in safety performance. Acquisition of St. Laurent Paperboard Inc. Ultimately, our goal and point-of-pur- TRANSACTION HIGHLIGHTS: is to grow our core chase displays. The ACQUISITION: St.Laurent Paperboard Inc. packaging businesses combination of these Leading specialty through strategic, packaging businesses packaging company opportunistic acquisi- with Smurfit-Stone tions. The first such into one North s 4 mills ASSETS: acquisition since the American unit will s 16 packaging plants merger, announced generate an estimated s 920,000 acres of forest land early in 2000 and $50 million annually expected to close in in cost savings. It will the second quarter, was that of St. Laurent also enhance cash flow, enabling us to service Paperboard Inc., for approximately $625 million the increased debt, and create significant new in cash and 25 million shares of Smurfit-Stone opportunities to optimize our containerboard common stock. manufacturing system. St. Laurent is a leading North American pro- Under the terms of the agreement, holders ducer, supplier, and converter of high-quality, of St. Laurent stock will receive $12.50 in cash, value-added specialty containerboard and high- plus one-half share of Smurfit-Stone common impact graphics packaging. In addition to its stock for each share of St. Laurent. To finance four mills and 16 packaging plants, the company the transaction, Smurfit-Stone will raise owns 920,000 acres of forest land in Quebec. approximately $625 million in new debt and This acquisition will significantly expand issue approximately 25 million new shares, our production capabilities in specialty grades increasing the number of fully diluted shares of containerboard, such as white-top linerboard, outstanding to approximately 250 million. coated and bleached linerboard, and light- We will also refinance about $400 million of weight medium. It will afford Smurfit-Stone St. Laurent debt. The transaction is subject to an unmatched ability to serve customers for approval of St. Laurent shareholders and microflute, high-impact graphics packaging, various regulatory bodies. 24
  27. 27. > Container/Containerboard System Integration Structural designers Andre Smith, left, and Rick Jaraczewski review a structure for a display designed and produced at the Cameo Container plant in Cameo, IL. Smurfit- Stone has greatly bene- fited from the creativity and innovation of design presentations produced by this affiliate facility. GOAL Optimize production, costs, inventories AGENDA In progress Implement best practices
  28. 28. Smurfit-Stone Container Corporation Board of Directors and Corporate and Division Officers David C. Stevens Victor E. Kendall BOARD OF DIRECTORS DIVISION OFFICERS Vice President and General Manager, Vice President and Manager, Ray M. Curran Reclamation Division Corporate Sales Corrugated Container Division President and CEO, William N. Wandmacher LeRoy R. Crocker Jerry Roeske Smurfit-Stone Container Corporation Vice President and General Manager, Vice President and Regional Manager Vice President and Manager, Richard A. Giesen Containerboard Mill Division Corporate Sales John J. Curry, Jr. Chairman and CEO, Lorne Parnell Vice President and Regional Manager Jim Laurence Continere Corporation Vice President, Vice President, Sales Stephen P. Folan Alan E. Goldberg Pacific Operations Vice President and Regional Manager Fred Klatt Managing Director, Jose A Santos Vice President, Manufacturing James A. Henderson Morgan Stanley & Co., Inc. Vice President, Vice President and Regional Manager Howard E. Kilroy Latin American Operations Folding Carton and Lane W. Hunter Retired, Boxboard Mill Division Cynthia S. Bowers Vice President and Regional Manager Jefferson Smurfit Group plc Vice President, J. Gregor Doman John B. Malloy James J. O’Connor Compensation and Administration Vice President, Sales Vice President and Regional Manager Retired, Daniel J. Garand Larry D. Fielder Unicom/Commonwealth Edison James A. McNeill Vice President, Vice President, Paper Can Vice President and Regional Manager Jerry K. Pearlman Supply Chain Operations John E. Straw Retired, Rodney A. Myers Edwin Goffard Vice President and Regional Manager, Zenith Electronics Corporation Vice President and Regional Manager Vice President Eastern Region Thomas A. Reynolds, III James S. Nolan Michael F. Harrington Curtiss M. Komen Partner, Vice President and Regional Manager Vice President, Vice President and Regional Manager, Winston & Strawn Employee Relations Donald A. Petri Western Region Dermot F. Smurfit Vice President and Regional Manager James A. Hayssen David J. Pietrowicz Deputy Chairman, Vice President, Donald A. Tinkoff Vice President and Regional Manager, Jefferson Smurfit Group plc Information Technology Vice President and Regional Manager Central Region Dr. Michael W.J. Smurfit Charles A. Hinrichs James S. Willis Nathan S. Holmes Chairman and CEO, Vice President and Treasurer Vice President and Regional Manager Vice President and General Manager, Jefferson Smurfit Group plc Boxboard Mills Craig A. Hunt Roger W. Clingerman Vice President, Vice President and General Manager - CORPORATE OFFICERS Specialty Packaging Division Secretary and General Counsel Corporate Accounts George Q. Langstaff Paul K. Kaufmann Stephen E. Jevyak Dr. Michael W. J. Smurfit Vice President, Converting and Vice President and Controller Vice President and Transition Chairman of the Board Marketing Team Leader Allen M. Koleff Ray M. Curran Vice President, Michael S. Rose President and CEO Reclamation Division Environmental Affairs Vice President, Patrick J. Moore Michael R. Oswald International Sales Development Leslie T. Lederer Vice President and CFO Vice President, Operations Vice President, Jerry D. Suiter Peter F. Dages Mark Brantley Strategic Investment Dispositions Vice President and Director, Vice President and General Manager, North Central Operations Manager Manufacturing Timothy J.P. McKenna Corrugated Container Division Steve Miller Vice President, Robert A. Guillou James P. Davis West Region Operations Manager Investor Relations and Vice President, National Accounts Vice President, Communications Tom Squires Corrugated Container Division South Region Operations Manager Containerboard Sales and Mark R. O’Bryan James D. Duncan Marketing Division Vice President, Jim Pope Vice President and General Manager, Purchasing Larry L. Burton International/West Sales Manager Specialty Packaging Division Vice President, Sales and Marketing Thomas A. Pagano Ed Tucciarone William G. Eustice Vice President, Peter Butier, Jr. National/East Sales Manager Vice President, Planning Vice President, Containerboard Corrugated Container Division and Kraft Paper Sales Smurfit Newsprint Corporation Thomas G. Pavlini Jay D. Lamb Vice President, Michael A. Siebers President and General Manager, Containerboard Mill Division Distribution Vice President and General Manager, Smurfit Newsprint Corporation John E. Davis Oregon City Mill Gayle M. Sparapani F. Scott Macfarlane Vice President, Forest Resources Vice President, Jon E. Melkerson Vice President and General Manager, Benefits Alain Dubuc Vice President, Folding Carton and Vice President, Mill Operations, Sales and Marketing John F. Allgood Boxboard Mill Division Northern Region Assistant Secretary Fran J. Ostlund John M. Riconosciuto W. G. Stuart Controller and Assistant Secretary Richard P. Marra Vice President and General Manager, Vice President, Mill Operations, Assistant Treasurer Bag Packaging Division Central Region Research and Development Division Ronald J. Megna Joseph V. LeBlanc Assistant Secretary Bag Packaging Division Vice President John Moran Vice President, Marketing and Specialty Bag Packaging 26
  29. 29. Stockholders’ Information STOCKHOLDERS’ ANNUAL MEETING May 18, 2000 at 1:00 pm The Sheraton Chicago Hotel & Towers City Front Center 301 E. North Water Street Chicago, IL 60611 REGISTRAR AND TRANSFER AGENT ChaseMellon Shareholder Services, L.L.C. Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07660 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, MO 63105 Telephone: 314-746-1223 Fax: 314-746-1347 Timothy McKenna Vice President, Investor Relations and Communications St. Louis: 314-746-1254 Chicago: 312-580-4637 CORPORATE OFFICE Smurfit-Stone Container Corporation 150 North Michigan Avenue Chicago, IL 60601-7568 Telephone: 312-346-6600 Design: ProWolfe Partners; St. Louis, MO Photography: Mark Green; Houston, TX
  30. 30. Smurfit-Stone Container Corporation (Nasdaq: SSCC) is the industry’s premier paper-based packaging company. Headquartered in Chicago, with additional corporate functions in St. Louis, Missouri, and Alton, Illinois, the company was formed November 18, 1998, as a result of the merger between Jefferson Smurfit Corporation and Stone Container Corporation. Core products include corrugated containers, folding cartons, specialty packaging, and bag packaging, which are supported by an integrated mill system and significant fiber resources. The company operates approximately 300 facilities worldwide. 150 North Michigan Avenue Chicago, IL 60601-7568 (312) 346-6600