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1998 Annual Report

CREATE SHAREHOLDER VALUE

Smurfit-Stone will create shareholder value by reducing debt through divestiture of non-core assets; rationalizing its manufacturing system; restructuring its corrugated container and containerboard businesses; eliminating redundancy, while continuing to serve its markets; leveraging its combined purchasing power; lessening exposure to low-margin businesses; reducing expenses; and refinancing debt.
Create Shareholder Value

CONSOLIDATION AND RATIONALIZATION
The merger creates a new company able to run its integrated corrugated container/containerboard business more profitably with a smaller, more efficient mill system. The merger is also an important first step in unlocking value for Smurfit-Stone shareholders.
     The next step is the rationalization of inefficient capacity, a problem that has plagued the industry for years. To address it, the company has implemented a major rationalization that includes the shutdown of four mills which produced approximately 1.1 million tons, or about 15 percent, of the company's North American containerboard mill capacity.
     As a result of the restructuring, Smurfit-Stone's annual U.S. containerboard production capacity has been reduced from approximately 7 million tons to about 5.9 million tons. This move increases the company's level of integration in containerboard from about 70 percent to 90 percent. The rationalization plan is a key element in generating expected annual synergies of at least $350 million.
     Cutting capacity substantially reduces unscheduled market-related downtime and associated fixed costs, which will result in considerable savings. Following the rationalization, Smurfit-Stone will have a lower-cost, more efficient mill system; improved freight costs; and better margins through grade-mix rationalization.
     At the mill level, the company will reduce its open-market sales position in containerboard and kraft paper in the domestic and export markets, though it will continue to be a player in both of these arenas. Several other strategic initiatives are planned. They include more efficient scheduling of paper machines by combining grades and measuring customers' needs against the company's capabilities.
     In order to improve price realization and profitability on open-market sales of containerboard, Smurfit-Stone is analyzing its customer base and evaluating customers against a number of factors. Our future customer mix will be based on meeting long-term, strategic objectives, including margin, potential, contracts, and good fit between customers and the company.
     The rationalization has significantly reduced the company's exposure to market pulp, a non-core business. The shutdown of one of the kraft linerboard mills, at Port Wentworth, Georgia, also included 235,000 tons of market pulp. In addition, about 90,000 tons of market pulp were shut down at the company's Bathurst, New Brunswick, mill in Canada. That mill will continue to produce containerboard. The shutdowns were in addition to Stone's exit last summer from its Celgar mill, a joint venture in British Columbia, which had production capacity of almost 600,000 tons. Taking those shutdowns into account, just under 600,000 tons of pulp capacity remain. This includes the specialty pulp mill at Pontiac, Quebec, and pulp production in Panama City, Florida.
     At the packaging level, Smurfit-Stone will create value for packaging customers by fully utilizing its resources — plants, people, and creative services — and widening the competitive gap between itself and its competitors. It 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.

DIVESTITURE
By divesting non-core assets, Smurfit-Stone will significantly reduce debt. The company is aggressively pursuing that strategy with a focused, disciplined restructuring effort and is projecting proceeds of approximately $2 billion from asset sales. The sale of Stone's Snowflake, Arizona, newsprint facility and part of the stake in Abititi-Consolidated have already raised approximately $350 million that has been applied to debt reduction.
     In line with mill rationalizations, 325,000 tons of unprofitable North American market-pulp operations have been shut down. Additionally, the specialty-pulp facility in Pontiac, Quebec, is expected to be sold in 1999. The remaining pulp line is a 350,000-ton plant in Panama City, Florida. Some of the pulp from Panama City may be used to expand the company's production of mottled white linerboard, a higher-value product.
     The company will continue to 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 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 of selling a number of other assets, including its West Coast newsprint operations. It also intends to divest its woodlands. Smurfit-Stone owns or leases 1 million acres of woodlands in Florida, Georgia, and Alabama.

LAST YEAR, SMURFIT–STONE PRODUCED 77 BILLION LINEAR FEET OF CORRUGATED CONTAINERBOARD. THIS IS ENOUGH TO WRAP A LINE OF BOXES PLACED, END–TO–END, AROUND THE WORLD 233 TIMES.

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SANTA FE SPRINGS CORRUGATED 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.
 
 
SANTA CLARA
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