1. 2003 Annual Report Smurfit-Stone Container Corporation strength andflexibility

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FinancialHighlights 2003 (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)2002 2001SUMMARY OF OPERATIONS $ 7,722 Net sales $ 7,483$ 7,69147 Income (loss) from operations 462583(341) Interest expense, net(355)(455) Income (loss) from continuing operations before (198)cumulative effect of accounting change5953 (208) Net income (loss) available to common stockholders 5466 BASIC EARNINGS PER SHARE Income (loss) from continuing operations before $ (.85)cumulative effect of accounting change $.20 $.17 (.85) Net income available to common stockholders.22.27 246 Weighted average shares outstanding (in millions) 244244 DILUTED EARNINGS PER SHARE Income (loss) from continuing operations before $ (.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) 246245 OTHER FINANCIAL DATA $ 162 Net cash provided by operating activities $503 $597 238 Capital investments and acquisitions 570232 282 Net working capital590465 4,974 Property, plant, equipment and timberland, net 5,1825,16610,102 Total assets10,805 10,652 4,807 Long-term debt 4,9904,943 2,270 Stockholders equity 2,3202,48535,400 Number of employees 38,600 38,500 Contents CustomerONEIndustry Safety LeaderSMSmurfit-Stones CustomerONESMSafety continues to be Smurfit-Stones top operating priority, Page 1operating philosophy repre-and is one of the core values represented in our CustomerONESM Letter to Stockholderssents a commitment fromphilosophy. Our objective is to achieve an accident-free and Page 6 Smurfit-Stone At-a-GlanceSmurfit-Stone and ourinjury-free workplace, and we subscribe to the belief that safetyemployees to one company,is everyones responsibility. Page 12 Strength and Flexibility one culture, one set of valuesSmurfit-Stone led the industry in safety performance for theand 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 Officersemployees strive to create and With SAFE, we have developed a model for building a workplace Page 25live a culture that embraces where continuous improvement is the normal operating Smurfit-Stone Form 10-Kquality, safety, customer satis- procedure, supported by comprehensive employee training Inside Back Coverfaction, value creation, ethical and the commitment to working safely with every job we do. Stockholder Informationbehavior, productivity, andenvironmental responsibility. 3. Letter to StockholdersBuilding on creating solutions forour 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 4. LettertoStockholders 2003 ResultsAmong our strategies, we have produced toorder, rather than to manufacturing capacity. We have Excluding the impact of restructuring activities, litigationeliminated costs and conserved capital, reduced debt andcharges, and foreign currency losses, the biggest factorstaken advantage of opportunities to lower costs through in the past years operating performance were continuedrefinancing. We have made strategic acquisitions to pricing and cost pressures. Overall trends in domesticdevelop the product capabilities and enter new marketsmanufacturing depressed demand for packaging.needed in a competitive environment. We continue to Although sales increased as a result of volume fromfocus 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 toAll these efforts have represented an ambitious the prior year.redirection of energies. In 2003, the companys fifth fullIn our largest segment, containerboard andyear, our strength and flexibility allowed us to pursue corrugated containers, board prices declined by aboutour market-driven strategy, recognize very tangible four percent compared to the prior year, while prices forbenefits, and advance our competitive position despitecorrugated containers declined by about one percent. Ina difficult operating climate.consumer packaging, both of our major businesses folding cartons and multiwall bags contended withWe continued to streamline our operations,pricing pressure in a low growth environment. Foldingmaximize efficiency, and improve the quality of ourcarton pricing declined about 2.4 percent from thepaperboard and packaging products.prior year. Additionally, boxboard mill downtime wasWe took action to overcome steadily inflating costs.an added cost as we resolved to control our inventory.We expanded the core capabilities required to serveIn our recovered fiber business, wastepaper prices werethe evolving needs of packaging customers in Northflat compared to the prior year, but cost cutting effortsAmerica, 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 amanufacturing and retailing the industries that net loss available to common stockholders of $208 million,define our market realities we began to change theor $.85 per diluted share, compared to net income availableway we organize our plants and go to market withto common stockholders of $54 million, or $.22 per dilutedpackaging solutions for our customers.share, in 2002. Income from operations was $47 million,compared to $462 million in the prior year. Sales for theWe did all of this while continuing to focus onfull 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 restructuringphilosophy and earning recognition for the thirdcharge of $115 million, or $.29 per diluted share, toconsecutive year as our industrys safest company.account for facility rationalizations and cost reductioninitiatives. In addition, the company recorded a pretaxcharge of $50 million, or $.13 per diluted share, fornon-cash foreign currency translation losses related tothe strengthening of the Canadian dollar. We tookpretax charges of $121 million, or $.30 per diluted share, Page 2 5. Smurfit-Stone Container Corporationto account for the settlement of the antitrust class action and refinancing activities lowered 2003 interest expensecases against the company and its subsidiaries andby $14 million to $341 million for the full year. In theother litigation matters, including unresolved lawsuits difficult earnings environment, we held capital spendingbrought on behalf of parties who have opted out of theto $212 million for the year, slightly higher than theclass actions.$207 million in 2002. The facility rationalization and cost cuttingChanging Market Trendsinitiatives, 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 trendsplan to streamline overall operations. In total, this have had a dramatic impact on our business. The firstplan will reduce our workforce by 1,400 and produce trend the shift of large parts of the U.S. manufacturingannual savings of $140 million once fully implemented base overseas has been largely responsible for the flatin 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, creatingHigher natural gas prices were partially mitigated by anboth challenges and opportunities.active hedging program implemented by the company.To align our system with market demand, wefurther rationalized our manufacturing base in the fourthquarter of 2003. We closed our corrugating medium mill We are investing in innovative technologyin Thunder Bay, ON; idled one of two paper machinesat our Jacksonville, FL, containerboard mill; closed one to grow our position as the leadingof two paper machines at our coated recycled boxboard packaging company in North America.mill in Philadelphia, PA; and closed three convertingoperations. In January 2004, we announced plans todiscontinue operations at four corrugated containerEarnings were also negatively affected by pension andfacilities. As part of the process, we expect to reduceemployee benefit costs, which increased by approximatelyemployment, 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, downover an 18-month period. As with all of Smurfit-Stones$183 million from the end of the prior year. In the firstrationalizations, these are difficult yet necessary stepsquarter 2003, Smurfit-Stone completed transactionsto ensure the long-term growth and success of ourwith Jefferson Smurfit Group (JS Group), formerlycompany. We expect to realize the annualized savings ofour largest stockholder, that exchanged our European$140 million associated with these steps by early 2005.operations for $189 million in cash and JS Groups shareof Smurfit-MBI, a Canadian corrugated containerproducer. Proceeds from this transaction accounted forthe majority of debt reduction in 2003. Reduced debt Page 3 6. LettertoStockholders While the shift of manufacturing overseas has hadWe acquired Arko Paper Products, an importanta negative impact on packaging demand, the changes inaddition to our consumer packaging business. Thisretailing may present genuine opportunities. As theNew Jersey-based producer of high-end folding cartonsmega-retailers increase their dominance of the market- enhances our ability to serve the cosmetics, personal careplace, our customers, particularly producers of consumer and health care sectors in consumer packaging. Much ofnon durables, have continued to consolidate as theythis business is concentrated in the Northeast, and theseek greater geographic presence and economies of scale. addition of Arko folding carton capabilities complementsIn the current retail environment, our customers require existing investments in package graphics capabilities.more value and creativity from suppliers while facingOne of the most significant achievements wasconstant demands to hold down costs and adapt to the the full integration of the Stevenson, AL, mill, anretailers needs. With competition fierce for retail aisle 830,000-ton facility acknowledged as one of the worldsand shelf space, most customers place greater reliance most efficient producers of high-quality corrugatingon 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 Stones objective to produce the widest variety of high quality containerboard substrates. As a result of the our sales, marketing, and production effortsefficient 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 ourcustomers must often customize their products and products and capabilities. In our corrugated containerpackaging for individual retail chains. business, we are combining plants in major metropolitanSmurfit-Stone, with its product diversity and regions under a single management. In addition tostrong 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 unifiedto our capabilities through acquisition. The exchange marketing plan for customers in a single region andtransactions with JS Group resulted in Smurfit-Stone manufacture products at plants best suited to produceowning all of Smurfit-MBI, further aligning our Canadian them. A unified sales force can focus on a particularpackaging business with our strategy to expand revenue strength for the group of plants, such as graphics orgrowth while increasing margins. Our packaging business heavy duty packaging, and then target that specialty toin 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 7. Smurfit-Stone Container CorporationStrength 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 companys white top andpaper-based packaging market. We introduced a number high-performance board. In consumer packaging, we areof 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 IdentificationOur 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 inventorychanging economic and retail environments, achieving management. Major consumer products companies andthe benefits of cost-cutting initiatives, and maximizing retailers are actively pursuing RFID implementationcash flow to reduce debt. and Smurfit-Stone already has developed unique Smurfit-Stone has made considerable progress RFID applications. Our research and developmentdespite 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 foodued evolution as a packaging solutions company, coupled packaging advancements.with our formidable range of packaging capabilities, pro-vides the most compelling strategy for Smurfit-Stones New Directorscontinued 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 chiefPatrick J. Moore executive officer of EVEREN Securities, Inc.; William T. Lynch, Jr., retired president and chief executive officerChairman, 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. 8. Smurfit-StoneAt-a-GlanceContainerboard and Corrugated Containers 75%Containerboard and corrugated containers represent Smurfit-Stones largest businesssegment. This segment supplies hundreds of national and international manufacturersand consumer products companies, as well as thousands of local and regional customers.Facilities21 containerboard mills in the U.S. and CanadaMore than 150 corrugated container operationsin the U.S., Canada, and MexicoProduct Lines DisplaysKraft linerboard Smurfit-Stone provides one-stop point-of-purchase display solutions including design, material sourcing, White top linerboard manufacturing, assembly, logistics, and brandingCoated white top linerboard that enable our customers to maximize sales, asSolid bleached sulfate (SBS) well as build and protect brand equity.Bleached paperboardMarket pulpKraft paperExport-specific linerboard, including SBS, white top,and high-performance gradesSemi-chemical and recycled medium, includinghigh-performance gradesCapabilitiesFull range of corrugated containersInnovative packaging solutionsHigh-quality graphics printingGraphic and structural design expertisePoint-of-purchase display consulting, design,and manufacturingFull line of specialty products and custom, die-cut boxesto display packaged merchandisePre-print and post-print flexography and label applicationsBulk packaging 2003 Revenue5,759mi $llion Page 6 9. MetaTM Corrugated Packaging System Smurfit-Stones 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.ContainerboardOperationsNorth American Production Units (Thousand tons) Containerboard: 7,185 Solid bleached sulfate (SBS) and bleached paperboard:290Market pulp: 497Corrugated Containers Kraft paper:Whether its a shipping container or a package 293requiring high-impact graphics, Smurfit-Stone deliverspackaging solutions for thousands of customers,from internationally recognized brands to localcompanies just around the corner. Corrugated ContainerOperations North American Shipments (Units) Billion square feet:84.3 Specialty PackagingThousand 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. 10. Smurfit-StoneAt-a-GlanceConsumer Packaging 21%The consumer packaging division offers a wide portfolio of primary packagingproducts and solutions that includes folding cartons, multiwall and specialtybags, flexible packaging, Lithoflute, labels and contract packaging. The various TMoperations within this business segment share many of the same customersand serve the same consumer product markets, with high-graphics printingas a core manufacturing competency. With cross-trained sales teamssupported by creative and technical resources, the consumer packagingdivision delivers added value to our customers. Leadingsuppl ierof folding cartons Largestproducer of clay-coated recycled boxboard Complete Packaging Whether its 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 11. LithofluteTM LithofluteTM packaging makes a great first, and instant, impression on retail customers. Its combina- tion of brilliant graphics and rugged performance open up a new realm of high-impact packaging possibilities. 2003 Revenue1,656mi $ llion Folding Carton and Boxboard Mill OperationsUnits (Thousand tons) Folding cartons shipped: 514 Coated recycled boxboard produced: 577 Folding Cartons Smurfit-Stones folding cartons are used to package an array of products from Bag Packaging some of the worlds most recognizedOperations consumer products companies. Our network of boxboard mills, folding carton plants, and structural and graphic designMultiwall 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) 293Bag Packaging As the largest bag packaging producer, Smurfit-Stone can provide customers with exactly the right solution, whether its a multiwall, consumer, specialty, flexible bag, or a flexible intermediate bulk container.Page 9 12. Consumer Packaging continuedFlexible PackagingFrom retail markets to theindustrial sector, our flexiblepackaging solutions arechanging the way productsare protected, shipped,displayed, and purchased.Unique structural designs,creative printing, andinventive package openingsand closures add value andFacilitiesconsumer appeal to ourcustomers 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 plantTMProduct Lineslargestproducer Folding cartons Bag packagingIndustrys Flexible packagingand marketer of bag packaging products, Labels including multiwall, consumer Laminations LithofluteTM and specialty bags. Clay-coated recycled boxboardCapabilities 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 printabilityTMHeat-Transfer Labels Bag packaging: multiwall, consumer, and specialty bags Smurfit-Stones 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 13. Smurfit-Stone At-a-GlanceRecycling Operations 4%Smurfit-Stones recycling operations provide a secure source of recovered fiber for thecompanys mills and have a broad product line that includes all grades of recovered paper.Smurfit-Stone Waste Reduction Services (SWRS) provides single-source waste managementand recycling solutions to businesses.2003 RevenueFacilities 23 collection centers 298mi $ 13 sales offices in North America 1 sales office in Shanghai, ChinallionProduct Lines Old corrugated containers Old newspapers Mixed papers Aluminum cans, glass, and plastic Recycling Operations Recycled Volume Processed Units (Thousand tons)Recovered fiber:6,549Non-fiber:78Total:6,627 Open market shipments:3,435 Page 11 Recovered FiberSmurfit-Stone is the worlds largest collector and marketer ofrecovered fiber. Our recycling operations provide a dependablesource of recovered fiber for our mill system. 14. Litho Labels TMLithofluteHeat-Transfer Labels Folding Cartons Flexible Packaging Page 12 15. 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 ContainersBag Packaging 16. Strength andFlexibility 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 Groups privatization. We also completed the transaction with JS Group that exchanged our European operations for JS Groups 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 productsFernandina Beach, FL and services to meet those requirements, and to Facility: outperform the competition. That commitment has Containerboard mill enabled Smurfit-Stone to address todays marketplace Product Solutions: realities and maintain our leadership position in the paperboard and paper-based packaging industry.Smurfit-Stones 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-Stones 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 companys 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 17. Smurfit-Stone Container Corporation 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 industrys broadest range of paperboardunique outsourcing services. substrates, a distinct competitive advantage.As the worlds largest collector and marketer of recycled More than 150 corrugated container operationsfiber, 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-impactmaterial sources and customer facilities. graphics point-of-purchase displays.Leading-edge structural and graphic design capabilities. Page 15 18. Strength andFlexibility 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 possibleand make necessary adjustments to ensure our system for us to respond and adapt to a changing market meets todays 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 Jacksonvilles In 2003, guided by our CustomerONE operating linerboard machine to shift medium production from theSM philosophy, we focused on improving manufacturingidled 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 anda higher quality medium. flexibility lead to continued growth. Page 16 19. Smurfit-Stone Container Corporation The net result was that we reduced our online The shutdowns reduce our reliance on old corru- recycled containerboard capacity by about 515,000 annualgated 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 itsFolding carton integration into the Smurfit-Stone system, Stevenson has shifted its focus from exports to a domestic customerProduct Solutions: base, primarily our own corrugated container plants.Part of Smurfit-Stones 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 linerboardcomplement our existing capabilities. In 2003, we used to produce heavy duty shipping containers, noacquired Arko Paper Products in New Jersey, where competitor can match Smurfit-Stones extensive line ofPhil Fantozzi is one of many employees who serves board substrates. In addition to providing containerboardcustomers in the cosmetics, personal care, and to our own corrugated container operations, we are thehealth 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 20. StrengthandFlexibilityFibertheir packaging. This includes delivering products with Through cost reduction efforts and an increase in themore high-end graphics on retail packaging, supply chain value-added portion of the business, our recycled fiberprocess improvements, and identifying new and creative operations achieved nearly an 18 percent increase in packaging solutions. Smurfit-Stones 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 todays key marketplace issues. recycled fiber, resulting in lower shipment volumes andSmurfit-Stone added to its North American flat pricing for the business. The recycling operationsgeographic 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 companys 150 plants strategically located throughout the U.S., processing plants where value-added sorting andCanada, 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, virginLocation: fiber costs were $50 million higher than 2002 as persistentEtobicoke, Ontario wet weather in the Southeast hampered harvests throughFacility: much of the year. Drier conditions prevailed at the endCorrugated container of the year, and inventories are being replenished. Virgin fiber costs will continue to be high in the first quarter ofProduct Solutions: 2004, but are expected to decline as the year progresses.Smurfit-Stone acquired the remaining 50 percentof Smurfit-MBI, a leading Canadian corrugated The Retailer Influence container manufacturer, in 2003. The acquisition The growing influence of the mega-retailer on theallows Smurfit-Stone to sharpen its focus on the packaging industry has created challenges, as well asNorth 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 productsON, facility, which adds incremental graphicscapabilities 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 industrys premier supplier. All customers are looking for better value in Page 18 21. Smurfit-Stone Container Corporation Our corrugated container business put severalBy 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 toresource 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 areaconcept 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 22. StrengthandFlexibilityA third area of focus in our corrugated containeranalyze 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 withopment 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 addedand 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 23. Smurfit-Stone Container Corporation 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-Stones 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 inAs the packaging landscape changes, we continue Asia. The center has already fueled excellent growth for theto 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 helpWest Point, VA our operations reduce costs.Facility: Increasing process automation, as appropriate, toContainerboard mill reduce highly repetitive motion tasks and improveProduct Solutions: overall operating costs.Our West Point, VA, mill produces white top Permanently shutting down one of two paperlinerboard and coated white top linerboard that machines at our Philadelphia boxboard mill, whichis converted into corrugated products for a variety should have a favorable impact on boxboard millof industries. White top linerboard creates a great operating efficiency in 2004.opportunity for consumer products companiesto create high-impact graphics on their packaging. Our decision to reduce coated boxboard capacityHere, 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 toexacting specifications for customers such as meet the needs of packaging customers, who are seekingPizza Hut, who rely on Smurfit-Stone to higher value packaging regardless of the substrate. Wemanufacture corrugated pizza boxes that build have the graphics, design, and service solutions ourtheir brand as well as protect their product. customers need.Page 21 24. Strength and FlexibilityAs an example, to extend our Valley Forge, PA,our Uni-FI system allows the company to better manage plants capabilities in the specialty packaging categoryits changing environment in terms of acquisitions or of the folding carton business, we transferred machinerydivestitures 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 customersWhen 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 aaffected the paperboard and packaging landscape. convenience food customer who was looking for higherOur operating principles that were cornerstones in value packaging. Key to our success in this instance1998 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. Arkos 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 Managementversus the conventional three-step process. This has Smurfit-Stone has a well-earned reputation for soundled 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 whilewith 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 25. Smurfit-Stone Container Corporation 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 activitySmurfit-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 andthe opportunities presented in todays 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 wastimes 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 theprepared to meet the challenges they present. fourth quarter. Shipments of corrugated containers byPage 23 26. Boardof Directors and Corporate andDivision OfficersBoard MembersCorporate OfficersPatrick J. MooreJames J. OConnorPatrick J. Moore Cynthia S. Bowers Craig A. HuntThomas A. PaganoChairman, President and CEO RetiredChairman, PresidentVice PresidentVice President Vice PresidentSmurfit-Stone Container Chairman and CEO and Chief Executive OfficerCompensation and Benefits SecretaryPlanningCorporation UNICOMand General Counsel Charles A. HinrichsJames E. Burdiss Lorne E. ParnellCommonwealth EdisonJames R. Boris Vice President Vice PresidentPaul K. Kaufmann Vice PresidentRetired Jerry K. Pearlmanand Chief Financial Officerand Chief Information Officer Vice President Pacific OperationsChairman and CEORetired and Corporate Controller Curtis A. Barton James P. Davis John M. RiconosciutoEVEREN Securities, Inc. Chairman and CEO Vice President Vice PresidentRichard P. Marra Vice PresidentZenith Electronics CorporationAlan E. Goldberg Environmental Affairsand General Manager Assistant Treasurerand General ManagerCo-Managing Partner Thomas A. Reynolds, III Corrugated Container DivisionConsumer Packaging Division Jeffrey S. BeyersdorferTimothy J. P. McKennaLindsay, Goldberg & PartnerVice President and Treasurer James D. Duncan Vice President David C. StevensBessemerWinston & StrawnVice PresidentInvestor Relations Vice President Mathew J. BlanchardWilliam T. Lynch, Jr. William D. SmithburgSales and Marketing and Communications and General Manager Vice PresidentRetired RetiredRecycling Division and General ManagerDaniel J. GarandRonald J. MegnaPresident and CEO Chairman, President and CEOBoard Sales Division Vice PresidentAssistant SecretaryWilliam N. WandmacherLeo Burnett Company The Quaker Oats Company Supply Chain OperationsVice PresidentMark R. OBryan and General ManagerRonald D. Hackney Vice President Containerboard MillVice PresidentProcurement and Forest Resources DivisionChairman Emeritus Human Resources Michael W.J. Smurfit Corrugated Container DivisionConsumer Packaging DivisionContainerboard Mill DivisionDaniel J. BurgerStephen E. JevyakEdward A. ByczynskiCurtiss M. KomenAlain L.M. BoivinMack C. JacksonVice PresidentVice President Vice President Vice PresidentVice President Vice Presidentand Regional Managerand Regional Manager and Area Manager CPD Sales Mill OperationsMill Operations Multiwall/SpecialtyCentral RegionJohn P. Crimmin John L. Knudsen George Q. LangstaffRoger M. JansenVice PresidentVice President Jeffrey Deitch Vice PresidentLarry L. BurtonVice Presidentand Regional Managerand Regional Manager Vice President Operations ImprovementVice President SBS Sales Technology Sales and MarketingLeRoy R. CrockerRodney A. Myers James B. LaurenceEve K. Rae Flexible Packaging GroupVice PresidentVice PresidentVice President of Sales John E. DavisVice Presidentand Regional Managerand Regional Manager L. David Fielder Multiwall/Specialty Vice President Pulp Sales Vice President Forest ResourcesRichard E. FlammRobert D. NelsonDonald W. McCallaW. G. Stuart Paper CanVice PresidentVice PresidentVice PresidentAlain DubucVice Presidentand Regional Managerand Regional Manager Michael L. Hempstead CPD Marketing Vice President Mill Operations Vice President Mill OperationsSouthern RegionStephen P. FolanJames S. NolanGary D. McDaniel and Regional Manager Northern RegionVice PresidentVice PresidentVice President Folding Cartons and LabelsSales and Marketing Corporate Sales and General Manager Nathan S. Holmes Flexible Packaging GroupJames A. HendersonDonald A. Petri Vice President Recycling DivisionVice PresidentVice PresidentJohn J. Moran and General Managerand Regional Managerand Regional ManagerVice President Boxboard Mills and and General Manager Michael R. OswaldTom E. SquiresCharles H. HollandStephen J. StrangLamination Multiwall BagsVice President Vice PresidentVice PresidentVice President Gary R. Huston Operations South Regionand Regional Managerand General Manager David J. Pietrowicz Vice PresidentSmurfit-MBI Vice PresidentMark C. Brantley James W. PopeLane W. Hunter Boxboard Sales and General Manager Vice President Vice PresidentVice PresidentJerry D. Suiter Steven L. KelchenFolding Cartons and LabelsNorth Central Region International/West Salesand Regional ManagerVice President Vice Presidentand Director of Manufacturing Michael L. Weisheit Steve A. MillerEdward V. Tucciarone and Regional Manager Vice PresidentVice President Vice President Folding Cartons and Labels and Regional ManagerWestern Region Eastern Sales Fred W. KlattFolding Cartons and LabelsBoard Sales Containerboard Mill Division Vice President and Area ManagerOtherMichael L. Butler Donald C. WyattMultiwall/SpecialtyVice PresidentVice PresidentNorth AmericanKraft Sales Joseph V. LeBlancWilliam C. WannerContainerboard Salesand National Accounts Vice President Vice PresidentResearch and Development Supply/Demand OperationsAndrew J. WoodroffeVice PresidentProduct Managementand Technical Services Page 24 27. Stockholder InformationSmurfit-Stone Container CorporationStockholders 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 63130Registrar and Transfer Agent Mellon Investor Services LLC Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07660 Telephone: (800) 676-0896 www.mellon-investor.comCommon Stock Smurfit-Stone Container Corporation Common Stock is traded on The Nasdaq Stock Market under the symbol: SSCCPreferred Stock Smurfit-Stones 7% Series A Cumulative Exchangeable Redeemable Convertible Preferred Stock is traded on Nasdaq under the symbol: SSCCPInvestor 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 Vice President, Investor Relations and Communications St. Louis, MO: (314) 746-1254 Chicago, IL: (312) 580-4637Corporate Headquarters Smurfit-Stone Container Corporation 150 North Michigan Avenue Chicago, IL 60601-7568 Telephone: (312) 346-6600 28. 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