smurfit stone container 2005_ar

S M U R F I T - S T O N E C O N T A I N E R C O R P O R A T I O N

2 0 0 5 A N N U A L R E P O R T

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Company Profile

Smurfit-Stone Container Corporation (Nasdaq: SSCC) is the industry’s leading integrated manufacturer of

paperboard and paper-based packaging. Smurfit-Stone is a leading producer of containerboard, including

white top linerboard and recycled medium; corrugated containers; point-of-purchase displays; multiwall

and specialty bags; and clay-coated recycled boxboard; and is one of the world’s largest collectors and

marketers of recovered fiber. In addition, Smurfit-Stone is a leading producer of solid bleached sulfate,

folding cartons, flexible packaging, and labels. The company operates approximately 240 facilities,

located primarily in the U.S., Canada and Mexico, and employs approximately 33,500 people.

Financial Highlights

((DDOOLLLLAARRSS IINN MMIILLLLIIOONNSS,, EEXXCCEEPPTT PPEERR SSHHAARREE DDAATTAA)) 22000055 22000044 22000033

Summary of Operations

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,396 $ 8,291 $ 7,722

Net loss available to common stockholders . . . . . . . . . . . . . . (339) (57) (208)

Basic and Diluted Earnings per Share

Net loss available to common stockholders . . . . . . . . . . . . . . $ (1.33) $ (.23) $ (.85)

Weighted average shares outstanding (in millions) . . . . . . . . 255 253 246

Other Financial Data

Net cash provided by operating activities . . . . . . . . . . . . . . . . $ 221 $ 273 $ 162

Capital investments and acquisitions . . . . . . . . . . . . . . . . . . . 285 232 238

Working capital, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) 148 136

Property, plant, equipment and timberland, net . . . . . . . . . . . 4,289 4,682 4,974

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,114 9,583 9,956

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,571 4,498 4,807

Stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,882 2,259 2,270

Number of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,500 35,300 36,700

Strategies and Goals

In 2005, Smurfit-Stone launched bold, strategicinitiatives designed to lower costs, drive revenuegrowth, and implement a new organizational

structure that better leverages our position as North America’slargest paperboard and packaging company.

Smurfit-Stone’s strategies and goals include:Lowering our cost profile to improve operating margins,create a more competitive manufacturing system, and sustain a leading market position.

Expanding our service offerings and developing strategicpartnerships to help drive sales growth through innovation.

Implementing a new organizational structure to drive our cost and revenue objectives.

Creating greater financial flexibility and delivering improvedvalue to our stockholders.

Goals and Timeline

(IN MILLIONS, COMPARED TO 2005) 2006 2007 2008

$650$325$100Revenue growth above market

$600$480$280Annual cost-savings targets

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Smurfit-StoneContainer Corporation2005 Annual Report

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Letter to Stockholders

Fellow Stockholders:

Smurfit-Stone redefined its strategy in 2005 to

improve our position as the industry’s leading

paperboard and packaging provider. The results

of our strategic reassessment, announced in the

fourth quarter, are designed to make the most

effective use of our resources in a marketplace

that continues to undergo extensive change.

A significant portion of the industry’s traditional

customer base has moved manufacturing

operations offshore, taking along major product

segments of the box market. The domestic

retail environment has come to be dominated

by mega-retailers, who are using their influence

to drive private label growth, and large consumer

products manufacturers. Leveraging our

strengths for these market realities demands

a more centralized and functionally focused

organization, unrelenting emphasis on

cost-effective operations, and new sales and

marketing approaches to help fuel growth.

The continuing commoditization of packaging,

pricing pressures, and cost inflation led us to

systematically reassess our business model.

We recognized that despite the company’s capa-

bilities, the structure we had in place could not

take full advantage of our potential in the new

market environment. To capitalize on evolving

market opportunities, we are implementing a

series of strategic initiatives to optimize our

system and redesign our operating structure.

This is a three-year plan designed to deliver cost

savings and revenue growth, with the full benefit

of the strategic initiatives realized by the end of

2008. In 2005, we made the following major

organizational changes.

We realigned the executive management

team to include a chief operating officer

and named veteran Smurfit-Stone executive

John Riconosciuto to that position.

We reorganized the management structure

in our corrugated container division to more

effectively take advantage of our integrated

business model, separating the sales and

marketing functions from manufacturing.

This approach allows us to deploy our assets

on an enterprise-wide basis to better meet

our customers’ needs.

Emphasizing our commitment to meeting

the cost-savings and revenue-growth goals,

we established an initiatives management

organization, reporting to me, focused on

driving the strategic initiatives.

2005 Results

Sales of $8.4 billion were up slightly from the

previous year’s $8.3 billion. For the full year,

Smurfit-Stone reported a net loss available to

common stockholders of $339 million, or

$1.33 per diluted share, compared with 2004’s

net loss of $57 million, or $0.23 per diluted

share. The 2005 results included $321 million

in restructuring charges related to closures

of mills and packaging facilities.

Until the market for containerboard and corru-

gated containers began to improve late in the

year, demand fell short of expectations for most

of 2005, causing prices to trend down. Cost

increases, including energy, freight, and fiber

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offset the improvement from better mix

and pricing.

Market-Driven Decisions

The determination and urgency we have brought

to our strategic initiatives is motivated by the

dramatic shift in the packaging market.

As American manufacturers moved production

offshore, they also sourced their packaging

requirements offshore. We saw the big-box

retailers increasingly pushing their influence

further along the supply chain in their persistent

focus on driving costs out of production and

distribution. These trends resulted in reduced

domestic packaging demand. At the same time,

domestic retail markets were emphasizing

a self-service environment that has led to

a dramatic increase in the importance of

packaging’s point-of-purchase appeal.

Smurfit-Stone responded with stronger,

lighter weight packaging, and developed

hybrid packaging that combined the traditional

strength of corrugated with high-end graphics

appeal. We expanded our offering of white top

linerboard, which provides the best substrate

for printing colorful, attention-getting packaging

graphics. Our strategic plan continues this

evolution and further enhances our ability to

capitalize on market trends.

Patrick J. Moore

Chairman, President, and

Chief Executive Officer

“Smurfit-Stone’s challenge now is to better align the size and scope of our converting operations with today’s market.

Lowering our cost structure is the first priority. Our target is to produce annual cost savings of $600 million by 2008.”

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Redefining the packagingexperienceSmurfit-Stone’s EnviroShell™

package combines brand andenvironmental awareness.EnviroShell™ is packaging thatenhances the appeal of ourcustomers’ environmentally friendly products. EnviroShell™

is adaptable to specialty printingwhile eliminating the glarecaused by more traditionalplastic clamshell packaging,giving products more shelfappeal at retail. EnviroShell™

is made from 65 percent recycled material and is easy to separate for disposal andrecycling purposes.

Lowering the Cost Structure

Smurfit-Stone’s challenge now is to better align

the size and scope of our converting operations

with today’s market. Lowering our cost structure

is the first priority. Our target is to produce annual

cost savings of $600 million by 2008, compared to

2005 when we launched our strategic initiatives.

In August, we eliminated an additional 700,000

tons of capacity by closing two high-cost mills

in Canada and permanently closing one of three

paper machines at our Fernandina Beach, Florida,

mill. These steps brought our mill system in

balance with current market demand. There

are additional mill savings still to be achieved

through productivity initiatives such as energy

reduction programs and further staff optimization.

In our corrugated container system, we are

improving productivity and increasing facility

scale to bring our overall cost profile in line

with our best performing plants. To support

this, we restructured our corrugated container

division organization by separating the sales

from the manufacturing teams. As a result,

our production managers now are focused on

producing packaging at the lowest possible cost

while still providing exceptional solutions and

services to our customers.

Driving improved productivity in our corrugated

container operations started with a rigorous

“best in class” assessment which focused on

addressing gaps between optimum and actual

performance and configuration at each site,

based on the reassessment findings. We identi-

fied many opportunities including eliminating

redundant machinery, improving labor efficiency,

and making select capital investments to

increase the productivity of key assets. The

corrugated container business is very scale

sensitive. We plan to establish high-volume

plants in a number of strategic geographic

markets to further reduce our cost profile

through economies of scale, investment in

high-speed corrugators, improved specialization,


Private label partnersSmurfit-Stone helped Office Depot launch a newbranding strategy for its private label products that included an updated graphic look for thecompany, and included approximately 5,000 items.Smurfit-Stone is well known as the industry’spremier packaging producer. Smurfit-Stone helpscustomers brand their products, with a network of service partners, offering merchandisingsolutions to retailers and consumer packaginggoods companies.

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Investing in the futureSmurfit-Stone opened a new corrugated

container manufacturing facility in Milton,

Ontario, in 2005. The plant, showing a view

from the control room, is equipped with

a state-of-the-art corrugator that produces

a consistent, high-quality product and

can rapidly manufacture several different

flutes with very short setup times. The

250,000-square-foot facility well positions

Smurfit-Stone to serve the expanding

Ontario and northeastern U.S. markets.

and closure of smaller, outdated facilities.

Collectively, our productivity and scaling

efforts could lead to the rationalization of

up to 20 percent of our corrugated container

plants over the next three years.

Significant opportunities exist to improve the

integration between our mill and corrugated

container systems. We have a number of initia-

tives to reduce our overall system costs while

maintaining the performance specifications of

the finished box. These efforts are reducing

the number of grade combinations, roll sizes,

inventory levels, and waste, as well as improving

mill productivity. Additional efforts will focus

on better leveraging our purchasing spend with

our suppliers, centralizing our transportation

management process and various administrative

functions currently performed at the plant level.

Capital investment is required to achieve our

cost reduction targets. Smurfit-Stone anticipates

spending $300 to $400 million in additional

capital by 2008 to drive a lower cost profile

through energy reduction programs, improving

the productivity of existing corrugating and

converting equipment, and investing in larger,

scaled facilities.

Revenue Growth

Just as important as lowering our cost profile

is our ability to serve and win customers who

require value-added products and services.

In the past, we focused our sales and marketing

efforts on leveraging the widest packaging

product array and our strong geographic

coverage in North America. In addition to this,

we will now focus our attention on promising

target markets — new and existing customers in

segments that exhibit attractive growth potential

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RecyclaCorr™ is safe fordirect and indirect foodcontact and is recyclableSmurfit-Stone’s RecyclaCorr™ wax replacement medium leads the way in an emerging market. Waxfrequently is used to provide boxes with additionalstrength when they are exposed directly to water or placed in a humid environment. Waxed packaging is troublesome in the retail supply chain because waxed board cannot be recycled, thus driving upretailers’ disposal and labor costs. Smurfit-Stone’sRecyclaCorr™ is safe for direct and indirect foodcontact and is compliant with recyclabilityrequirements adopted by the American Forest & Paper Association. The product is manufactured at the company’s West Point, Virginia, mill.

and who require value-added packaging services.

We will employ many tools, including innovative

packaging solutions tailored to address changing

packaging needs, our unique “agency service”

approach to deliver a wider complement of

products and services, and leveraging a

more cost-competitive operation to improve

margins and open new markets previously

considered unattractive.

As with our cost initiatives, separating our

corrugated container organization between sales

and manufacturing teams is the first step to

drive profitable revenue growth. Instead of each

plant having a sales force working on behalf

of the individual plant, sales teams report into

a central sales organization with units focused

on local, regional and national accounts, as well

as key targeted segments. This change allows

us to remain focused on improving revenue

growth and assigning the right resources to

the best opportunities.

We will achieve growth by targeting key markets

such as protein, frozen specialty foods, and

pharmaceuticals, and similar high-growth

potential markets. With specific teams focused

on attractive market segments, we will better

understand our customers’ needs. This focus

will allow us to continue to deliver innovative

products such as RecyclaCorr™ and EnviroShell™,

and our META™ and Value Proposition Solutions

(VPS) packaging systems.

We will create opportunities from the point-of-

purchase retail environment and the growing

influence of private labels. This applies to retailers

interested in extending their private label lines

as well as manufacturers whose products are

now channeled through those retailers. Often,

these customers operate on a global scale,

requiring Smurfit-Stone to further expand its

reach beyond North America.

Our Innovation to Implementation (i2i) concept

incorporates the “agency service” model. This

allows Smurfit-Stone to serve as our customer’s

agent in obtaining branding and related services

to provide fresh approaches to customers’

packaging challenges. We are building strategic

alliances to provide these offerings. One of our

partners is Daymon Worldwide, a private-label

brand management and market research firm.

We formed a joint venture with Winterborne, Inc.,

to help address packaging needs with hybrid

paper and plastic solutions. In Asia, we have

joint ventures in place with Pacific Millennium

and Hang Yick, broadening our relationships

with our North American customers who source

products domestically and in Asia, and who

benefit from a globally coordinated branding,

packaging design, and fulfillment process.

Many of our customers continue to have tradi-

tional packaging requirements. We will leverage

our low-cost converting and mill operations to

improve our margins in these segments.

Financial Flexibility

As part of our strategic reassessment, we

evaluated each of our business segments for

strategic fit as well as prospects for growth and

margin improvement. We are working with a

financial advisor to explore selling some or

all of our consumer packaging business in order

to focus our resources on the containerboard

and corrugated container businesses.

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“We will create opportunities from the point-of-purchase retail environment and

the growing influence of private labels.”

Proceeds from any asset sales will be used

to pay down debt. The pressure on financial

performance from high energy costs, disruptions

in wood fiber supplies, and fiercely competitive

markets inhibited our financial flexibility and

stalled our deleveraging initiatives. Paying

down debt remains our top financial priority,

and the strategic initiatives are designed to help

achieve that goal.

Safety

While Smurfit-Stone has initiated changes to

the way we conduct our business, one area that

remains unchanged is our unwavering commit-

ment to safety as the company’s top operating

priority. A core value of our CustomerONE®

operating philosophy, safety at all of our

facilities embraces five key beliefs:

All injuries are preventable;

Safety is everyone’s responsibility;

Working safely is a condition of employment;

Training employees to work safely

is essential; and,

Safety is good business.

Smurfit-Stone’s 1.16 domestic recordable case

rate (RCR) in 2005 was the best in company

history and led our industry, according to

preliminary data made available by the

Pulp & Paper Safety Association, a major

trade organization. RCR is the major measure-

ment utilized by the Occupational Safety and

Health Administration (OSHA).

Creating Value

We began 2006 on an encouraging note. Year-

end inventories were at their lowest levels in

10 years. Our mills and packaging plants were

running at high utilization levels. We are well

positioned in the near term to benefit from an

improving price environment.

The initiatives in place are beginning to deliver

the intended benefits. We have a timeline in place

to accomplish far-reaching changes. We have

begun to put the organizational structure in

place to execute the plan. And, we have taken

the critical steps to assess each component

of the organization and realign operations as

needed. We must improve the returns on

Smurfit-Stone’s resources to make the

company an increasingly valuable investment

for customers, employees, and stockholders.

Patrick J. Moore

Chairman, President, and Chief Executive Officer

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Smurfit-Stone’s META™ and Value Proposition Solution(VPS) packaging systems are part of a broader growthstrategy that provides value beyond the package. META™

and VPS are proprietary packaging systems that providecustomers with a unique way to differentiate theirpackaging, while adding value to their marketing mix.META™ and VPS target U.S. meat and produce markets,respectively, segments which have demonstrated growth and stability.

Among their many benefits, META™ boxes, such as the Boar’s Head package, offer improved stacking

strength with boxes up to eight sides, which also provides high-impact merchandising capabilities. META™ packaging equipment provides high-speed auto-erect capabilities up to 65 cases a minute with quick changeovers and flexibility.

VPS boxes, such as the Ocean Mist salad spinachpackage, are designed to maximize packaging strengthwhile minimizing material use, all in a one piece design.VPS packaging equipment provides versatility on themanufacturing line, and the superior strength of VPSdesigns maximizes customers’ packaging graphics.

Growing our presence in key markets

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Board of Directors

Patrick J. MooreChairman, President and Chief Executive Officer

John M. RiconosciutoChief Operating Officer

Charles A. HinrichsSenior Vice President and Chief Financial Officer

James E. BurdissSenior Vice President andChief Information Officer

James D. DuncanSenior Vice President Sales and Marketing

Daniel J. GarandSenior Vice PresidentSupply Chain Management

Ronald D. HackneySenior Vice President Human Resources

Craig A. HuntSenior Vice President Secretary and General Counsel

M.C. (Sonny) JacksonSenior Vice President and General Manager Containerboard Mill Division

Paul K. KaufmannSenior Vice President andCorporate Controller

John L. KnudsenSenior Vice PresidentManufacturingCorrugated ContainerDivision

Timothy J. P. McKennaSenior Vice President Investor Relations and Communications

Mark R. O’BryanSenior Vice President Strategic Initiatives

Michael R. OswaldSenior Vice President and General Manager Recycling Division

Thomas A. PaganoSenior Vice President Corporate Development

Curtis A. BartonVice President Environmental Affairs

Roger P. BeckerVice President Taxes

Jeffrey S. BeyersdorferVice President andTreasurer

Mathew J. BlanchardVice President and General Manager Board Sales

Cynthia S. BowersVice President Compensation, Benefits and HR Services

Regina G. (Jean) WyseVice President Enterprise ProcessIntegration

Ronald J. MegnaAssistant Secretary

Corporate Officers

Patrick J. MooreChairman, President and Chief Executive OfficerSmurfit-Stone ContainerCorporation

James R. BorisRetiredChairman and CEOEVEREN Securities, Inc.

Connie K. DuckworthFounding Partner8Wings Enterprises, LLC

Alan E. GoldbergCo-Managing PartnerLindsay Goldberg &Bessemer GP LLC

William T. Lynch, Jr.Retired President and CEOLeo Burnett Company

James J. O’ConnorRetired Chairman and CEOUNICOM Commonwealth Edison

Jerry K. PearlmanRetired Chairman and CEO Zenith Electronics

Thomas A. Reynolds, IIIPartnerWinston & Strawn LLP

Eugene C. SitChairman, CEO, and Chief Investment OfficerSit Investment Associates

William D. SmithburgRetired Chairman, President and CEOThe Quaker Oats Company

Chairman Emeritus

Dr. Michael W.J. Smurfit


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Corrugated ContainerDivision

Daniel J. BurgerVice President Strategic Planning

John P. CrimminRegional Vice PresidentSales

Richard E. FlammRegional Vice PresidentManufacturing

James A. HendersonRegional Vice PresidentManufacturing

Stephen E. JevyakRegional Vice PresidentSales

George Q. LangstaffVice PresidentOperational Excellence

Robert A. MillerVice PresidentInternational Sales and Marketing

Rodney A. MyersRegional Vice PresidentManufacturing

Robert D. NelsonRegional Vice PresidentSales

James S. NolanVice President Corporate Sales, StrategicMerchandising Solutions and Graphics

Donald A. PetriVice President and General Manager Specialty/Hybrid Plants

Thomas A. PiggottRegional Vice PresidentSales

E. Lawrence QuatmannVice President and Division Controller

Donald RoyRegional Vice President Sales

Stephen J. StrangVice President and General Manager Smurfit MBI

John YoderRegional Vice PresidentManufacturing

Containerboard MillDivision

Alain L.M. BoivinVice PresidentMill OperationsNorthern Region

Larry L. BurtonVice PresidentSales and Marketing

Michael L. ButlerVice PresidentContainerboard Sales

James S. ChouVice President and Division Controller

John E. DavisVice PresidentForest Resources

Roger M. JansenVice PresidentSBS Sales

Larry T. PriceVice PresidentMill Operations

Eve K. RaeVice PresidentPulp Sales

W. G. StuartVice PresidentMill OperationsSouthern Region

Andrew J. WoodroffeVice PresidentProduct Management and Technical Services

Donald C. Wyatt Vice PresidentKraft Sales and National Accounts

Consumer PackagingDivision

Curtiss M. KomenSenior Vice President Sales

John P. AntonucciVice PresidentSales and MarketingLabel Products

Edward A. ByczynskiVice President and General ManagerBag Packaging Group

Jeffrey DeitchVice PresidentTechnology Flexible Packaging Group

Michael L. HempsteadVice President Sales and Product Development Folding Cartons

Nathan S. HolmesVice President and General Manager Boxboard Mills and Lamination

Gary R. HustonVice PresidentSales Boxboard Mills

James B. LaurenceVice President of SalesBag Packaging Group

Robert E. LewisVice President and Regional ManagerFolding Cartons

Fred W. KlattVice President and Regional ManagerBag Packaging Group

Kenneth E. KushibabVice President and Division Controller

Donald W. McCallaVice PresidentMarketing

Gary D. McDanielVice President and General Manager Flexible Packaging and Labels

John J. MoranVice President Strategic Services

Thomas J. PastorinoVice President and Regional General ManagerFolding Cartons

David J. PietrowiczVice President and General ManagerFolding Cartons

Michael L. WeisheitVice PresidentStrategic InitiativesFolding Cartons

Recycling Division

Mark C. BrantleyVice PresidentEastern Region

Robert J. CurranVice President Business Development

Delmar C. JonesVice President Western Region

James W. PopeVice President International Sales

Tom E. SquiresVice President Operational Excellence

Edward V. TucciaroneVice President Domestic Sales

Other

John J. CapliceVice PresidentCorporate Accounts

David F. KosterVice PresidentTransportation and Distribution

Joseph V. LeBlancVice PresidentResearch and Development

Mark A. PolivkaVice PresidentProcurement

William C. WannerVice PresidentSupply/Demand Operations

Division Officers

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Stockholder Information

Stockholders’ Annual Meeting

May 10, 2006 at 11 a.m.

University of Chicago

Gleacher Center

450 N. Cityfront Plaza Drive

Chicago, IL 60611

Registrar and Transfer Agent

Mellon Investor Services LLC

480 Washington Boulevard

Jersey City, NJ 07310-1900

(800) 676-0896

TDD for Hearing Impaired: (800) 231-5469

Foreign Stockholders: (201) 680-6578

TDD Foreign Stockholders: (201) 680-6610

www.melloninvestor.com/isd

Common Stock

Smurfit-Stone Container Corporation Common

Stock is traded on The Nasdaq National Market

under the symbol: SSCC

Preferred Stock

Smurfit-Stone’s 7% Series A Cumulative

Exchangeable Redeemable Convertible

Preferred Stock is traded on Nasdaq under

the symbol: SSCCP

Investor Information

Investor Relations and Communications

Smurfit-Stone Container Corporation

8182 Maryland Avenue

St. Louis, MO 63105

Telephone: (314) 746-1223

Fax: (314) 746-1347

www.smurfit-stone.com

Timothy McKenna

Senior Vice President,

Investor Relations and Communications

Chicago: (312) 580-4637

St. Louis: (314) 746-1254

Corporate Headquarters

Smurfit-Stone Container Corporation

150 North Michigan Avenue

Chicago, IL 60601

Telephone: (312) 346-6600

150 NORTH MICHIGAN AVENUE

CHICAGO, IL 60601-7568

(312) 346-6600

WWW.SMURFIT-STONE.COM

smurfit stone container 2005_ar

Economy & Finance

sales growth

new net loss

leading market position

share net loss available

revenuegrowth goals

packaging company

operating structure

drive revenue growth