DBRS Confirms Smurfit-Stone Container Corporation at B (high)

DBRS has today confirmed the rating of Smurfit-Stone Container Corporation (Smurfit-Stone or the Company) at B (high) with a Stable trend. The Company’s heavy reliance on the economically sensitive corrugated packaging sector, and consistently high debt levels has resulted in a relatively high business and financial risk.

The corrugated packaging industry has experienced periods of oversupply in the past decade that have produced volatile financial results. North American containerboard producers have reduced supply to meet demand in the past two years and product prices have been on an upward trend since Q4 2005. U.S. containerboard inventories at box plants and mills were at low levels in Q4 2007, and continued strength in industry exports, along with more stable demand and supply indicates that announced price increases should be implemented in 2008.

In addition, industry forecasts suggest that retailers have reduced box inventories in anticipation of a slower economy, which contributed to some of the negative box demand in 2007. As a result, box demand is expected to exhibit moderate growth in 2008, compared with 2007 levels. Higher containerboard prices and increased box demand and prices will positively affect sales this year.

However cost pressures, including high chemical and freight costs, and rising recycled fibre prices are showing few signs of abating; they are expected to offset some of positive aspects of higher revenues. The Company also faces the risk of (1) increased linerboard imports from China as more domestic capacity comes on stream in 2007 and 2008 (high freight rates are expected to constrain imports unless product prices rise substantially above current levels) and (2) pressure from major retailers to reduce packaging volumes. Despite the potential for a negative impact on earnings, the aforementioned risks are not expected to have a major impact on Company profitability in the near term.

A major restructuring plan to reduce costs is underway. The Company expects to achieve approximately $538 million in annual cost savings by the end of 2008. At year-end 2007, Smurfit-Stone had achieved cumulative savings of $438 million and is targeting another $100 million in additional incremental cost reduction in 2008. Capex is expected to remain at high levels in 2008 as the Company completes its restructuring and cost-reduction program. However, cash flow from operations is forecast to be sufficient to fund capital expenditures this year.

Although free cash flow is expected to be positive, it is unlikely to be sufficient to produce a major improvement in the financial profile until the restructuring program is completed at the end of 2008. Smurfit-Stone has a long history of high leverage and this trend is expected to continue in the near term. As a result, the Company’s credit profile is not expected to change significantly over the next year, remaining within the parameters associated with the above rating.

Note:
All figures are in US dollars unless otherwise noted.