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Smurfit-Stone Container (SSCC)Stock (Consumer Products Industry, Paper & Paper Products Industry)
 Smurfit-Stone Container (NASDAQ: SSCC) makes paperboard and paper-based packaging. The company has most of its mills and facilities in North America and does most of its business there as well; 97% of net sales in 2007 came from the U.S. and Canada [1]. 81% of the company's income comes from selling containerboard and corrugated containers (light and heavy cardboard boxes)[2]. The company is also one of the nation's leading recyclers, as it collected 7 million tons of recyclable materials in 2007.[3]. Consecutive years of net losses forced the company to change its business strategy. In 2006, Smurfit-Stone eliminated one of its two business segments, Consumer Packaging,[4] which represented almost 20% of net sales in 2005[5]; this has trimmed costs as the company now focuses on manufacturing for industrial clients. Adding to the company’s struggles is a slowing U.S. economy. Because Smurfit-Stone makes packaging for consumer goods that range from children's toys to automotive parts, when spending on these goods goes down SSCC's revenues suffer. In addition, increasing energy and commodities prices are also hiking up the cost of obtaining raw materials, such as wood fiber and reclaimed fiber, and making packaging products. Smurfit-Stone's operations are vertically integrated - the company’s own paper mills supply paper to be converted to corrugated containers - but nonetheless the rising costs of raw inputs are cutting the company with a double-edged sword. Raising prices on its products exposes the company to the risk of losing customers (North American per day shipments decreased 7.2% in 2007[6]), but keeping costs low trims its operating margins, causing it to earn less profit (operating margins decreased from 3.5% in 2006 to 3.0% in 2007[7]).
[edit] Company Overview[edit] Product SegmentSmurfit-Stone only has one business segment: [edit] Containerboard, Corrugated Containers, and Reclamation Segment (100% of sales, 100% of operating profit)The company uses a unique vertical integration strategy to manufacture its products. Smurfit-Stone owns 24 reclamation plants, 16 paper mills, and 124 container plants [2]. Reclamation plants primarily collect fiber resources, most of which are sent to the company’s own paper mills. These plants also collect aluminum and plastics for resale to the manufacturers. Paper mills, which are often located near reclamation plants, use the fiber resources to produce mainly containerboard, some of which is sold to third parties, but most of which is sent to container plants. The paper mills also produce market pulp, kraft paper, and solid bleached liner, all of which are sold to third parties. Kraft paper is used in products such as grocery bags, counter rolls, and refuse bags. Container plants turn the containerboard into corrugated containers[2]. 
[edit] Smurfit-Stone Changes Its Business StrategyConsecutive years of net losses forced the company to redefine its corporate strategy. In 2005, the company introduced a plan that would drive growth and improve financial performance; one of the main goals being to achieve $525 million in annual savings by the end of 2008. The company closed/consolidated converting facilities and paper mills, transferred production to other facilities, invested in new corrugators and finishing equipment, and increased productivity[9]. Yearly In-Depth[10]:
[edit] Sale of Consumer Packaging DivisionOn June 30th, 2006, the company announced that it was selling its Consumer Packaging division. The move was consistent with the company’s strategic plan to improve financial performance by cutting costs. The division was sold to the Texas Pacific Group for $1.04 billion in cash. However, after capital adjustments, transaction costs, and taxes, the company lost $3 million on the deal. In 2005, the segment had net sales of $1,584 million [11][12]. [edit] Financial MetricsIn 2007, Smurfit-Stone saw a fifth straight year of a net loss. Net sales rose 3.7% from $7.16 billion to $7.42 billion but net income dropped -62% from $(71 million) to $(115 million). [13]. However, the higher net loss can be attributed to the sale of its Brewton, Alabama mill in which the company lost $150 million[14].
 [edit] Trends and Forces[edit] Rising Commodities and Energy Prices are Forcing Smurfit-Stone to Make Difficult ChoicesHigh raw materials and energy costs have already forced the company to shut down several of its facilities, including containerboard operations in Snowflake, Arizona in 2008 and its Northside Jacksonville, California mill in 2007. [15][16] The ability to obtain raw materials, such as wood fiber and reclaimed fiber [17], at favorable prices is an essential part of the company’s success. Higher commodities prices translate into high production costs for the company, which forces the company to either raise the prices of its products by placing the burden on the consumer or to take the burden itself by absorbing the higher costs and decreasing profit margins. For example, the company faces higher recovered paper and wood fiber costs, the basic two materials in the company's corrugated containers business. Prices and demand for these materials have reached record highs[18][19] as demand is growing at 8-10% annually as of 2008[20]. The company also faces problems as the increasing price of energy adds to production costs. Production plants and its machines are powered by oil and natural gas,[21] both of which are seeing record high prices[22]. [edit] Environmental Regulations and LiabilitiesSmurfit-Stone is forced to adhere to many federal, state, provincial, and local environmental regulations. To make sure that these regulations aren’t violated, the company must implement policies and invest in more efficient technology to ensure they are emitting below pollution emission standards; this process can be very costly to the company. In addition, if the company fails to meet all environmental regulations, they face hefty fines. For example, the EPA’s Cluster Rule [23] for water discharges and its Maximum Achievable Control Technology (MACT)[24] standards have forced the company to spend $152 million in 2007 in order to keep up with standards[25]. In addition, the company spends about $9 million annually on other expenditures for environmental purposes [26]. It is also important to note that as one of the world’s biggest recyclers, the company has also been pushing to increase world wide recycling efforts and sustainability. In 2008, the company teamed up with the American Forest & Paper Association (AF&PA) to promote a nationwide goal of recovering 60% of recyclable paper by 2012 (the previous record was 56% set in 2007)[27]. If the company can increase recycling efforts and reuse old paper, it would translate into cost cuts as they would have to spend less money on raw materials. [edit] A Slowing Economy Means Less Demand for Smurfit-Stone’s ProductsSmurfit-Stone is dependent on the average consumer buying products with discretionary income. A slowing economy spells trouble for Smurfit-Stone. As consumers cut back on spending [28], it leads to a decrease in demand for the goods that use Smurfit-Stone's packaging. As the demand for these goods drops, Smurfit-Stone’s customers order less containerboard and corrugated containers because fewer items are being shipped out. Fewer sales leads to less revenue and more struggles for the company. For example, the electronics retailer Best Buy (BBY) lowered its 2008 forecast due to low sales in home theater systems, MP3 devices, and digital imaging devices[29]; all of these items require packaging to get from the manufacturer to each Best Buy outlet as well as individual packaging for each item. A decrease in demand for these goods decreases the amount of packaging needed. [edit] Can Smurfit-Stone Replace the Revenues of its Divested Assets?When Smurfit-Stone decided to focus its business in containerboards and corrugated containers and to divest from its consumer packaging, the company took a substantial risk in concluding that it would be able to replace the revenue generated by the division and eventually profit from the divestiture of this asset. Although the company is cutting operation costs and saving some money, most of the risk lies in the company’s ability to recapture the $1,584 million annual revenue[30] that its departed division contributed to the balance sheet. This means that the company will have to either produce and sell more of its current food products or spend money on R&D to create new and profitable food items. [edit] CompetitorsBecause the Paper & Paper Products Industry has few barriers to entry and many competitors, the company faces competition from both big companies with a diversified line of products and other smaller narrowly-focused companies. The company’s paper-based packaging competitors are: Packaging Corporation of America (PKG) - PCA is the sixth largest producer of containerboard and corrugated products in the United States. It's only business segment is focused on the production of containerboard and corrugated materials, which makes it a direct competitor of Smurfit-Stone[31]. Weyerhaeuser Company (WY) - Weyerhaeuser is a large integrated forest products company. Although 32% of the company's revenue [32] comes from its containerboard and packaging segment, the company also does business in timberlands, wood products, cellulose fibers, fine paper, and real estate [33]. Sonoco Products Company (SON) - Sonoco generates 78% of it's revenue from it's consumer packaging and tubes and cores/paper segments[34]. Although the company doesn't produce containerboard and corrugated packaging like Smurfit-Stone does, its paperboard prodcuts are used for packaging. Also, unlike Smurfit-Stone, Sonoco has a packaging services segment; this segment represented 13% of the Sonoco's revenue in 2007[35]. Temple-Inland (TIN) - more than 75% of Temple-Inland's revenue comes from the production of corrugated packaging products. And similar to Smurfit-Stone, Temple-Inland's productions are also vertical integration. The rest of the company's revenue comes from the production of building prodcuts such as lumber, particleboard, and fiberboard [36].
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