Smurfit-Stone 2003 Annual Report Highlights Financials and Safety Performance

2003 Annual Report
Smurfit-Stone Container Corporation

strength and
flexibility

Financial Highlights

2003
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001

SUMMARY OF OPERATIONS
$ 7,722
Net sales $ 7,483 $ 7,691
47
Income (loss) from operations 462 583
(341)
Interest expense, net (355) (455)
Income (loss) from continuing operations before
(198)
cumulative effect of accounting change 59 53
(208)
Net income (loss) available to common stockholders 54 66
BASIC EARNINGS PER SHARE
$ (.85)
cumulative effect of accounting change $ .20 $ .17
(.85)
Net income available to common stockholders .22 .27
246
Weighted average shares outstanding (in millions) 244 244
DILUTED EARNINGS PER SHARE
$ (.85)
cumulative effect of accounting change $ .20 $ .17
(.85)
Net income (loss) available to common stockholders .22 .27
246
Weighted average shares outstanding (in millions) 246 245
OTHER FINANCIAL DATA
$ 162
Net cash provided by operating activities $ 503 $ 597
238
Capital investments and acquisitions 570 232
282
Net working capital 590 465
4,974
Property, plant, equipment and timberland, net 5,182 5,166
10,102
Total assets 10,805 10,652
4,807
Long-term debt 4,990 4,943
2,270
Stockholders’ equity 2,320 2,485
35,400
Number of employees 38,600 38,500

Contents CustomerONE Industry Safety Leader
SM

Smurfit-Stone’s CustomerONESM Safety continues to be Smurfit-Stone’s top operating priority,
Page 1
operating philosophy repre- and is one of the core values represented in our CustomerONESM
Letter to Stockholders
sents a commitment from philosophy. Our objective is to achieve an accident-free and
Page 6
Smurfit-Stone At-a-Glance Smurfit-Stone and our injury-free workplace, and we subscribe to the belief that safety
employees to one company, is everyone’s responsibility.
Page 12
Strength and Flexibility one culture, one set of values Smurfit-Stone led the industry in safety performance for the
and one operating philosophy. third consecutive year in 2003. Our Smurfit-Stone Accident-Free
Page 24
Board of Directors Through CustomerONESM
, Environment (SAFE) process is the linchpin of our safety efforts.
and Officers
employees strive to create and With SAFE, we have developed a model for building a workplace
Page 25 live a culture that embraces where continuous improvement is the normal operating
Smurfit-Stone Form 10-K
quality, safety, customer satis- procedure, supported by comprehensive employee training
Inside Back Cover
faction, value creation, ethical and the commitment to working safely with every job we do.
Stockholder Information
behavior, productivity, and
environmental responsibility.


Building on creating
solutions for
our customers

Dear Stockholder,
Smurfit-Stone Container Corporation was founded on straightforward
operating principles. We recognized that fundamental shifts were taking
place in the markets for paper-based packaging, and that we had to respond
to these shifts if we were to create new value for stockholders. We had to
take a creative, non-traditional approach to our business, be willing and able
to adapt to change, and have the financial flexibility to respond to market
opportunities. We proceeded to integrate the most competitive assets of our
predecessor companies, sell or close those operations that no longer supported
our objectives, and redirect our energies toward building a stronger, more
competitive force in the North American packaging business.

Page 1


2003 Results
Among our strategies, we have produced to
order, rather than to manufacturing capacity. We have Excluding the impact of restructuring activities, litigation
eliminated costs and conserved capital, reduced debt and charges, and foreign currency losses, the biggest factors
taken advantage of opportunities to lower costs through in the past year’s operating performance were continued
refinancing. We have made strategic acquisitions to pricing and cost pressures. Overall trends in domestic
develop the product capabilities and enter new markets manufacturing depressed demand for packaging.
needed in a competitive environment. We continue to Although sales increased as a result of volume from
focus our marketing efforts toward more value-added recently acquired facilities, prices for our primary paper-
paperboard and packaging products. board and packaging products declined compared to
All these efforts have represented an ambitious the prior year.
redirection of energies. In 2003, the company’s fifth full In our largest segment, containerboard and
year, our strength and flexibility allowed us to pursue corrugated containers, board prices declined by about
our market-driven strategy, recognize very tangible four percent compared to the prior year, while prices for
benefits, and advance our competitive position despite corrugated containers declined by about one percent. In
a difficult operating climate. consumer packaging, both of our major businesses —
folding cartons and multiwall bags — contended with
We continued to streamline our operations,
pricing pressure in a low growth environment. Folding
maximize efficiency, and improve the quality of our
carton pricing declined about 2.4 percent from the
paperboard and packaging products.
prior year. Additionally, boxboard mill downtime was
We took action to overcome steadily inflating costs.
an added cost as we resolved to control our inventory.
We expanded the core capabilities required to serve
In our recovered fiber business, wastepaper prices were
the evolving needs of packaging customers in North
flat compared to the prior year, but cost cutting efforts
America, while furthering our foothold strategy in China.
enabled that business to achieve a profit increase.
And, as we responded to fundamental shifts in U.S. For the full year 2003, Smurfit-Stone reported a
manufacturing and retailing — the industries that net loss available to common stockholders of $208 million,
define our market realities — we began to change the or $.85 per diluted share, compared to net income available
way we organize our plants and go to market with to common stockholders of $54 million, or $.22 per diluted
packaging solutions for our customers. share, in 2002. Income from operations was $47 million,
compared to $462 million in the prior year. Sales for the
We did all of this while continuing to focus on
full year were $7.7 billion, compared to $7.5 billion in 2002.
safety — a core value of our CustomerONE operating
SM

The 2003 results included a pretax restructuring
philosophy — and earning recognition for the third
charge of $115 million, or $.29 per diluted share, to
consecutive year as our industry’s safest company.
account for facility rationalizations and cost reduction
initiatives. In addition, the company recorded a pretax
charge of $50 million, or $.13 per diluted share, for
non-cash foreign currency translation losses related to
the strengthening of the Canadian dollar. We took
pretax charges of $121 million, or $.30 per diluted share,

Page 2


to account for the settlement of the antitrust class action and refinancing activities lowered 2003 interest expense
cases against the company and its subsidiaries and by $14 million to $341 million for the full year. In the
other litigation matters, including unresolved lawsuits difficult earnings environment, we held capital spending
brought on behalf of parties who have opted out of the to $212 million for the year, slightly higher than the
class actions. $207 million in 2002.
The facility rationalization and cost cutting
Changing Market Trends
initiatives, which will be discussed later in this letter,
were announced in the fourth quarter as part of a During the past five years, two major economic trends
plan to streamline overall operations. In total, this have had a dramatic impact on our business. The first
plan will reduce our workforce by 1,400 and produce trend — the shift of large parts of the U.S. manufacturing
annual savings of $140 million once fully implemented base overseas — has been largely responsible for the flat
in early 2005. to declining growth rates in overall domestic packaging
Higher energy prices drove energy costs up demand. The second trend — the growth of the mega-
by approximately $69 million compared to last year. retailers — presents more of a mixed picture, creating
Higher natural gas prices were partially mitigated by an both challenges and opportunities.
active hedging program implemented by the company. To align our system with market demand, we
further rationalized our manufacturing base in the fourth
quarter of 2003. We closed our corrugating medium mill
We are investing in innovative technology in Thunder Bay, ON; idled one of two paper machines
at our Jacksonville, FL, containerboard mill; closed one
to grow our position as the leading
of two paper machines at our coated recycled boxboard
packaging company in North America. mill in Philadelphia, PA; and closed three converting
operations. In January 2004, we announced plans to
discontinue operations at four corrugated container
Earnings were also negatively affected by pension and
facilities. As part of the process, we expect to reduce
employee benefit costs, which increased by approximately
employment, at the operating and corporate levels,
$60 million compared to 2002.
through attrition and layoffs of approximately 1,400
Total debt at year end was $4.8 billion, down
over an 18-month period. As with all of Smurfit-Stone’s
$183 million from the end of the prior year. In the first
rationalizations, these are difficult yet necessary steps
quarter 2003, Smurfit-Stone completed transactions
to ensure the long-term growth and success of our
with Jefferson Smurfit Group (JS Group), formerly
company. We expect to realize the annualized savings of
our largest stockholder, that exchanged our European
$140 million associated with these steps by early 2005.
operations for $189 million in cash and JS Group’s share
of Smurfit-MBI, a Canadian corrugated container
producer. Proceeds from this transaction accounted for
the majority of debt reduction in 2003. Reduced debt

Page 3


While the shift of manufacturing overseas has had We acquired Arko Paper Products, an important
a negative impact on packaging demand, the changes in addition to our consumer packaging business. This
retailing may present genuine opportunities. As the New Jersey-based producer of high-end folding cartons
mega-retailers increase their dominance of the market- enhances our ability to serve the cosmetics, personal care
place, our customers, particularly producers of consumer and health care sectors in consumer packaging. Much of
non durables, have continued to consolidate as they this business is concentrated in the Northeast, and the
seek greater geographic presence and economies of scale. addition of Arko folding carton capabilities complements
In the current retail environment, our customers require existing investments in package graphics capabilities.
more value and creativity from suppliers while facing One of the most significant achievements was
constant demands to hold down costs and adapt to the the full integration of the Stevenson, AL, mill, an
retailers’ needs. With competition fierce for retail aisle 830,000-ton facility acknowledged as one of the world’s
and shelf space, most customers place greater reliance most efficient producers of high-quality corrugating
on packaging to sell the product at the point of purchase. medium. We also expanded the production of lighter
weight medium grades, which are the optimum grades
for this mill and an important component of Smurfit-

Our focus for 2004 will be on improving Stone’s objective to produce the widest variety of high
quality containerboard substrates. As a result of the
our sales, marketing, and production efforts efficient integration of Stevenson, we were able to
to respond to changing economic and achieve the predicted annualized synergy savings of
$40 million by the end of the second quarter. We also
retail environments.
divested 81,000 acres of timberland and other assets
acquired with Stevenson for $38.5 million. The proceeds
from this sale funded the purchase of the Arko assets.
The growth of retailers’ power also means that our
We continue to change the way we market our
customers must often customize their products and
products and capabilities. In our corrugated container
packaging for individual retail chains.
business, we are combining plants in major metropolitan
Smurfit-Stone, with its product diversity and
regions under a single management. In addition to
strong North American focus, is well-positioned to com-
eliminating duplicate service and administrative func-
pete in this market environment, and, in 2003, we added
tions, this approach allows us to develop a more unified
to our capabilities through acquisition. The exchange
marketing plan for customers in a single region and
transactions with JS Group resulted in Smurfit-Stone
manufacture products at plants best suited to produce
owning all of Smurfit-MBI, further aligning our Canadian
them. A unified sales force can focus on a particular
packaging business with our strategy to expand revenue
strength for the group of plants, such as graphics or
growth while increasing margins. Our packaging business
heavy duty packaging, and then target that specialty to
in Canada operates at high rates of capacity utilization.
the most profitable niches in the region. With more than
150 corrugated container operations in North America,
Smurfit-Stone has significant opportunities to employ
this strategy in many metropolitan regions.

Page 4


Strength and Flexibility
Throughout our business, we are emphasizing
our abilities in design, service and graphics. In container- Despite a difficult climate in 2003, we completed transac-
board, for example, we market the graphic capabilities tions to focus the company on the North American
and protective qualities of the company’s white top and paper-based packaging market. We introduced a number
high-performance board. In consumer packaging, we are of crucial cost-cutting initiatives and began taking addi-
realigning assets to focus our color printing capabilities tional steps to rebuild market share and shift marketing
on sectors such as convenience foods, health and person- resources to more lucrative, value-added categories.
al care products. We are leveraging our North American As we look to 2004, we are positioned for
presence to serve national brand owners created by improved results. Late last year, we began to see signs of
consolidation, and to serve regional market trends. a general recovery in manufacturing and a return to more
We are investing in innovative technology to robust growth in corrugated demand. We believe that the
grow our position as the leading packaging company correction of the dollar against European currencies
in North America. One of the most promising of the will stimulate U.S. exports to that region.
emerging technologies is Radio Frequency Identification Our focus for 2004 will be on improving our
(RFID) technology. RFID is a next-generation tool to sales, marketing, and production efforts to respond to
improve supply chain efficiency and improve inventory changing economic and retail environments, achieving
management. Major consumer products companies and the benefits of cost-cutting initiatives, and maximizing
retailers are actively pursuing RFID implementation cash flow to reduce debt.
and Smurfit-Stone already has developed unique Smurfit-Stone has made considerable progress
RFID applications. Our research and development despite some of the toughest economic conditions our
group is also making progress on less publicized but industry has ever faced. We are confident that our contin-
important applications for produce and other food ued evolution as a packaging solutions company, coupled
packaging advancements. with our formidable range of packaging capabilities, pro-
vides the most compelling strategy for Smurfit-Stone’s
New Directors continued success.
With the exit of JS Group as our largest stockholder,
the company added three new independent directors
to its board: James R. Boris, retired chairman and chief
Patrick J. Moore
executive officer of EVEREN Securities, Inc.; William T.
Lynch, Jr., retired president and chief executive officer Chairman, President and
of Leo Burnett Company; and William D. Smithburg, Chief Executive Officer
retired chairman, president and chief executive officer
of The Quaker Oats Company. Our board of directors
consists of independent and energetic members with
decades of experience in disciplines vital to our business
such as manufacturing, consumer products, sales and
marketing, and finance.

Smurfit-Stone At-a-Glance

Containerboard and Corrugated Containers
75%
Containerboard and corrugated containers represent Smurfit-Stone’s largest business
segment. This segment supplies hundreds of national and international manufacturers
and consumer products companies, as well as thousands of local and regional customers.

Facilities
21 containerboard mills in the U.S. and Canada
More than 150 corrugated container operations
in the U.S., Canada, and Mexico

Product Lines
Displays
Kraft linerboard
Smurfit-Stone provides one-stop point-of-purchase
display solutions including design, material sourcing, White top linerboard
manufacturing, assembly, logistics, and branding
Coated white top linerboard
that enable our customers to maximize sales, as
Solid bleached sulfate (SBS)
well as build and protect brand equity.
Bleached paperboard
Market pulp
Kraft paper
Export-specific linerboard, including SBS, white top,
and high-performance grades
Semi-chemical and recycled medium, including
high-performance grades

Capabilities
Full range of corrugated containers
Innovative packaging solutions
High-quality graphics printing
Graphic and structural design expertise
Point-of-purchase display consulting, design,
and manufacturing
Full line of specialty products and custom, die-cut boxes
to display packaged merchandise
Pre-print and post-print flexography and label applications
Bulk packaging

2003 Revenue

5,759mi
$
llion
Page 6

MetaTM Corrugated Packaging System
Smurfit-Stone’s MetaTM system is a unique concept designed
to erect cases in four-, six- and eight-sided configurations,
provide enhanced graphics, increase stacking strength,
and deliver dramatic retail shelf impact.

Largest
containerboard producer;
white top linerboard producer;
and corrugated container supplier.

Containerboard
Operations

North American Production
Units (Thousand tons)

Containerboard:

7,185
Solid bleached sulfate (SBS) and
bleached paperboard:

290
Market pulp:

497
Corrugated Containers Kraft paper:
Whether it’s a shipping container or a package
293
requiring high-impact graphics, Smurfit-Stone delivers
packaging solutions for thousands of customers,
from internationally recognized brands to local
companies just around the corner.
Corrugated Container
Operations

North American Shipments
(Units)

Billion square feet:

84.3
Specialty Packaging Thousand tons:
We design and manufacture specialty corrugated
5,415
products that serve a wide range of food
products, including a family of proprietary
Page 7
designs exclusively for our produce customers.


Consumer Packaging
21%
The consumer packaging division offers a wide portfolio of primary packaging
products and solutions that includes folding cartons, multiwall and specialty
bags, flexible packaging, Lithoflute, labels and contract packaging. The various
TM

operations within this business segment share many of the same customers
and serve the same consumer product markets, with high-graphics printing
as a core manufacturing competency. With cross-trained sales teams
supported by creative and technical resources, the consumer packaging
division delivers added value to our customers.

Leadingsuppl ier
of folding cartons

Largestproducer
of clay-coated recycled boxboard

Complete Packaging
Whether it’s the boxboard, the boxboard
converted to a folding carton, the windowing,
or as in this case, all three of those packaging
pieces, Smurfit-Stone can provide customers
with complete packaging solutions.

Labels
Labels are a vital aspect of building and
maintaining a brand. Smurfit-Stone utilizes
its years of expertise and state-of-the-art
equipment to manufacture heat transfer,
offset litho, and rotogravure labels to
meet customers’ needs.

Page 8

LithofluteTM
LithofluteTM packaging makes a
great first, and instant, impression
on retail customers. It’s combina-
tion of brilliant graphics and
rugged performance open up
a new realm of high-impact
packaging possibilities.

2003 Revenue

1,656mi
$
llion

Folding Carton and Boxboard
Mill Operations


Folding cartons shipped:

514
Coated recycled boxboard produced:

577
Folding Cartons
Smurfit-Stone’s folding cartons are used
to package an array of products from
Bag Packaging
some of the world’s most recognized
Operations
consumer products companies. Our
network of boxboard mills, folding carton
plants, and structural and graphic design Multiwall bags shipped:
experts allows Smurfit-Stone to create (Million bags)
packaging solutions for customers large
1,156
and small across North America.

Kraft paper produced:
(Thousand tons)

293

Bag Packaging
As the largest bag packaging
producer, Smurfit-Stone can
provide customers with exactly
the right solution, whether it’s
a multiwall, consumer, specialty,
flexible bag, or a flexible
intermediate bulk container.

Page 9

Consumer Packaging continued
Flexible Packaging
From retail markets to the
industrial sector, our flexible
packaging solutions are
changing the way products
are protected, shipped,
displayed, and purchased.
Unique structural designs,
creative printing, and
inventive package openings
and closures add value and
Facilities consumer appeal to our
customers’ products.
18 folding carton plants
4 clay-coated recycled boxboard mills
11 bag plants
1 technical and graphics center
1 bag packaging equipment plant
1 flexible intermediate bulk container (FIBC) plant
3 lamination plants
2 heat-transfer label plants
2 litho label plants
1 prepress operation
5 flexible packaging plants
1 contract packaging facility
1 PaperCan plant TM

Product Lines

largestproducer
Folding cartons
Bag packaging
Industry’s
Flexible packaging
and marketer of bag packaging products,
Labels
including multiwall, consumer
Laminations
Lithoflute TM

and specialty bags.
Clay-coated recycled boxboard

Capabilities
Folding cartons: converting capabilities include gluing, tray forming, windowing,
waxing, and laminating
Labels: foil, printed paper and heat-transfer labels, including high-speed
heat-transfer labels for plastic containers
Laminations: film, foil, and paper
Flexible packaging: polyethylene bags, pouches, and sheeting and tubing
Lithoflute : combines corrugated strength with folding carton graphics printability
TM

Heat-Transfer Labels
Bag packaging: multiwall, consumer, and specialty bags
Smurfit-Stone’s DI-NA-CALTM
system consists of concept
design, developmental artwork,
electronic art capability, and
state-of-the-art manufacturing
that results in eye-popping
heat transfer labels for our
customers.

Page 10


Recycling Operations
4%
Smurfit-Stone’s recycling operations provide a secure source of recovered fiber for the
company’s mills and have a broad product line that includes all grades of recovered paper.
Smurfit-Stone Waste Reduction Services (SWRS) provides single-source waste management
and recycling solutions to businesses.

2003 Revenue
Facilities
23 collection centers

298mi
$
13 sales offices in North America
1 sales office in Shanghai, China

llion
Product Lines
Old corrugated containers
Old newspapers
Mixed papers
Aluminum cans, glass, and plastic

Recycling Operations

Recycled Volume Processed

Recovered fiber:

6,549
Non-fiber:

78
Total:

6,627
Open market shipments:

3,435

Page 11

Recovered Fiber
Smurfit-Stone is the world’s largest collector and marketer of
recovered fiber. Our recycling operations provide a dependable
source of recovered fiber for our mill system.

Litho Labels
TM
Lithoflute

Heat-Transfer Labels

Folding Cartons

Flexible Packaging

Page 12

strength and flexibility
Design creativity, manufacturing expertise, and geographic reach give Smurfit-Stone
the strength and flexibility to deliver packaging solutions for the products consumers
bring home every day.

Corrugated Containers

Bag Packaging


2003 marked a significant milestone for Smurfit-Stone. It was the first year
Smurfit-Stone operated as a 100 percent publicly owned organization, the
result of Jefferson Smurfit Group (JS Group) distributing its 29 percent stake
as part of JS Group’s privatization. We also completed the transaction with
JS Group that exchanged our European operations for JS Group’s remaining
share of Smurfit-MBI, providing Smurfit-Stone with expanded reach and
focus on the North American packaging market.

We remain committed to our strategies: to
manufacture according to market demand, to constantly Location:
evaluate our customers’ needs and align our products Fernandina Beach, FL
and services to meet those requirements, and to
Facility:
outperform the competition. That commitment has
Containerboard mill
enabled Smurfit-Stone to address today’s marketplace
Product Solutions:
realities and maintain our leadership position in the
paperboard and paper-based packaging industry. Smurfit-Stone’s Fernandina Beach, FL, mill is an
ISO 9002-certified facility that produces kraft
Despite an economic climate the past four years
linerboard. Implementing the operating principles
that created significant challenges for growth, Smurfit-
and continuous improvement processes that are
Stone is well positioned for success in 2004. An increase
part of Smurfit-Stone’s CustomerONE SM operating
in demand, the early results of our cost-cutting initia-
philosophy, employees such as William Terry have
tives and asset rationalization, and our willingness
helped the 67-year-old mill make improvements
and ability to approach the marketplace in new and
in safety, equipment reliability, planning and
creative ways make us optimistic about 2004.
scheduling, and customer satisfaction that have
A volatile business environment influenced
led to improved operating efficiencies and
largely by two key factors — the move to offshore
manufacturing processes.
manufacturing and the increasing dominance of the
retail landscape by mega-stores — has presented chal-
lenges. More significantly, that business environment
has opened opportunities for which Smurfit-Stone is
ideally suited, and, in fact, for which the company’s
strategy has been developed.
During the last five years, we created
a system that is the right size for our
market, with capabilities appropriate to
the North American customer base.

Page 14


Key elements of our strength and flexibility are rooted in A network of facilities that make a wide range of
our manufacturing capabilities, which include: consumer packaging products including folding
21 containerboard mills producing high-quality kraft cartons, bag packaging, flexible packaging, paper-
linerboard, white top linerboard, corrugating medium, and heat-transfer labels, and laminations.
kraft paper, solid bleached sulfate, and market pulp. Contract packaging operations that provide a range of
The industry’s broadest range of paperboard unique outsourcing services.
substrates, a distinct competitive advantage. As the world’s largest collector and marketer of recycled
More than 150 corrugated container operations fiber, a dependable source of recycled fiber to our mills.
that produce corrugated packaging ranging from Geographic reach, with strategic locations near raw
common shipping containers to high-impact material sources and customer facilities.
graphics point-of-purchase displays.
Leading-edge structural and graphic design capabilities.

Page 15


Mill System Efficiencies
We have continued to demonstrate the financial
strength and flexibility that allow us to pursue opportunities Our containerboard and corrugated container manufac-
that fit within our strategic objectives. In addition, our turing system is large and complex. We constantly evaluate
operational management experience makes it possible and make necessary adjustments to ensure our system
for us to respond and adapt to a changing market meets today’s market needs. In November 2003, we
environment. closed the Thunder Bay, ON, corrugating medium mill
Smurfit-Stone is taking the necessary steps to and idled one of two paper machines at our Jacksonville,
become a value-added packaging solutions company. FL, containerboard mill. We reconfigured Jacksonville’s
In 2003, guided by our CustomerONE operating linerboard machine to shift medium production from the
SM

philosophy, we focused on improving manufacturing idled machine. The linerboard-turned-medium machine
performance, sales growth, and cost reductions. We is more efficient, runs more smoothly and manufactures
expect 2004 to be a year in which our strengths and a higher quality medium.
flexibility lead to continued growth.

Page 16


The net result was that we reduced our online The shutdowns reduce our reliance on old corru-
recycled containerboard capacity by about 515,000 annual gated containers (OCC), a key raw material, to about a
tons. These steps reduce our fixed costs and will require third of our system needs, compared to about 40 percent
less downtime on a systemwide basis, increasing our in 1998. OCC prices have become more volatile as a
overall mill operating rates in 2004. result of increased demand in Asia and Europe.
The combination of asset rationalizations and Despite numerous containerboard mill machine
seasonal downtime resulted in more than a 2.5 percent reconfigurations that impact which mills serve our
operating rate increase, from less than 86 percent to container plants, surveys show that overall quality and
better than 88 percent, in the fourth quarter 2003 versus customer service have improved from just two years ago.
the previous quarter. In the future, we anticipate sustain- This is even more impressive in light of the numerous
able operating rates in the 92-95 percent range in a good trial runs our mills undertake as part of our overall
market environment. machine efficiency process.
In 2003, we completed the integration of the
Stevenson, AL, medium mill into the Smurfit-Stone
system, and the mill has become a strong contributor.
Location:
Its geographic location provides two key advantages:
Piscataway, NJ
proximity to its Southeastern forest raw material base,
Facility: and strategic location in the supply chain. As part of its
Folding carton integration into the Smurfit-Stone system, Stevenson
has shifted its focus from exports to a domestic customer
Product Solutions:
base, primarily our own corrugated container plants.
Part of Smurfit-Stone’s strategy to deliver total
From coated white top linerboard used in high-
packaging solutions is to make acquisitions that
graphics printing applications to brown kraft linerboard
complement our existing capabilities. In 2003, we
used to produce heavy duty shipping containers, no
acquired Arko Paper Products in New Jersey, where
competitor can match Smurfit-Stone’s extensive line of
Phil Fantozzi is one of many employees who serves
board substrates. In addition to providing containerboard
customers in the cosmetics, personal care, and
to our own corrugated container operations, we are the
health care sectors of consumer packaging.
largest supplier to independent box manufacturers.
Our containerboard operations have become
more adept than ever at finding ways to improve overall
machine efficiency and reduce costs. Despite inflationary
pressures, Smurfit-Stone has been able to maintain close
to flat levels of manufacturing costs during the past five
years, excluding energy costs.

Page 17


Fiber their packaging. This includes delivering products with
Through cost reduction efforts and an increase in the more high-end graphics on retail packaging, supply chain
value-added portion of the business, our recycled fiber process improvements, and identifying new and creative
operations achieved nearly an 18 percent increase in packaging solutions. Smurfit-Stone’s corrugated container
profits in 2003, despite a soft market environment. business has been designed to meet these kinds of chal-
Continued low overall operating rates in the container- lenges and has anticipated and aggressively responded
board industry tended to depress domestic demand for to today’s key marketplace issues.
recycled fiber, resulting in lower shipment volumes and Smurfit-Stone added to its North American
flat pricing for the business. The recycling operations geographic reach in 2003 by acquiring the remaining
offset the decline in demand for brokered recycled fiber 50 percent of Smurfit-MBI. We now have more than
by increasing the volume of fiber at the company’s 150 plants strategically located throughout the U.S.,
processing plants where value-added sorting and Canada, and Mexico.
cleaning command higher margins.
The profits in recycled fiber partly offset the impact
of higher virgin fiber costs in 2003. For the year, virgin
Location:
fiber costs were $50 million higher than 2002 as persistent
Etobicoke, Ontario
wet weather in the Southeast hampered harvests through
Facility:
much of the year. Drier conditions prevailed at the end
Corrugated container
of the year, and inventories are being replenished. Virgin
fiber costs will continue to be high in the first quarter of
Product Solutions:
2004, but are expected to decline as the year progresses.
Smurfit-Stone acquired the remaining 50 percent
of Smurfit-MBI, a leading Canadian corrugated
The Retailer Influence container manufacturer, in 2003. The acquisition
The growing influence of the mega-retailer on the allows Smurfit-Stone to sharpen its focus on the
packaging industry has created challenges, as well as North American packaging market. Giuseppi
opportunities, for Smurfit-Stone. Retailers are looking to Chiarelli (left) and Jeff Abbott work at the Etobicoke,
drive down costs, and the effect on consumer products ON, facility, which adds incremental graphics
capabilities to our corrugated container system.
and packaging companies is dramatic. The retailer forces
the consumer product producer to reduce material and
add value and point-of-purchase appeal to the packaging.
Smurfit-Stone is best positioned to take advantage
of these significant opportunities, even as consumer
products companies — our customers — consol-
idate. Our capabilities in value-added packaging
products and services, unparalleled geographic
reach, supply chain management, and the total
packaging solutions approach clearly establish
Smurfit-Stone as the industry’s premier supplier.
All customers are looking for better value in

Page 18


Our corrugated container business put several By creating these teams in areas where we have multiple
initiatives into action in 2003, and these will carry over operations, we can leverage operational and human
into 2004 and beyond. These initiatives are designed to resource synergies, improve sales effectiveness, and
generate profitable revenue growth in an industry that deliver manufacturing efficiencies. This concept was put
has lost a full percentage point of annual growth to into action in several large metropolitan areas in 2003.
offshore manufacturing the past five years. Cost reduction is another key initiative underway in
One of the steps taken in 2003 was to expand the our corrugated container business. Specific emphasis has
“area”concept within our corrugated container operations. been placed on waste reduction, fiber optimization, freight
In order to better capture synergies in our corrugated and transportation costs, and warehousing. In addition,
container business, and to provide additional value to our corrugated container business continues to take the
customers, we continued the process of restructuring difficult but necessary steps in rightsizing the workforce
our operations into single area-management teams. to efficiently and effectively support our customer base.

Page 19


A third area of focus in our corrugated container analyze and modify our customers’ business processes
business underscores the increasing importance our and help them improve supply chain management.
SM
customers place on value-added products and services. We put our CustomerONE operating philosophy
Providing a total packaging solution, rather than just into action, and have revitalized the training and devel-
the package, makes Smurfit-Stone a partner with opment of sales and marketing talent. This includes a
our customers. comprehensive sales training plan for all sales managers
One example of how Smurfit-Stone brings added and representatives that focuses on value-added selling.
value to our products is in our display group, which While most of our sales and marketing efforts are
creates point-of-purchase (POP) displays for some of the focused on exceeding industry growth rates in North
most recognizable consumer products companies. We do America, we are implementing a foothold strategy to
more than simply manufacture POP displays. We also grow with customers who are manufacturing in Asia.
The capital intensive nature of our business makes it

Page 20


Consumer Packaging Operations
impractical to invest in paperboard mills in still-developing
Asian economies. Just as the retail market evolution has affected our
We have developed a joint venture presence in corrugated container business, it has redefined the way
China that includes a highly successful packaging solu- Smurfit-Stone’s consumer packaging operations approach
tions center in Hong Kong and four packaging plants the market. Like our container operations, our two largest
on the mainland. Like our centers in the U.S., the Hong consumer packaging businesses — folding cartons and
Kong packaging solutions center provides design, graphics multiwall bags — contended with pricing pressure in 2003.
and marketing services to customers who manufacture in As the packaging landscape changes, we continue
Asia. The center has already fueled excellent growth for the to reposition ourselves to take full advantage of our
packaging plants, and, in the future, we plan to increas- strength and flexibility. Examples of this willingness and
ingly utilize our own containerboard in these facilities. ability to adapt to change in our consumer packaging
operations include:

Forming a sales team dedicated to identifying and
completing cross-selling opportunities to benefit all
businesses within our consumer packaging business.
Location:
Undertaking a process improvement initiative to help
West Point, VA
our operations reduce costs.
Facility:
Increasing process automation, as appropriate, to
Containerboard mill
reduce highly repetitive motion tasks and improve
Product Solutions: overall operating costs.
Our West Point, VA, mill produces white top
Permanently shutting down one of two paper
linerboard and coated white top linerboard that
machines at our Philadelphia boxboard mill, which
is converted into corrugated products for a variety
should have a favorable impact on boxboard mill
of industries. White top linerboard creates a great
operating efficiency in 2004.
opportunity for consumer products companies
to create high-impact graphics on their packaging.
Our decision to reduce coated boxboard capacity
Here, JinLing Xue conducts a grease-resistance
was made in part as a response to market conditions.
test to ensure that our West Point board meets
It demonstrates our ability to shift our capabilities to
exacting specifications for customers such as
meet the needs of packaging customers, who are seeking
Pizza Hut, who rely on Smurfit-Stone to
higher value packaging regardless of the substrate. We
manufacture corrugated pizza boxes that build
have the graphics, design, and service solutions our
their brand as well as protect their product.
customers need.

Page 21


As an example, to extend our Valley Forge, PA, our Uni-FI system allows the company to better manage
plant’s capabilities in the specialty packaging category its changing environment in terms of acquisitions or
of the folding carton business, we transferred machinery divestitures of non-core assets.
from one of our closed facilities. This enhanced our bakery
Looking Ahead
packaging line by including windowing and improved
graphics capabilities. We now offer our bakery customers When Smurfit-Stone was formed, we had already seen
attractive packaging with visual product presentation. the signs of swift change that have since dramatically
As a result, we were able to win new business from a affected the paperboard and packaging landscape.
convenience food customer who was looking for higher Our operating principles that were cornerstones in
value packaging. Key to our success in this instance 1998 remain true today. Despite an unprecedented four
was delivering the customer the right substrate for the consecutive years of negative growth in the corrugated
package, rather than trying to fit a particular substrate container industry, Smurfit-Stone is poised for success
into an existing packaging equation. in 2004 and beyond.
Smurfit-Stone has acquired operations and
redeployed assets to serve customers who require
Location:
value-added packaging products. We acquired Arko
Eastman, GA
Paper Products in New Jersey, a folding carton business
Facility:
that focuses on markets that require high-impact
Bag packaging
graphics, such as cosmetics and personal care products.
Arko’s strengths include hot foil stamping, silk screen
Product Solutions:
applications for folding cartons, and gloss and matte
Tal Fountain works at our Eastman, GA, plant, which
ultraviolet coatings.
recently installed high-speed bag manufacturing
equipment that produces shipping sacks in one step,
Financial Management versus the conventional three-step process. This has
Smurfit-Stone has a well-earned reputation for sound led to higher volume opportunities with less waste
financial management. Despite a difficult climate in 2003, and decreased labor costs, providing Smurfit-Stone
we reduced our debt $183 million to $4,807 million while with increased ability to service customers in the
extremely competitive building products, chemical,
contributing an additional $171 million to our employee
cement, and sand/silica markets.
pension plans. Debt reduction remains the primary use of
free cash flow. While energy costs increased $69 million
due to higher prices, hedging strategies mitigat-
ed our cost exposure and helped avoid greater
expense.
In 2003, we embarked on a program to
upgrade the financial reporting systems across
the enterprise. Project Uni-FI replaces numerous
legacy financial reporting systems in favor of a
single, standardized one, utilizing SAP software.
In addition to improved reporting capabilities,

Page 22


The rationalization and cost cutting initiatives U.S. producers increased, the first time in four years that
announced in October 2003 will continue throughout we have seen sustained growth.
2004. The primary driver for all rationalization activity Smurfit-Stone stands at the forefront of paper-
is to improve cost efficiency while retaining the business board and packaging manufacturing, innovation, and
of our valued customers. We believe that our initiatives quality. We have built our company to take advantage of
will bring operating rates to more sustainable levels and the opportunities presented in today’s marketplace. Our
reduce our business risk going forward. strategy has carried us through one of the most difficult
As we entered 2004, the U.S. economic climate was times our industry has seen. We recognize that globaliza-
looking somewhat brighter. Real gross domestic product tion, consolidation among consumer products companies,
was up in the second half of 2003, and the manufacturing and offshore manufacturing are here to stay, and we are
sector was showing signs of a sustainable recovery in the prepared to meet the challenges they present.
fourth quarter. Shipments of corrugated containers by

Page 23

Board of Directors and Corporate and Division Officers

Board Members Corporate Officers
Patrick J. Moore James J. O’Connor Patrick J. Moore Cynthia S. Bowers Craig A. Hunt Thomas A. Pagano
Chairman, President and CEO Retired Chairman, President Vice President Vice President Vice President
Smurfit-Stone Container Chairman and CEO and Chief Executive Officer Compensation and Benefits Secretary Planning
Corporation UNICOM and General Counsel
Charles A. Hinrichs James E. Burdiss Lorne E. Parnell
Commonwealth Edison
James R. Boris Vice President Vice President Paul K. Kaufmann Vice President
Retired Jerry K. Pearlman and Chief Financial Officer and Chief Information Officer Vice President Pacific Operations
Chairman and CEO Retired and Corporate Controller
Curtis A. Barton James P. Davis John M. Riconosciuto
EVEREN Securities, Inc. Chairman and CEO Vice President Vice President Richard P. Marra Vice President
Zenith Electronics Corporation
Alan E. Goldberg Environmental Affairs and General Manager Assistant Treasurer and General Manager
Co-Managing Partner Thomas A. Reynolds, III Corrugated Container Division Consumer Packaging Division
Jeffrey S. Beyersdorfer Timothy J. P. McKenna
Lindsay, Goldberg & Partner Vice President and Treasurer James D. Duncan Vice President David C. Stevens
Bessemer Winston & Strawn Vice President Investor Relations Vice President
Mathew J. Blanchard
William T. Lynch, Jr. William D. Smithburg Sales and Marketing and Communications and General Manager
Vice President
Retired Retired Recycling Division
and General Manager Daniel J. Garand Ronald J. Megna
President and CEO Chairman, President and CEO Board Sales Division Vice President Assistant Secretary William N. Wandmacher
Leo Burnett Company The Quaker Oats Company Supply Chain Operations Vice President
Mark R. O’Bryan
and General Manager
Ronald D. Hackney Vice President
Containerboard Mill
Vice President Procurement
and Forest Resources Division
Chairman Emeritus Human Resources

Michael W.J. Smurfit

Corrugated Container Division Consumer Packaging Division Containerboard Mill Division
Daniel J. Burger Stephen E. Jevyak Edward A. Byczynski Curtiss M. Komen Alain L.M. Boivin Mack C. Jackson
Vice President Vice President Vice President Vice President Vice President Vice President
and Regional Manager and Regional Manager and Area Manager CPD Sales Mill Operations Mill Operations
Multiwall/Specialty Central Region
John P. Crimmin John L. Knudsen George Q. Langstaff Roger M. Jansen
Vice President Vice President Jeffrey Deitch Vice President Larry L. Burton Vice President
and Regional Manager and Regional Manager Vice President Operations Improvement Vice President SBS Sales
Technology Sales and Marketing
LeRoy R. Crocker Rodney A. Myers James B. Laurence Eve K. Rae
Flexible Packaging Group
Vice President Vice President Vice President of Sales John E. Davis Vice President
and Regional Manager and Regional Manager L. David Fielder Multiwall/Specialty Vice President Pulp Sales
Vice President Forest Resources
Richard E. Flamm Robert D. Nelson Donald W. McCalla W. G. Stuart
Paper Can
Vice President Vice President Vice President Alain Dubuc Vice President
and Regional Manager and Regional Manager Michael L. Hempstead CPD Marketing Vice President Mill Operations
Vice President Mill Operations Southern Region
Stephen P. Folan James S. Nolan Gary D. McDaniel
and Regional Manager Northern Region
Vice President Vice President Vice President
Folding Cartons and Labels
Sales and Marketing Corporate Sales and General Manager
Nathan S. Holmes Flexible Packaging Group
James A. Henderson Donald A. Petri
Vice President Recycling Division
Vice President Vice President John J. Moran
and General Manager
and Regional Manager and Regional Manager Vice President
Boxboard Mills and and General Manager Michael R. Oswald Tom E. Squires
Charles H. Holland Stephen J. Strang Lamination Multiwall Bags Vice President Vice President
Vice President Vice President
Gary R. Huston Operations South Region
and Regional Manager and General Manager David J. Pietrowicz
Vice President
Smurfit-MBI Vice President Mark C. Brantley James W. Pope
Lane W. Hunter Boxboard Sales and General Manager Vice President Vice President
Vice President Jerry D. Suiter
Steven L. Kelchen Folding Cartons and Labels North Central Region International/West Sales
and Regional Manager Vice President
Vice President
and Director of Manufacturing Michael L. Weisheit Steve A. Miller Edward V. Tucciarone
and Regional Manager Vice President Vice President Vice President
Folding Cartons and Labels and Regional Manager Western Region Eastern Sales
Fred W. Klatt Folding Cartons and Labels
Board Sales — Containerboard Mill Division Vice President
and Area Manager
Other
Michael L. Butler Donald C. Wyatt Multiwall/Specialty
Vice President Vice President
North American Kraft Sales Joseph V. LeBlanc William C. Wanner
Containerboard Sales and National Accounts Vice President Vice President
Research and Development Supply/Demand Operations
Andrew J. Woodroffe
Vice President
Product Management
and Technical Services

Page 24

Stockholder Information Smurfit-Stone Container Corporation

Stockholders’ Annual Meeting
May 12, 2004 at 10 a.m.
The Charles F. Knight Executive Education Center
Washington University in St. Louis
One Brookings Drive
St. Louis, MO 63130

Registrar and Transfer Agent
Mellon Investor Services LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
Telephone: (800) 676-0896
www.mellon-investor.com

Common Stock
Smurfit-Stone Container Corporation Common Stock is traded
on The Nasdaq Stock 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
8182 Maryland Avenue
St. Louis, MO 63105
Telephone: (314) 746-1223
Fax: (314) 746-1347
www.smurfit-stone.com

Timothy McKenna
Vice President, Investor Relations and Communications
St. Louis, MO: (314) 746-1254
Chicago, IL: (312) 580-4637

Corporate Headquarters
150 North Michigan Avenue
Chicago, IL 60601-7568
Telephone: (312) 346-6600

150 North Michigan Avenue
Chicago, IL 60601-7568
(312) 346-6600
www.smurfit-stone.com

S M U R F I T- STO N E CO N TA I N E R CO R P O R AT I O N 2003 ANNUAL REPORT

Smurfit-Stone 2003 Annual Report Highlights Financials and Safety Performance

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