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1998 Annual Report
LETTER TO SHAREHOLDERS
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.
1998 RESULTS AND 1999 OUTLOOK
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 inventories. 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. 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.
MANAGING FOR RESULTS
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 depreciation 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.
WIDENING THE COMPETITIVE GAP
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
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.
April 1, 1999