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After more than a decade of management and financial turmoil that ravaged a once-premier Baltimore company, Sweetheart Cup Co. is coming back, and in more ways than one.

It has posted its first annual profit in five years. Its net worth has climbed out of the hole. Sales are rising.

And the successor of the old Maryland Cup Co., which has had operations in the Baltimore area since 1920, may be returning home to Owings Mills.

Sweetheart, the nation's largest maker of plastic and paper cups, plates, cutlery and ice cream cones with $845.5 million in annual sales, turned a profit of $9.4 million in the fiscal year that ended Sept. 30 -- its first since becoming an independent company again in 1989.

Sales are up by 7 percent for the most recent quarter and shareholders' equity, in a dramatic reversal, now stands at $110 million.

For its new owner -- American Industrial Partners Capital Fund L. P. (AIP), which took over in August 1993 -- the upturn is just the start. Now, AIP is intent on boosting profits and further shrinking the work force -- by as much as 1,500 -- with the ultimate goal of spinning a healthy Sweetheart off in a public stock offering in four or five years.

"We need to establish a consistent performance improvement rate over a period of time, so we have demonstrated performance," said William F. McLaughlin, president and chief executive of Sweetheart who calls last year's profit a "modest rebound." "And I think we need a story to tell in terms of the future -- where the business is trending."

In his 10 months as chief executive officer, Mr. McLaughlin has moved quickly to restructure Sweetheart.

He has divided the company into six "strategic business units," geared to meet the needs of key customer groups. He has cut 10 percent of the company's 1,500 salaried worers and has set the stage for reducing the company's overall head count from 8,500 to about 7,000 during the next two years.

He also is considering moving the company's headquarters from Chicago back to Owings Mills, Maryland Cup's home until 1983, and expects to decide sometime this spring. Such a move would add a few hundred jobs to the site of the company's largest plant, with 2,300 workers.

With several operations, such as research and development and manufacturing, already in Owings Mills, there are sound reasons to move the headquarters here, Mr. McLaughlin said.

"A lot of the attributes of a corporate headquarters location, we find here in Owings Mills. There's no question about that," he said.

Perhaps an even surer sign is that Mr. McLaughlin already lives in Reisterstown and is building a house in Cockeysville, although he emphasized that a decision will be based on the best interests of the company, not his personal preference.

Mr. McLaughlin, a former Nestle's food service executive, was hired last May by AIP. The investment group bought Sweetheart in August 1993 in a complex $445.6 million transaction that dramatically reduced the company's crushing debt, pushing its balance sheet into the black and restoring profitability.

AIP's plans for Sweetheart reflect the backgrounds of its six partners, who include former CEOs of such manufacturers as Goodyear Tire & Rubber Co., Armco Inc. and Mead Corp. It prefers to beef up balance sheets rather than load them with debt, with the aim of bringing a rebuilt company to market.

"None of us in AIP had any desire to be in an operation where you go in and leverage the hell out of it, make a few bucks and get the hell out," said Burnell R. Roberts, one of AIP's partners and chairman of Sweetheart. "That is not what our lives have been about," he said.

In Sweetheart, AIP has taken on a company whose products are as ubiquitous as any in American life.

From its 14 factories in the United States and Canada, including its sprawling 1.1 million-square-foot Owings Mills plant, Sweetheart makes paper and plastic cups, plates spoons, forks and other disposable food service products. Buy a drink at McDonald's, Taco Bell or Wendy's and it will be in a Sweetheart cup. Buy an ice cream cone and chances are it will be served up in a Eat-It-All cone -- the biggest brand of cones in the country.

Sweetheart also supplies containers for ice cream, frozen novelty products and cottage cheese.

Plummeting despite stature

But despite its huge market, Sweetheart was hemorrhaging.

With the sale of the publicly traded Maryland Cup to Fort Howard Co. in 1983, the company began a traumatic period that included the firing of much of its management, the closing of about half its plants, and the alienation of many customers put off by Fort Howard's adversarial approach.

While customer relations improved following its sale in a leveraged buyout six years later, its finances continued to deteriorate under Morgan Stanley & Co., the Wall Street investment banking company that then controlled it.

By the time AIP took over 10 years later, it had a negative net worth of $121.9 million and millions in annual losses.

That transaction marked the beginning of a turnaround, thanks to a $100 million cash infusion and elimination of 40 percent of Sweetheart's debt. Overnight, net worth jumped to a positive $100.5 million and in the first month the company had a $172,000 profit, according to a filing with the Securities and Exchange Commission.

Even now, while long-term debt is much more manageable, annual interest payments are $37.5 million -- four times last year's earnings.

And it probably will remain that way for the foreseeable future as the company increases capital improvements, according to Roger A. Cregg, vice president and chief financial officer of the company.

"We are concentrating on making investments in the long-term growth," he said.

Sweetheart has set a goal of spending an average of $40 million a year on plant upgrades in the next several years -- double the amount spent before 1993, Mr. Cregg said. This fiscal year the company will spend about $55 on capital improvements.

And in an effort to harness its energies on its diverse customer base, Sweetheart has reorganized itself into six strategic business units that will focus on its customer groups: food service distributors, such as Kraft and Sysco; national fast-food chains like Wendy's and Taco Bell; ice cream cone customers; companies that use its ice cream and dairy product containers; its Canadian customers, and McDonald's -- the company's largest single customer at 13 percent of its annual sales.

It also has launched an operations-wide training program to instill a culture of quality and service to the customer -- a hallmark of the old Maryland Cup.

Mr. McLaughlin said the reorganization is geared to meeting needs of different customers. "We have not only a very broad range of products, but we have customers that have very divergent needs that I don't think were fully recognized under the former business units," he said.

Meeting customer demands for ever more distinctive cups and plates and other innovative products is one of Sweetheart's chief goals, according to Mr. McLaughlin. Indeed, the old Maryland Cup was known for innovative products, like the Styrofoam clamshell it created for McDonald's hamburgers.

"We find ourselves in the business of designing and printing items that have a very, very short life cycle in increasingly smaller batches," he said, pointing out that last year the company produced 35,000 varieties of products.

Besides the ever-changing designs for fast-food companies, Sweetheart has been particularly aggressive in producing souvenir cups, moving beyond sporting events to making specialized cups for touring musical groups like the Gatlin Brothers.

Searching for product niche

The pressure to find a niche for a new product and move in on a competitor's turf has intensified in recent years as annual sales growth rates in the industry have fallen to 5 percent or less a year -- a far cry from double-digits of the 1960s and 1970s, said Joseph W. Bow, president of the Foodservice and Packaging Institute, an industry trade group.

While Sweetheart controls 10 percent to 12 percent of the overall $6 billion market, it slipped under Fort Howard, particularly after Fort Howard purchased Lily-Tulip Inc. in 1986 -- the No. 2 food service disposable company at the time.

Instead of adding to Sweetheart's sales, many customers switched to competitors such as James River Corp., the maker of Dixie Cups, as a secondary supplier, according to Daniel M. Carson, Sweetheart's vice president and general counsel.

The planned improvement strategy appears to be paying off already, according to Ronald M. Attman, vice president at Acme Paper & Supply Co. of Savage, a regional distributor of disposable paper and plastic products and janitorial supplies.

"Sweetheart is getting a bigger share than ever before," Mr. Attman said, attributing the increase to a change of style after Fort Howard left the scene. "Since then, they've taken a much more customer-friendly attitude."

At the same time, the company also has to grapple with the skyrocketing costs of paper and plastic resins, which have forced the company to raise prices by 20 percent for paper products and 27 percent for plastic items during the last six months.

"When raw materials go up, there's always a lag by the time you pass that on, whether or not you can pass the full amount of it on," Mr. Roberts said. "So that certainly hurts margins at the time, there's no question about it."

The increased cost of materials is expected to have a negative effect on the company's bottom line, according to Bruce Klein, a bond analyst for Donaldson Lufkin & Jenrette. "In essence, our posture is that 1995 could be a somewhat disappointing year, although reasonably good credit quality ought to be maintained,"

Mr. Klein said in a Jan. 12 report.

Straight talk with workers

Besides prices, the company also has to deal with employee morale, which has been battered by past job cuts, mangement turmoil and the elimination of some benefits.

In meetings with workers, Mr. McLaughlin told them that layoffs were preferable to risking the long-term future of the company. "What I said to the organization was that we are better off saving 7,000 jobs and making the company more capable for growing again in the long-term, than we are sitting on our hands not doing anything and losing 8,500," he said. "And I think people are buying into that.

Mr. McLaughlin said there is no estimate of how many will be affected at the Ownings Mills plant. But in the last eight months, about 150 jobs have been eliminated, about 50 to 75 through layoffs.

While there is uneasiness about the cutbacks, Mr. McLaughlin's straightforward approach has won some of the workers over.

"He's just really a top-notch individual," said one salaried worker who asked not to be identified. "This man is bringing us up to the '90s."

Yet, the company has a lot of fences to mend with its workers.

Employees had been particularly upset by Fort Howard gutting medical benefits for retirees and eliminating its pension plan for salaried workers and buying annuities to replace it.

Both of these actions were challenged in court and the cases are still pending -- with the exception of a settlement on the vacation benefit portion of the pension case.

"I think we are being very open with people in the organization," he said. "And I think we are indicating to them that we would like to do a better job of taking care of people."

"But that too has to be earned," Mr. McLaughlin said. "And it has to be based on the improved performance of the business."

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