SCA Annual Report 2009

Transcription

1 SCA Annual Report 2009

2 The year at a glance Net sales amounted to SEK 110,857m (110,449) Profit before tax 1) totalled SEK 8,004m (6,237) Earnings per share amounted to SEK 6.78 (7.94) Proposed dividend is SEK 3.70 (3.50) per share 1) Excluding items affecting comparability. Net sales and operating margin Cash flow from current operations Earnings, dividend and cash flow per share SEKm % SEKm SEK SEK 100, , , , , , , , , , Net sales Excluding items affecting comparability. Operating margin Earnings Cash flow from current operations Earnings do not include items affecting comparability. Dividend for 2009 relates to the proposed dividend. Dividend Key figures SEK EUR 2) SEK EUR 2) SEK EUR 2) Net sales, SEKm/EURm 110,857 10, ,449 11, ,913 11,456 Operating profit 8, , ,147 1,098 Operating profit 1) 9, , ,847 1,066 Operating margin, % Operating margin, % 1) Profit before tax, SEKm/EURm 6, , , Profit before tax, SEKm/EURm 1) 8, , , Profit for the year, SEKm/EURm 4, , , Profit for the year, SEKm 1) 5, , , Earnings per share, SEK Earnings per share, SEK 1) Cash flow from current operations per share, SEK Dividend, SEK ) Strategic investments, incl. acquisitions, SEKm/EURm 3, , , Equity, SEKm/EURm 67,906 6,577 67,252 6,147 64,279 6,792 Return on capital employed, % Return on equity, % Debt/equity ratio, multiple Average number of employees 49,531 51,999 50,433 1) Excluding items affecting comparability. 2) See page 50 for exchange rates. 3) Proposed dividend. SCA Annual Report

3 Introduction CEO s message Strategy for difficult times yields results In 2009, SCA increased profit before tax by 28% to SEK 8,004m 1), reversed a negative net cash flow to a positive SEK 5,985m, and reduced its indebtedness by SEK 6,572m. The Group continued to develop new products at an intensifying pace, advanced its positions in key growth markets, and strengthened global and regional brands. The year 2009 represented one of the most dramatic economic shifts that SCA has ever experienced in its long history. Our response to a unique, uncertain economic situation was a concentrated strategy in the short term, with focus on three areas: costs and cash flow, capital efficiency and innovation. Today, I can declare that we have improved in all three areas, thanks to the fantastic efforts of all our employees. For SCA, the effects of the dramatic downturn in industrial production during the year were mainly felt in the packaging operation and the forest products operation. Initially, demand for corrugated board declined by between 10 and 30%, depending on the segment, but stabilised towards the end of the year, down 6% in total. Prices dropped by 10% during the year. For containerboard, rising inventory levels, combined with a weak demand scenario, created large imbalances and prices were put under pressure. Despite a slight recovery towards the end of the year, the price level was below the level in 2008 and large parts of the industry are unprofitable. Demand in the market for publication papers declined by more than 15% during Overcapacity in the market is still a problem despite the termination of a large amount of production in the industry. The advertising sector reported weak business activity, resulting in thinner publications and declining circulations. We were early to implement a number of structural, cost and efficiency programmes. Several action programmes were rapidly implemented in the forest products and packaging operations. These and other measures throughout the Group resulted in a SEK 1bn reduction in costs during the year. At the same time, the 2 SCA Annual Report ) Excluding items affecting comparability.

4 Introduction CEO s message Profit before tax +28 % Cash flow from current operations, SEKbn +7.7 Net debt, SEKbn 6.6 Share attributable to Hygiene business Sales 60 % Operating profit 71 % cash flow from current operations was improved by SEK 7.7bn compared with the preceding year. SCA s hygiene operation, which accounted for 60% of consolidated sales in 2009, is fundamentally much less sensitive to economic movements, but naturally the need for cost efficiency increases in more turbulent times. Our work during the year included streamlining our European plant structure for tissue. In Mexico, we are constructing a new tissue plant that will considerably strengthen our profitability in the region. Within Personal Care, we have upgraded production and the quality of our baby diapers. An area that is every bit as important as reducing costs is creating the conditions for higher growth. An integral part of this ambition is our insight and innovation work. During the year, we invested considerable resources in greater consumer insight, in addition to trend, market and competitor intelligence, and research and design. We also reorganised the innovation work to ensure that we can deliver a larger number of products at an increasingly rapid pace. A more detailed description of our innovation work is presented on pages In our prioritised growth markets, the hygiene business grew by 10% and with our strong regional market positions as a base, we are broadening our product categories and product range. In 2009, for example, we initiated market testing in China for incontinence care and will continue with testing for baby diapers. Through our joint venture in Latin America, we acquired an Argentine company with a 20% market share in the feminine care segment. This acquisition provides SCA with a stable platform from which it can launch other strong brands in Argentina. In conclusion, I can say that SCA effectively managed the recession and emerged in a favourable position thanks to a good mix in its product portfolio, rapid and flexible adaptation of the operation, and solid contributions from employees. Without reducing the pressure on our three strategic focus areas costs and cash flow, capital efficiency and innovation we can now add a fourth: growth. We hold leading global and regional positions in the largest markets and in emerging markets. We have more successful products, stronger brands, and more rapid and innovative product development than in the past. This allows us to continue to create long-term value for our shareholders, customers, employees and other stakeholders. Jan Johansson, President and CEO SCA Annual Report

5 Introduction The SCA share The SCA share in 2009 The 2009 closing price on the Nasdaq OMX Stockholm for SCA s B shares was SEK (66.75), corresponding to a market capitalisation of SEK 67bn (47). SCA s market capitalisation corresponds to approximately 2% (2) of the total market capitalisation on the Nasdaq OMX Stockholm. Since the beginning of 2009, the share price rose by 43%. During the same period, the Nasdaq OMX Stockholm rose by 47%. The highest closing price for SCA s B shares during the year was SEK , which was noted on 16 October. The lowest price was SEK on 2 March. The proposed dividend is SEK 3.70 per share, see below under the section Dividend. Viewed over a five-year period, the SCA share has demonstrated stronger performance than comparable industry indexes. Trading in SCA shares SCA shares are listed and traded primarily on the Nasdaq OMX Stockholm, and as American Depository Receipts (ADR level 1) in the US through the Bank of New York. In addition to indexes directly linked to the Stockholm Exchange, SCA is included in other indexes, such as the Dow Jones STOXX Index, FTSE Eurotop 300 and MSCI Eurotop 300. SCA is also represented in sustainability indexes, including the FTSE4Good index and the Dow Jones STOXX Sustainability Index (both in the Dow Jones STOXX Sustainability Index and the Dow Jones Sustainability WORLD Index, which are two of the world s most prestigious sustainability indexes). SCA is one of only four Swedish companies that comply with the requirements for inclusion in the two Dow Jones indexes. Liquidity In 2009, the volume of SCA shares traded was 653 million (849), representing a value of approximately SEK 53bn (72). Average daily trading for SCA on the Nasdaq OMX Stockholm amounted to 2.6 million shares, corresponding to a value of SEK 211m (286). Ownership Some 58% (59) of the share capital is owned by investors registered in Sweden and 42% (41) by foreign investors. The US and the UK account for the highest percentage of shareholders registered outside Sweden, with 16% and 12%, respectively. Dividend The Board of Directors has proposed a dividend to shareholders of SEK 3.70 per share for The 2009 dividend represents a dividend yield of 3.9% per share, based on SCA s share price at the end of the year. SCA s dividend policy is described on page 8. Ticker names Nasdaq OMX Stockholm New York (ADR level 1) SCA A, SCA B SVCBY Price trend and share trading 2009 Price trend and share trading SEK Thousand shares SEK Million shares , , , , , , Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. SCA B Daily trading OMXSPI SCA B Trading per quarter OMXSPI 4 SCA Annual Report 2009

6 Data per share All earnings figures include items affecting comparability unless otherwise indicated. SEK per share unless otherwise indicated Earnings per share after full tax: After dilution After dilution, excluding items affecting comparability Before dilution Market price for B share: Average price during the year Closing price, 31 December Cash flow from current operations 1) Dividend ) Dividend growth, % 3) Dividend yield P/E ratio 4) Price/EBIT 5) Beta coefficient 6) Pay-out ratio (before dilution), % Equity, after dilution Equity, before dilution Average number of shares after dilution (millions) 7) Number of registered shares 31 December (millions) 7) Number of shares after full conversion (millions) 7) ) See definitions of key ratios on page ) Board proposal. 3) Rolling 10-year data. 4) Share price at year-end divided by earnings per share after full tax and dilution. 5) Market capitalisation plus net debt plus minority interests divided by operating profit. (EBIT = earnings before interest and taxes). 6) Share price volatility compared with the entire stock exchange (measured for rolling 48 months). 7) 2006 and 2005 adjusted for 3:1 split. Shareholders by country, capital Sweden, 58% US, 16% UK, 12% Luxembourg, 3% Other, 11% Shareholders by category, capital Institutions, 82% Private individuals, 18% Source: Euroclear SCA s ten largest shareholders According to Euroclear s official share register for directly registered and trustee-registered shareholders at 31 December 2009, the following companies, foundations and mutual funds were the ten largest registered shareholders based on voting rights (before dilution): Shareholder No. of votes Votes (%) No. of shares Holding (%) AB Industrivärden 474,700, ,800, Handelsbanken* 220,649, ,195, SEB Funds and Life Assurance* 95,359, ,626, Skandia 59,692, ,835, Alecta 46,220, ,540, Swedbank* 15,335, ,307, Third Swedish National Pension Fund 15,245, ,617, Nordea Funds 14,381, ,697, Second Swedish National Pension Fund 12,808, ,715, Government of Norway 10,265, ,265, * Including mutual funds and foundations. Shareholder structure Holding No. of shareholders No. of shares Holding (%) Votes (%) ,297 8,806, ,000 14,028 10,638, ,001 5,000 16,045 34,921, ,001 10,000 2,215 15,921, ,001 15, ,166, ,001 20, ,351, ,001 1, ,303, Total 81, ,110, Source: Euroclear Percentage of foreign ownership % Share distribution 31 December 2009 Series A Series B Total shares Number of registered shares 103,035, ,074, ,110,094 of which treasury shares 2,767,605 Shares issues, etc Since the beginning of 1993, the share capital and the number of shares have increased due to issues of new shares, conversions and splits, as detailed below: No. of shares Increase in share capital, SEKm 1993 Conversion of debentures and new subscription through Series 1 warrants 4,030, Cash payment, SEKm Series A Series B Total New share issue 1:10, issue price SEK 80 17,633, , ,145, ,821, ,967, Conversion of debentures 16, ,145, ,837, ,983, Conversion of debentures 3,416, ,145, ,254, ,399, New share issue 1:6, issue price SEK ,899, , ,133, ,166, ,299, Conversion of debentures 101, ,626, ,775, ,401, New share issue, private placement 1,800, ,787, ,414, ,201, New share issue through IIB warrants ,701, ,500, ,202, Conversion of debentures and subscriptions through IIB warrants 2,825, ,437, ,590, ,027, Conversion of debentures 9, ,427, ,608, ,036, Split 3:1 470,073, ,905, ,204, ,110,094 SCA Annual Report

7 Introduction Strategy Strategy Business concept To sustainably develop, produce and market increasingly value-added products and services within Personal Care, Tissue, Packaging and Forest Products. SCA s products simplify the everyday lives of hundreds of millions of people around the globe. They also generate strong cash flows that enable favourable dividend growth and increased value for the SCA share. Increased share for Hygiene business % Hygiene business Packaging/Forest Products 2009 Strategic focus SCA s strategy is based on the Group s fundamental strength factors: customer and consumer insight, regional presence, global strength and sustainable development. The business stands on two pillars, the Hygiene businesses (Personal Care and Tissue) and Packaging/Forest Products, with varying strategic prerequisites. The overriding strategy is to shift the balance toward the hygiene operation to reduce the cyclical impact and ensure long-term and more stable profitability, expansion and dividend growth. Significant potential in a strong base HYGIENE business The Group s strategy in the short and medium term is to develop its already leading positions and strong profitability in Europe and in North and Latin America: Further strengthen Tena, SCA s brand for incontinence care, through continued growth in the premium range and strengthen presence in the economy segment. The leading positions in baby diapers in selected regions in Europe shall be strengthened through continued consumer-driven innovation and communication. Efficiency with respect to production and sale of baby diapers to retailer brands shall be enhanced to boost profitability. Increased profitability and presence within feminine care in selected markets in Europe shall be achieved through product and range development. Strengthen established brands through range expansion. Continue strong profitability and organic growth for consumer tissue, raise margins through innovation, better product mix, distribution and marketing. SCA s share of brands shall steadily increase at the same time as retailers brands shall be developed. Strengthen the position in the AFH-tissue segment, number one in Europe and number three in the US, through the global brand Tork. Innovation and increasing the share of system solutions are prioritised. The rapidly growing markets outside Europe and the US currently account for about 25% of hygiene sales a share that will increase in the years ahead. The strong position in several countries in Latin America, Southeast Asia as well as Russia and Eastern Europe will be prioritised in the medium-term perspective. To promote organic growth, SCA is investing in production, but selective acquisitions, such as Algodonera Aconcagua in Argentina in 2009, add to total growth. In 2009, SCA commenced large-scale testing in China of incontinence care products. SCA also owns a minority share in the Chinese tissue company Vinda. PACKAGING AND FOREST PRODUCTS In the packaging industry, overcapacity and weak demand remain a general problem. Through restructuring, cost and efficiency measures, SCA shall increase the operation s profitability. In 2009, substantial capacity reductions and productivity improvements were implemented at some 50 sites. On full implementation, the programme will yield annual savings of more than SEK 1bn. Review of the supply and market structure. Several projects are under way to identify more synergies within and between the corrugated board and containerboard operations. The focus on innovation and product development continues. Furthermore, SCA shall increase the share of products with higher value content and strengthen the service offering to customers. SCA s publication paper production shall be focused on profitable segments in magazine paper. Several investment decisions enable increased pulp production and a higher degree of self-sufficiency based on raw materials from the Group s forest holding. SCA s forest holding secures about half of the Group s timber needs and enables efficient raw material integration and cost control. To complement the forest operation, SCA conducts an extensive sawmill operation. The sawmill business is being progressively consolidated and the product offering is being upgraded to products with an increasing degree of value addition and customisation. The forest products business is also developing several important strategic initiatives to commercialise such renewable energy as wind power and biofuel. 6 SCA Annual Report 2009

8 Introduction Strategy Financial targets Sustainability targets The Group shall achieve a return on capital employed of 13% over an economic cycle. Personal Care 30% Packaging 10% Reduce carbon emissions from fossil fuels by 20% between 2005 and % control of all fresh fibre-based raw material Group 13% Tissue 13% Forest Products 11% Reduce water consumption by 15% and reduce organic content by 30% between 2005 and 2010 Compliance with Code of Conduct throughout the Group Three themes to combat the recession 1. COST AND CASH FLOW Costs were reduced by about SEK 1bn and cash flow from current operations was strengthened by SEK 7.7bn. Restructuring programme and savings measures in all parts of the Group reduced costs. Cash flow was strengthened due to higher operating cash surplus, reduced working capital and lower current capital expenditures. 2. CAPITAL EFFICIENCY Enhanced productivity and efficiency in large areas of the Group contributed to increased capital efficiency. The tissue operation in Europe raised profitability through extensive rationalisations and closures of uncompetitive units. Packaging pursued a large number of projects to increase productivity in approximately 50 production units. 3. Innovation Innovation is a fundamental theme in SCA s long-term strategy for growth and profitability. Examples: Continued product development and valueenhancing service offering in AFH under SCA s global brand Tork. Development work in the European consumer tissue business based on a new, consumerdriven brand platform. All manufacturing of baby diapers has been upgraded. Packaging successfully launched a proprietary packaging solution for the confectionery category. Forest Product s focus on high-quality publication paper, GraphoVerde, contributes to increased growth, as does the development of increasingly value-added window components for window manufacturers. Expansion in the Hygiene business Several factors support continued growth in the hygiene sector. There is a steady increase in the age of the world s population at the same time as large populations are emerging from poverty with greater disposable incomes. In mature markets, consumers are becoming increasingly aware of sustainability issues, while they also seek a higher level of comfort. SCA is responding to growth opportunities through a broad spectrum of activities: establishments in new markets through selective strategic acquisitions and the introduction of new products, as well as growth in established markets with launches and upgrades of products. Examples: In China, SCA will train about 10,000 nurses over the coming 18 months, which supports the ongoing market tests to launch incontinence care. Increased knowledge reduces the taboos that surround incontinence and lead to increased use. High market shares in baby diapers in the rapidly expanding Malaysian market provides good opportunities for the launch of feminine care products. Strong local positions and brands provide support for the introduction of several product categories in many markets. The acquisition of Algodonera Aconcagua, with 20% of the market for feminine care products in Argentina, means that good opportunities exist to introduce other product categories. During the year, a successful launch in the Nordic region took place of Libero baby-care products, such as baby oil, nursing pads and wet wipes. Complementary products can utilise and strengthen SCA s brand in several markets. Tampons were introduced in Norway and the launch will continue in new markets in This further strengthens SCA s position in feminine care. SCA Annual Report

9 Introduction Strategy Return and capital structure Required rate of return in operating activities SCA measures and evaluates profitability in operating activities by monitoring return on capital employed (ROCE). The target for ROCE in the Group has been set at 13% and varies among the business areas based on their different circumstances. Required rate of return on investments SCA s required rate of return on expansion investments shall satisfy the return requirement assigned to each of the business areas. The required rate of return is determined by the capital market s estimated return requirement on an investment in SCA shares and current long-term interest rates. The return requirement, the weighted average cost of capital (WACC), is based on SCA s capital structure from a debt/ equity ratio of Dividend policy SCA aims to provide long-term stable and rising dividends. Over a business cycle, approximately one-third of cash flow from current operations (after interest expenses and tax) is normally allocated to dividends. If, in the long term, cash flow from current operations exceeds what the company can place in profitable expansion investments, the surplus shall be used to amortise loans or is returned to shareholders through higher dividends or share repurchases. The Board resolved to propose a dividend of SEK 3.70 for the 2009 financial year, corresponding to an increase of 5.7% compared with Accordingly, dividends have risen by an average of 5% per year over the past decade. Capital structure SCA s debt/equity ratio, measured as net debt in relation to recognised equity, was 0.60 at 31 December This was lower than SCA s longterm target of 0.7. The debt/equity ratio target of 0.7 takes into account SCA s business risk, the composition of the product portfolio and its substantial forest holdings. Periodically, the debt/ equity ratio may deviate from the target. Over the past decade, the debt/equity ratio has varied between 0.39 and SCA has a credit rating for long-term borrowing of Baa1/BBB+ and shortterm borrowing of P2/A2 from Moody s and Standard & Poor s, respectively, and a short-term credit rating of K1 in Sweden from Standard & Poor s. During the autumn, Moody s changed its outlook for SCA from negative to stable. Standard & Poor s negative outlook for SCA remained unchanged. For more detailed information about SCA s financial risk management, see pages Incentive programme SCA s incentive programme is designed to support the company s objective of creating shareholder value. The programme for senior executives has two components: achievement of cashflow, growth and earnings targets, which are determined annually by the Board, and the performance of SCA shares compared with an index consisting of SCA s largest global competitors. For more information about the structure of the programme, see Note 6 (Personnel and Board costs), on page 73. Strategic investments, acquisitions and divestments SEKm 6,000 5,000 4,000 3,000 2,000 1, ,000 2,000 3, Personal Care Packaging Tissue Forest Products Divestments Key ratios Dividend per share Operating margin (EBIT) Margin 1) (%) Cash flow from current operations Outcome (SEK bn) Return metrics Return on capital employed 1) (%) Return on equity 1) (%) Financial metrics Debt/equity ratio (multiple) Market adjusted debt/equity ratio (multiple) Debt payment capacity (%) ) Excluding items affecting comparability. SEK Average cumulative growth: 5% SCA Annual Report 2009

10 Board of Directors Report Page Operations and structure 10 Acquisitions, investments and divestments 11 Other Group information 12 Sales and earnings 13 Operating cash flow 14 Financial position 15 Innovations 16 Personal Care 22 Tissue 26 Packaging 30 Forest Products 34 Responsibility and Governance 38 Corporate Governance 38 Board of Directors and auditors 44 Corporate Senior Management Team 45 Risk and risk management 46 Sustainability 52 SCA Annual Report

11 Board of Directors Report Svenska Cellulosa Aktiebolaget SCA (publ), Corp. Reg. No , registered office in Stockholm Operations and structure SCA is a global hygiene and paper company that develops, produces and markets personal care products, tissue, packaging, publication papers and solid-wood products. SCA offers products that make everyday life for people considerably easier. Based on customer and consumer needs, new and more value-added products are constantly being developed for consumers, institutions, industry and the retail trade. SCA s products consist almost exclusively of renewable and recyclable materials. Although Europe is SCA s main market, the Group also holds strong positions in North America, Latin America and Asia Pacific. Expansion takes place through organic growth and acquisitions, primarily within Personal Care and Tissue. SCA owns approximately 2.6 million hectares of forest land, which guarantees just under half of the Group s timber supplies and enables efficient raw material integration and effective cost control. SCA conducts extensive sawmill operations as a natural complement to the forest operations. Organisation SCA consists of four business areas Personal Care, Tissue, Packaging and Forest Products. The business areas are organised in six business groups. The SCA Personal Care Europe business group manufactures and sells personal care products in Europe and Africa. SCA Tissue Europe s operations involve manufacture and sales of consumer and AFH tissue in Europe. Also located in Europe is the SCA Packaging Europe business group, which manufactures and sells packaging solutions, and the SCA Forest Products business group, which manufactures publication papers, pulp, timber and solid-wood products. The SCA Asia Pacific business group manufactures and sells packaging, personal care products and tissue. The SCA Americas business group includes both tissue and personal care products. The Global Hygiene Category (GHC) is a unit that creates the potential for global growth in the hygiene categories. GHC shall focus on longterm strategies for all segments in tissue and personal care. To capitalise on synergies among the business areas, GHC is responsible for customer and consumer insight, innovation, technology processes and brand development. Significant events during the year SCA s joint-venture company in Colombia, Productos Familia S.A., acquired the Argentine company Algodonera Aconcagua. Although the operation is focused on feminine care, it also holds a small market share in the baby diapers and incontinence care segments. In addition, SCA decided to invest in a new production line for incontinence products at the plant in Veniov, Russia. In the European tissue operation, the Pratovecchio paper mill in Italy was divested. During the year, a restructuring programme was implemented in the European packaging operation. Measures included the closure of a testliner mill in New Hythe and 11 corrugated board plants in Europe. SCA decided to invest in the containerboard mills in Aschaffenburg, Germany, and Munksund, Sweden. Within the forest products operation, a decision was made to invest in Östrand pulp mill in Timrå, Sweden. A detailed account of acquisitions, investments and divestments during the year can be found on page 11. Significant events for each business area are detailed on pages Organisation CEO and President Corporate Staffs Global Hygiene Category (GHC)* SCA Personal Care Europe SCA Tissue Europe SCA Americas SCA Asia Pacific SCA Packaging Europe SCA Forest Products * GHC was established in 2008 to manage innovation, brand strategy and technology for the Group s hygiene operations. 10 SCA Annual Report 2009

12 Board of Directors Report SCA Group Acquisitions, investments and divestments SCA acquires company in Argentina through its Colombian joint venture In October 2009, SCA s joint-venture company in Colombia, Productos Familia S.A., acquired the Argentine company Algodonera Aconcagua. The business is focused on feminine care products, an area in which Algodonera Aconcagua currently holds a market share in Argentina of approximately 20%, which puts the company in the number three position in the country. With respect to the market for feminine care, the three largest companies in the market account for roughly 80% of sales. Algodonera Aconcagua also has a small market share in baby diapers and incontinence care, which offers potential for future expansion in these segments. The acquisition provides SCA with a foothold in a new and attractive market with considerable growth potential. SCA s share of the purchase price amounts to SEK 78m, excluding the acquired portion of net debt totalling SEK 5m. SCA upgrades energy plant at liner mill in Aschaffenburg, Germany In April 2009, SCA decided to invest in the containerboard plant in Aschaffenburg, Germany, which is part of the packaging operation. The mill has a capacity of 350,000 tonnes and is SCA s most modern and efficient liner mill. More stringent emissions standards, with additional limitations on the amount of nitrous contaminants (NOx), require that the facility must be adapted. In conjunction with these adaptations, two gas-fired steam boilers will be installed. As a result, the mill gains maximum distribution between electricity and steam production, with high energy efficiency. It will be possible to increase capacity to 400,000 tonnes, with a positive annual effect on profit of about SEK 100m. This portion of the investment has a payback period of three years. The total investment will amount to SEK 635m and will be fully implemented in SCA invests in personal care in Russia In response to anticipated consumer needs, SCA decided to invest in a new production line for incontinence care products at its Veniov plant south of Moscow, Russia, which is part of SCA Personal Care. In 2008, SCA established a plant in the Moscow region, where it has since installed production facilities for baby diapers. This plant will be commissioned at the beginning of The Russian market for personal care products is characterised by rapid growth and the forecast is that the market for incontinence care products will expand significantly in the years ahead. The decision entails that SCA once the plant is in place in 2011 will be able to substantially reduce its import of products from its plants in Poland and the Netherlands. Accordingly, high duties and transportation costs will also be reduced. The investment cost for the new production line for incontinence care products is approximately SEK 138m. SCA invests in increased efficiency and reduced emissions in Timrå, Sweden In December 2009, SCA decided to invest in a new lime kiln at the Östrand pulp mill in Timrå, Sweden, part of the Forest Products business area. The investment will entail an annual increase in pulp production of 10,000 tonnes and an 80% reduction in fossil-based CO 2 emissions, since oil consumption will be replaced with biofuel. The investment will also cut chemical and maintenance costs. Östrand pulp mill produces 420,000 tonnes of chlorine-free bleached kraft pulp and approximately 90,000 tonnes of chemically treated mechanical pulp (CTMP). The new lime kiln is scheduled to enter service at the end of 2011 and enables future expansion in capacity at Östrand pulp mill. The investment amounts to about SEK 500m. SCA invests in Munksund, Sweden In December 2009, a decision was taken in packaging operations to replace the existing winder and install a new machine in Munksund mill, outside Piteå, Sweden. The new winder will improve delivery reliability, ensure future quality standards and slightly increase production capacity at the mill. The investment further improves production of the premium product SCA White Top Kraftliner, which is growing strongly in the market. This grade of containerboard has a full-cover white surface layer, which offers excellent printing characteristics. The new winder is scheduled to go online in spring The investment cost is estimated at SEK 255m. SCA divests Pratovecchio paper machine in Italy In December 2009, SCA sold its tissue facility and paper machine with an annual capacity of about 20,000 tonnes in Pratovecchio, Italy. The sale follows the March announcement of an action programme aimed at improving supply-chain operations in Italy by concentrating resources to facilities in the nearby Lucca region. The purchase price received amounted to SEK 65m, corresponding to the carrying amount of net assets. SCA Annual Report

13 Board of Directors Report SCA Group Other Group information Environmental impact SCA conducts 14 operations for which a permit is required and six that are under obligation to submit reports in Sweden. Operations for which permits are required or reporting is mandatory account for 12% (17) of consolidated net sales. Six permits relate to the manufacture of pulp and paper. These operations impact the environment through emissions to air and water, solid waste and noise. Seven permits relate to the production of solid-wood and value-added products, and biofuels. These operations affect the environment through noise and emissions to air and water. One permit relates to the manufacture of fuel pellets. This operation affects the environment through emissions to air and water, as well as noise. The operations required to submit reports comprise the production of corrugated board (three plants), EPS packaging (two plants), and display packaging (one plant). The production of corrugated board packaging, EPS packaging and display packaging impacts the external environment through emissions to air and water and by generating solid waste. Research and development (R&D) During the year, research and development costs amounted to SEK 738m (612), which is equivalent to 0.7% of consolidated net sales. Research and development is conducted both centrally and locally in the various business groups. The central activities are carried out in the form of R&D in the fields of materials and technology, while the local units work with product development, often in direct cooperation with customers. Parent Company The Group s Parent Company, Svenska Cellulosa Aktiebolaget SCA (publ), owns most of the forest land and other real estate relating to forestry Holding of treasury shares operations, and grants felling rights for standing forest to the subsidiary SCA Skog AB. The Parent Company is otherwise a holding company, whose key tasks are to own and manage shares in a number of business group companies and to perform Group-wide management and administrative functions. In 2009, the Parent Company recognised operating income of SEK 196m (126) and reported a profit before appropriations and tax of SEK 33,351 (loss: 539). During the year, the Parent Company s net investments and divestments in shares and participations in companies outside SCA amounted to SEK 0m (0). Investments in property and plant totalled SEK 80m (176) during the year. Cash and cash equivalents at year-end were SEK 0m (0). Distribution of shares During the year, 7,904,854 Class A shares were converted into Class B shares. The proportion of Class A shares was 14.6% at year-end. The number of treasury shares amounted to 2,767,605. Earlier applicable employee option programmes expired during the year. Calculated in accordance with IFRS recommendations, the employee option programme does not entail any dilutive effect. Dividend The Board of Directors proposes that the dividend be raised by 5.7% to SEK 3.70 (3.50) per share, representing 55% of earnings per share and 23% of cash flow from current operations per share. The dividend is expected to total approximately SEK 2,599m (2,458). Accordingly, dividend growth in the most recent ten-year period has amounted to 5%. The Board s assessment is that the proposed dividend will provide the Group with the scope to fulfil its obligations and make the required investments. The record date for entitlement to receive dividends is proposed as 29 April Number Nominal amount Percentage of share capital Paid/received remuneration Total holding 1 Jan ,800,000 18,000, ,090,000 Transferred in , , ,750,757 Transferred in , , ,972,803 Transferred in , , ,135,024 Transferred in , , ,496,430 Transferred in ,145 3,491, ,680,700 Transferred in ,902 2,015, ,751,693 Received from 3:1 split 2,154,576 0 Transferred in ,207 1,290, ,491,756 Total holding 31 Dec ,767,605 9,225, ,271,477 See also Note 45. Guidelines for remuneration of senior executives The Board has decided to propose to the 2010 Annual General Meeting the following unchanged guidelines for determining salaries and other remuneration for senior executives to apply for the period following the Annual General Meeting. Remuneration to the CEO and other senior executives will be a fixed amount, possible variable remuneration, additional benefits and pension. Other senior executives include the Executive Vice President, Business Group Managers and equivalent, and Central Staff Managers. The total remuneration is to correspond to market practice and be competitive in the senior executive s field of profession. Fixed and variable remuneration is to be linked to the executive s responsibility and authority. For the CEO, as well as for other senior executives, the variable remuneration is to be limited and linked to the fixed remuneration. The variable remuneration is to be based on the outcome of predetermined objectives and, as far as possible, be linked to the increase of value of the SCA share, from which the shareholders benefit. Programmes for variable remuneration should be formulated so that the Board, if exceptional circumstances prevail, has the possibility to limit, or refrain from, payment of variable remuneration if such an action is considered reasonable and in compliance with the company s responsibility to shareholders, employees and other stakeholders. In the event of termination of employment, the notice period should normally be two years should the termination be initiated by the company, and one year, when initiated by the senior executive. Severance pay should not exist. Pension benefits are to be either defined benefit or defined contribution, or a combination of both, and entitle the senior executive to pension from the age of 60, at the earliest. To earn the pension benefits, the period of employment must be long term, at present 20 years. When resigning before the age providing entitlement to pension, the senior executive will receive a paid-up pension policy from the age of 60. The pension is not to be based on variable remuneration. Matters of remuneration of senior executives are to be dealt with by the Remuneration Committee and, as regards the President, be resolved by the Board of Directors. The Board s proposal concurs with the guidelines adopted by the 2009 Annual General Meeting. For information concerning the company s application of these guidelines and information on the company s expenses, see Note 6 on pages SCA Annual Report 2009

14 Board of Directors Report SCA Group Sales and earnings Operating profit, excluding restructuring costs in packaging operations, improved by SEK 1,094m and amounted to SEK 9,648m (8,554). The Hygiene business, comprising Tissue and Personal Care, increased its operating profit by 66% and 11%, respectively. Forest Products increased earnings by 13% while Packaging s earnings fell by 72%. Net sales SCA s net sales rose slightly to SEK 110,857m, compared with SEK 110,449m in the preceding year. Sales for Personal Care and Tissue increased by 10 and 8%, respectively, mainly as a result of higher prices and an improved product mix. The sales increase in emerging markets was 13% for Personal Care and 6% for Tissue. Net sales for Forest Products increased by 2%, primarily as a result of higher prices in the publication paper business. For Packaging, net sales declined by 15% mainly due to lower prices. The closure and divestment of packaging operations in the UK and Ireland reduced net sales by 5%. Exchange-rate movements had a positive impact on net sales of 7%. Earnings Operating profit, excluding restructuring costs of SEK 1,458m, improved by SEK 1,094m and amounted to SEK 9,648m, compared with SEK 8,554m in the preceding year. The Tissue business continued to improve its operating profit and reported an increase of 66%. Personal Care and Forest Products increased operating profit by 11 and 13%, respectively. Packaging s operating profit declined by 72%. Lower costs for raw materials and energy increased operating profit, while lower volumes and higher other manufacturing costs reduced profit. Intensified marketing efforts and high campaign activity resulted in increased costs for sales and administration. Financial items declined by 29% and totalled an expense of SEK 1,644m (expense: 2,317). Profit before tax, excluding restructuring costs, improved by SEK 1,767m and amounted to SEK 8,004m (6,237). The average tax rate for operating earnings was about 26%. Profit for the year, excluding restructuring costs after tax of SEK 1,076m, amounted to SEK 5,906m (5,598). Earnings per share, excluding restructuring costs, were SEK 8.32, and including restructuring costs, were SEK Key figures The Group s gross margin, excluding restructuring costs, amounted to 23.6%, compared with 20.2% in the preceding year, and the operating margin was 8.7%, compared with 7.7% in Return on capital employed, excluding restructuring costs, increased to 9%, compared with 8% in the preceding year, and return on equity was unchanged at 9%. The interest coverage ratio rose to 5.0, compared with 3.7 in the preceding year. Summary income statement SEKm Net sales 110, , ,913 Gross profit 1) 26,113 22,259 21,101 Operating profit 2) 9,648 8,554 9,847 Financial items 1,644 2,317 1,910 Profit before tax 2) 8,004 6,237 7,937 Tax 2) 2, ,028 Profit for the year 2) 5,906 5,598 6,909 1) In figures for 2008, reclassification took place between Cost of goods sold and Sales and administration expenses. 2) Excluding items affecting comparability in 2009 amounting to an expense of SEK 1,458m before tax and SEK 1,076m after tax and income in 2007 totalling SEK 300m before tax and SEK 252m after tax. Increase in profit before tax 28 % EBIT margin 8.7 % Excluding items affecting comparability Operating profit and operating margin SEKm % 10, ,000 8 Earnings per share after dilution SEK 10 8 Net sales, share of Group Personal Care, 23% Tissue, 37% Packaging, 25% Forest Products, 15% 6, , , Operating profit Operating margin Excluding items affecting comparability Excluding items affecting comparability. SCA Annual Report

15 Board of Directors Report SCA Group Operating cash flow During the year, SCA worked actively to improve cash flow and this approach yielded results. Cash flow from current operations, that is, operating cash flow after financial items and paid tax, increased by SEK 7,680m and amounted to SEK 11,490m (3,810). Exchange-rate movements due to the strengthening of the Swedish krona reduced net debt by SEK 1,316m. The debt/equity ratio dropped to 0.60 (0.70) and the debt payment capacity improved and amounted to 31% (26). Operating cash flow, share of the Group Personal Care, 30% Tissue, 41% Packaging, 6% Forest Products, 23% Operating cash surplus was up 13% compared with the preceding year and amounted to SEK 15,733m (13,869). In its work to improve cash flow, SCA focused on such aspects as reducing working capital, which had a positive cash flow effect of SEK 3,307m, mainly as a result of lower inventory levels, which contributed SEK 2,210m. Working capital declined in all business areas, except for Packaging, where working capital was essentially unchanged. Working capital s share of net sales declined and amounted to 7% (11). SCA s efforts to improve cash flow also resulted in a reduction in current capital expenditure, which, during the year, fell by SEK 1,316m amounting to SEK 4,037m (5,353), slightly less than 4% of net sales. Operating cash flow improved by SEK 6,320m, 81%, and amounted to SEK 14,133m (7,813). Financial items declined by SEK 673m and amounted to an expense of SEK 1,644m (expense: 2,317). The decline was an effect of lower interest rates, which were offset by higher average net debt. Tax payments were lower than the preceding year and amounted to SEK 1,003m (1,702). Cash flow from current operations improved by SEK 7,680m, or 202%, and amounted to SEK 11,490m (3,810). Strategic investments to strengthen the organic growth were prioritised during the year and amounted to SEK 3,031m (3,109). The year s expenditure for strategic investments pertained primarily to investments in Tissue and Personal Care in Russia and Mexico, but also investments in Packaging and Forest Products. Acquisitions and divestments amounted to SEK 24m (expense: 624). The dividend to shareholders was lower and amounted to SEK 2,498m (3,128). Net cash flow for the year improved by SEK 9,008m and amounted to SEK 5,985m (neg: 3,023). Net debt During the year, net debt declined by SEK 6,572m and amounted to SEK 40,430m (47,002) at yearend. Net cash flow reduced net debt by SEK 5,985m. Net debt increased SEK 729m as a result of the market valuation of pension assets, pension obligations and financial instruments. Summary operating cash flow statement SEKm Operating cash surplus 15,733 13,869 15,286 Change in working capital 3, ,299 Current capital expenditures, net 4,037 5,353 5,165 Restructuring costs, etc Operating cash flow 14,133 7,813 8,127 Financial items 1,644 2,317 1,910 Tax payments, etc ,686 1,709 Cash flow from current operations 11,490 3,810 4,508 Strategic investments, net 3,007 3,733 3,035 Cash flow before dividend 8, ,473 Operating cash flow by business area SEKm 6,000 4,500 3,000 1,500 0 Cash flow, Group SEKm 12,000 9,000 6,000 3, Personal Care Packaging 3,000 Tissue Forest Products 6, Divestments Capital expenditures SEKm Cash flow from current operations Strategic capital expenditures Company acquisitions 7,500 Strategic restructuring costs 6,000 4,500 3,000 1, Strategic capital expenditures Depreciation according to plan Current capital expenditures, net Change in operating cash flow 81 % Cash flow before dividend 14 SCA Annual Report 2009

16 Board of Directors Report SCA Group Financial position Assets and capital employed The Group s total assets declined 6% compared with the preceding year and amounted to SEK 149,859m (158,968). Property, plant and equipment decreased by SEK 1,610m due to impairment losses of SEK 576m in conjunction with the restructuring programme in the packaging operation and exchange-rate movements. Current and strategic investments in fixed assets amounted to SEK 7,016m and depreciation for the year to SEK 6,480m. Intangible assets and other property, plant and equipment declined by SEK 951m mainly due to exchange-rate movements. In total, the value of intangible assets and property, plant and equipment declined SEK 2,316m as a result of exchange-rate movements. Current assets decreased SEK 6,551m to SEK 36,052m (42,603) primarily as a result of SCA s work to improve cash flow resulting in lower tiedup working capital in accounts receivable and inventories totalling SEK 5,516m. Working capital decreased by SEK 3,692m and amounted to SEK 8,126m (11,818). Capital employed was 5% lower than in the preceding year and totalled SEK 108,336m (114,254). A distribution of capital employed by currency is shown in the table below. The value in Swedish krona of the Group s foreign net assets increased because of the changed Group structure, and at year-end was SEK 72,591m (45,542). Equity During the period, consolidated equity rose SEK 654m to SEK 67,906m (67,252). Net profit for the period increased equity by SEK 4,830m, while dividends reduced equity by SEK 2,498m. Equity decreased by SEK 731m due to remeasurements to market value after tax of the net pension liability, and increased by SEK 412m after tax as a result of the remeasurement of financial instruments. Exchange-rate movements, including net investment hedging in foreign countries, reduced equity by SEK 1,359m. Financing At year-end, the Group s interest-bearing gross debt amounted to SEK 44,104m (52,029). The average maturity period was 2.6 years at the same date. The decrease in gross debt was largely due to the Group s improved cash flow. Net debt at year-end amounted to SEK 40,430m, compared with SEK 47,002m at the beginning of the year. The net cash flow was positively impacted by SEK 5,985m. Furthermore, net debt increased by SEK 729m due to the market valuation of pension assets and obligations, as well as the market valuation of financial instruments. Exchange-rate movements resulting from the weakening of the Swedish krona reduced net debt by SEK 1,316m. Key figures The debt/equity ratio was 0.60 (0.70) and the visible equity/assets ratio was 45% (42). Return on capital employed (ROCE) and on equity (ROE), excluding restructuring costs, amounted to 9% (8) and 9% (9), respectively. The capital turnover Consolidated capital employed by currency SEKm Consolidated balance sheet Debt/equity ratio and debt payment capacity multiple % Debt/equity ratio Debt payment capacity rate was 0.99 (1.04). At year-end, working capital amounted to 7% (11) of net sales. Capital employed, share of Group Personal Care, 11% Tissue, 35% Packaging, 24% Forest Products, 30% 2009 % 2008 % 2007 % EUR 35, , , SEK 35, , , USD 8, , ,890 7 GBP 8, , , Other 20, , , Total 108, , , SEKm Intangible assets 22,551 23,160 21,616 Property, plant and equipment 61,404 63,700 56,447 Biological assets 25,397 24,711 23,905 Other non-current assets 4,455 4,794 5,845 Total non-current assets 113, , ,813 Current assets 36,052 42,603 37,237 Total assets 149, , ,050 Equity 67,906 67,252 64,279 Non-current liabilities 44,356 53,008 34,579 Current liabilities 37,597 38,708 46,192 Total equity and liabilities 149, , ,050 Working capital 8,126 11,818 11,623 Capital employed 108, , ,647 Net debt 40,430 47,002 37,368 Return on capital employed and equity % Return on capital employed 2007 Excluding items affecting comparability ROCE 9 % Excluding items affecting comparability Working capital 1) 7 % 1) Working capital as a percentage of net sales Return on equity SCA Annual Report

17 Board of Directors Report SCA Group Innovation at SCA SCA has a long history of successful innovations. The company s innovation activities are pursued in line with a model adapted to match the requirements of the four business areas. In recent years, the focus has been on honing innovation-related processes and boosting their efficiency. Innovation is a multi-faceted, complex configuration of activities that emerge in various forms. SCA categorises its various innovations and their potential market impact on the basis of three categories: Upgrade Next generation Breakthrough SCA consistently strives to improve existing products and services, and these efforts are most commonly referred to as upgrades. An upgrade innovation is a modification of an existing offering, and is a necessary move in the bid to remain competitive and maintain high levels of satisfied customers and consumers. Upgrade is the most common form of innovation across all companies. What SCA refers to as next generation innovations occur when a completely new offering is launched for an existing customer or consumer segment. A good example of this is Tork Elevation, a new tissue dispenser system designed for the AFH (Away-From-Home) market segment, which is described in more detail on page 19. Breakthrough innovations which emerge seldom in most industries are new growth platforms that completely transform an entire industry, new customer or consumer segments or provide an entirely new offering to existing customer segments. The launch of heavy incontinence care products in the 1970s is one such example. The new products replaced catheters which caused infections of the urinal canal and other problems for patients and created an entirely new market segment. Driving forces underlying innovations Innovations are not just a matter of enhancing the offering to existing customers and markets. A global group such as SCA must generate new demand and create new markets, while also attracting new customers at minimum cost. A number of interactive driving forces create the need for continual innovation programmes in the four business areas. Generally, SCA is compelled to work with innovations in order to: Satisfy changing demands and requirements among customers and consumers in terms of environmental, economic and social factors. Create long-term, profitable differentiation visà-vis competitors. Create value by combining higher customer and consumer value with reduced manufacturing and sales costs, thereby raising shareholder value. Generate growth in sales, earnings and in the number of customers and consumers. General innovation model The SCA Group has three basic building blocks for innovation programmes in the business groups: Customer and consumer insight New technology Business model SCA s definition of innovation: Innovations involve creating or identifying perceptive solutions and successfully launching them in the market. 16 SCA Annual Report 2009

18 Board of Directors Report SCA Group Innovations can start anywhere in the Group or in cooperation with external partners in a network. Experience proves that an innovation becomes successful only when there is coherence between customer and consumer insight, new technology and business model. The general innovation model illustrated below shows the interaction of the various building blocks. This type of model is used in SCA s most innovative areas of operations: Personal Care and Tissue. Similar models are used in Packaging and Forest Products. Open innovation In addition to its in-house innovation programmes, SCA has increasingly applied the open innovation model in recent years. This approach adopted in an effort to optimise access to competencies and resources involves using outside resources alongside in-house competency as an integral part of the innovation process. It is a natural step forward since good ideas are spread across our ever-more globalised world in companies, universities and think tanks. Moreover, open innovation offers other benefits, such as new customers and consumer insight and know-how from related industries, which accelerate the development process and cut costs. For example, SCA has used InnoCentive, which is a know-how community and innovation broker based in Boston with 180,000 researchers active in its global network. 1) SCA has posted a number of research and innovation-related challenges on InnoCentive s web and the response from researchers in the network has been highly satisfactory. Open innovation is a complement to in-house innovation, and offers major potential to companies such as SCA to optimise the combination of internal and external ideas. SCA primarily uses open innovation in the following ways: Patent exchange Partnership with suppliers and selected companies Utilisation of innovation brokers SCA R&D Centre SCA R&D Centre in Sundsvall, Sweden, conducts strategic research and development for SCA s Forest Products and Packaging business areas. The centre has specialist know-how that ensures leading-edge expertise in key areas. In the case of Forest Products, the focus is on publication papers and pulp products; while Packaging focuses on containerboard manufacturing and packaging solutions. A key component is the establishment and maintenance of contacts with external research organisations. SCA R&D Centre adjoins Mid Sweden University in Sundsvall. The centre pursues close cooperation with the university and shares certain resources with the Fibre Science and Communication Network (FCSN). The close relationship between product-oriented and academic research favours both parties, since cooperation enhances access to the skills base and facilitates recruitment to the two organisations. The number of employees at the SCA R&D Centre was 90 at yearend ) The Economist, InnoCentive: A market for ideas, 17 September 2009, paper edition. SCA s general innovation process CONCEPT DEVELOPMENT LAUNCH S T R A T E G Y Technology Discovery Consumer Insight Business model SCA s general innovation process represents a fundamental framework for concept generation and innovation based on trends in the business environment, insight into customer and consumer requirements and technological progress while also being deeply embedded in the Group s strategy and business model. Thanks to well-defined process stages, creative and valuable concepts emerge in an objective and time-effective manner ahead of their market launch as value-creating and profitable products and services. SCA Annual Report

19 Board of Directors Report SCA Group Innovation in hygiene operations SCA s two hygiene operations Personal Care and Tissue both have a long history of innovation. Innovation in the hygiene area is a prerequisite for retaining and strengthening market shares, building strong brands and creating new values for customers and consumers. A higher innovation pace and shorter launch times are two focus areas. Some of the most important factors underlying the establishment of the new organisation, Global Hygiene Category (GHC), were to bolster innovation programmes and brand value, while capitalising on global economies of scale and boosting competitiveness. By sharpening its focus and raising the pace of innovation in the hygiene area, SCA can meet changing demands and requirements among customers and consumers worldwide. SCA further differentiates its offering by building strong brands in a bid to reach new customers and consumers. Moreover, there is a growing requirement for sustainable supply chains, products and solutions. This development is consumer driven. For example, four out of five Europeans say that they take into account the environmental impact of the products they purchase. 1) In addition, legislative measures are underway to strengthen sustainability programmes. Guidelines are being introduced in EU member countries to encourage sustainable consumption and production that promote green supply chains. 2) Naturally, the growing market potential may also be viewed as a driving force for differentiated innovation. Global economic trends with more people able to afford hygiene products, plus changing demographics, with a growing world population, especially among the elderly most definitely require a greater input in innovation. SCA must also ensure that it offers suitable products, solutions and business models to match a growing number of segments. 1) European Commission, Euro Barometer Survey July ) European Commission, (DG Environment), Towards a greener retail sector Final report, February 2009, in collaboration with GHK, Ecologic, TME and Ekopolitika. SCA enhances public hygiene facilities Many public hygiene facilities worldwide have been given a facelift since SCA launched its new tissue dispenser system, Tork Elevation, for the AFH segment. This marked the largest product launch by Tork the global brand during the past decade. The dispenser system functions in all sorts of toilets, as well as being functional and easy to maintain since it: Combines a simple, sculptured shape with soft rounder surfaces and corners. This results in a compact but nonetheless attractive design that is readily cleaned. Meets the demand in small toilets with few users as well as in larger hygiene facilities with a high through-flow. There is a large range of dispensers, soap and other products to meet various requirements. Is user-friendly. The flexible and reliable paper and soap feed helps to reduce consumption. In turn, this leads to less waste, a reduction in transport, reduced stocks and less costs for customers. Tork Elevation was awarded two international design distinctions in 2009 if Product Design Award and the Reddot design award. 18 SCA Annual Report 2009

20 Board of Directors Report SCA Group Examples of innovations in hygiene operations: Tempo Complete Care paper handkerchiefs contain a unique combination of lotion and ethereal oils. The lotion treats the skin and reduces the red nose risk, while the oils make it easier to breathe. The product has proved a major sales success and was ranked Product of the year 2010 in Italy. Plenty Active Wipe (marketed under the name Zewa Aktiv Wisch- Tuch in Germany) is the world s first household tissue to include a cleanser. When dampened, the wipes readily remove dirt such as honey, jam, oil and fat, etc. Even when wet, the paper is resilient, as well as being biodegradable and has been dermatologically tested. WooDi is a project aimed at developing a diaper based on wood fibre. The project is a cooperative venture between the pulp producer Södra Cell AB and the Chalmers Institute of Technology. In a bid to remove the oil-based super absorbents from diapers, attempts are in progress to develop a chemical pulp with higher absorption capacity and a superior ability to retain liquids. During 2009, SCA launched a complete new range of baby-care products in the Nordic market. This is an example of a category expansion, which includes baby lotion, nursing pads and wet wipes. The products carry the Nordic Swan environmental label. In the incontinence care area, under the Tena brand, and in the baby diapers segment, a major e-trade venture aimed at customers and consumers is under way. Tena has created an individualised portal for its customers where they can buy products and order product samples, as well as downloading information and participating in netbased communities. Tena s consumer site is aimed at people who do not live in care institutions and for whom discretion is a key factor, since incontinence is a taboo subject for many. The e-trading venture is an example of a new approach to customer and consumer communications. SCA Annual Report

21 Board of Directors Report SCA Group Innovation in Packaging SCA s Packaging business area has innovation expertise in many areas throughout the organisation. Packaging seeks to make the supply chain more flexible and greener, while simultaneously strengthening retail outlets and reducing the complexity of the packaging industry s solutions. SCA s Mira System represents the future in shelf-ready packaging systems Packaging s Mira System is a module based, uniform packaging solution for flat products, which is designed to increase availability and sales in stores. The system links a new packaging design with a new store system for which SCA has exclusive rights. The SCA system impacts the entire supply chain and all its players, from manufacturers, packaging suppliers and distributors to retailers, customers and consumers. Apart from making supply chains more flexible, less complex and more sustainable, the primary benefits of the Mira System is that it offers shelf-ready outer packaging systems, making it easier to open, use for signage, marketing and purchases, as well as facilitating the recycling of the products and packaging material. Packaging consultant and production partners Packaging has close, long-term relations with its customers, many of whom are leading brands and resellers in fast-moving consumer goods (FMCG) worldwide. By acting simultaneously as a packaging consultant and production partner, SCA plays an active role throughout the supply chain, from industrial production chains to store shelves among retailers throughout Europe. Packaging is increasingly a full-service supplier, with a leading role in materials, design work and supply-chain solutions. Supplementary innovation expertise Packaging utilises the innovation expertise in areas available at the SCA R&D Centre in Sundsvall and at Packaging s Innovation Centre in Brussels, as well as among the business area s 17 Design Centres worldwide. This is done in close cooperation with production, development, marketing and sales specialists at paper mills. Driving forces behind innovation A cost-effective, sustainable supply chain is a significant dimension of business strategy that creates competitive advantages. The supply chain can represent up to 50% of the operating costs of a retail company and up to 50% of a company s total assets. 1) Thus, a reduction in the supply chain costs of just a few percent for example, through superior, shelf-ready packaging systems can entail substantial savings for retailers and FMCG producers worldwide. Innovative design in packaging solutions is viewed as one of the primary means of reducing carbon dioxide emissions in global supply chains. 2) However, the creation of more sustainable supply chains in the retail trade involves much more than energy-efficient transport and environmentally favourable packaging. The most significant environmental benefit of packaging, and one that is frequently ignored, is its role in preventing wastage. In Western Europe alone, some 3% of food is spoilt before it reaches consumers. 3) Close cooperation with customers For the Packaging business area, close cooperation with customers is an integral part of day-today operations, since the business group supplies more than 100 customised solutions daily in the European market. Meanwhile, a number of strategically important innovation projects are in progress that are aimed at entering the customer s innovation pipeline and creating long-term business relations. This can be achieved by raising the value of the customer s business operations through cutting the overall cost of product packaging and related logistics. Other innovations in Packaging: During the year, SCA organised the second SCA Packaging Design Challenge. This challenges students throughout Europe to come up with innovative ideas for the packaging industry. 500 students from 23 countries participated in the 2008 event. The 2009 event involved identifying a simple and sustainable packaging design for existing products sold via retail outlets. 1) SCA s estimate. 2) World Economic Forum, Logistics & Transport Authority, based on Accenture, Supply Chain Decarbonization, February ) ECR Europe and EUROPEN, Packaging in the Sustainability Agenda: A Guide for Corporate Decision Makers, SCA Annual Report 2009

22 Board of Directors Report SCA Group Innovation in Forest Products Innovations are a tool for the Forest Products business area to further strengthen its competitiveness. Efforts in this respect permit Forest Products to move up the value chain and produce products and solutions with higher value and margins. By this means, SCA differentiates itself from the rest of the industry, while also meeting requirements among business partners and customers. Higher margins and value Forest Products seeks to move up the value chain and supply products and solutions with higher value and margins, while also creating greater satisfaction among business partners and customers. One example of SCA s strategic shift towards more value-added, customised products is the cooperative venture with Ikea involving the Gorm storage shelving system. SCA s sawmill in Bollsta produces timber products designed for the Gorm shelf, which accounts for about 10% of the sawmill s total output. These products go directly into the sub-supplier Träteam s customised production line, where the shelving components are finished and assembled automatically together before being packaged for distribution to Ikea stores in the Nordic region, Benelux and Germany. Some one million shelves annually will be produced in this efficient and specially developed facility. SCA is Europe s largest private forest owner. From an innovation perspective, this offers the business area access to a wide spectrum of resources and know-how, as well as the requisite potential to work with development throughout the value chain, making it a major competitive advantage. For example, 50% of solid-wood products are customised for specific customers. This is the result of robust relations with leading business partners and customers and innovations in manufacturing processes, organisation, logistics and business model adjustments. Driving forces underlying innovation Productive, cost-effective production plants and not necessarily a high market share are a precondition for favourable profitability. As a result, the company applies what is referred to as the strong-mill concept, which focuses resources on a number of large, high-tech paper and pulp mills. The concentration of resources and knowhow creates a platform for value-building innovation resulting in market-leading product development and manufacturing. Operationally, each mill has production, development and marketing specialists who work closely with the SCA R&D Centre in contributing a broad spectrum of innovation projects in designated areas to meet demands from business partners and customers. Growing significance of biofuel SCA s FSC certified forests are substantially more productive today than they were just a few decades ago. This permits an expansion of forestbased production, including the economic production of biofuel, and opens up application areas for tree branches, crowns, roots, sawdust, peat and processed products, such as pellets and briquettes. SCA BioNorr supplies households and central boilers with pellets, a market with an annual growth rate of 20%. SCA s pellets plant in Härnösand is one of the largest in Sweden. SCA s existing forest products facilities are ideal for the development of new, energy-related products and solutions. Instead of being compelled to build green facilities, it is now possible to add bioconversion or thermo-chemical processes around SCA s existing paper mills in Europe to generate bio-energy or produce bio-products. This offers SCA the potential to raise productivity and profitability in existing manufacturing structures. Smaller plants save time and space The PowerPot plant is a new, smaller plant supplied by SCA NorrPlant. PowerPot conducts cultivation, transport and planting cheaper, since almost twice as many plants can be accommodated per case compared with SCA s normal-size plants, or what are referred to as JackPot plants. The inside of the pots are coated with copper paint, just like the pots for the JackPot plants, which means they build a good root system. The copper means that the roots stop growing when they come into contact with the side of the pot, but when removed from the pot and planted in soil, they resume their growth. Since the roots are not forced to bend around the sides of the pot, they do not become deformed but, instead, grow straight out, very much like roots in natural regeneration plants. Major field tests are now in progress and the initial results are very promising. If the tests continue to show equally good results, PowerPot will see a commercial launch during Examples of other innovations: At the Laakirchen paper mill in Austria, SCA has developed a high-quality SC-paper grade, Grapho- Verde, designed for magazines and catalogues, and based on more than 50% recovered fibre. In the past, the view was that it was impossible to manufacture top-quality paper grades using such a high proportion of recycled fibre. Customer demand has been substantial, with sales rising 50% amid an otherwise declining market. In a bid to boost output, SCA has invested in higher capacity for the manufacture of pulp based on recovered paper in Laakirchen, which also reduces energy and wood consumption. Wind power is an energy source that can be linked to SCA s considerable forest holdings. Already, there are 64 wind turbines on SCA s land and a cooperative venture is in progress with the Norwegian energy producer, Statkraft, in respect of six future wind farms with a total of 455 wind turbines and an output of 2.4 TWh annually. The wind power project is an example of new application areas for SCA s forest holdings. SCA Annual Report

23 SCA Annual Report 2008

24 SCA at a glance SCA creates value by fulfilling the needs of customers and consumers in a spirit of innovation, through continuous efficiency enhance ments and with a clear desire to contribute to a sustainable development. The Group develops, produces and markets personal care products, tissue, packaging, publication papers and solid-wood products in more than 90 countries. During 2008 SCA had annual sales of SEK 110bn (approximately EUR 11.5bn) and 52,000 employees. Group s largest markets Net sales Operating profit SEKm Germany Tyskland UK Storbritannien France US Italiy Frankrike USA Italien Sweden Sverige Netherlands Nederländerna Spain Spanien Personal Care Tissue Packaging Forest Products 21 % 34 % 30 % 15 % 32 % 26 % 17 % 25 % Danmark0 4,000 8,000 12,000 16,000 Australien Mexiko Belgien SCA Annual Report

25 Personal Care The business area comprises three product segments: incontinence care, baby diapers and feminine care. Production is conducted at 22 facilities in 19 countries. Products are sold in some 90 countries throughout the world. Tissue Tissue consists of toilet paper, kitchen rolls, facial tissue, handkerchiefs and napkins. In the AFH segment SCA delivers complete hygiene concept to companies and institutions. Production is conducted at 38 facilities in 18 countries. Products are sold in some 80 countries throughout the world. Packaging SCA is a full-service supplier of packaging solutions and offers both transport and consumer packaging. Production is conducted at more than 200 facilities in 28 countries. Products are sold in some 50 countries in Europe and Asia. Forest Products Production comprises publication papers, pulp and solid-wood products, and is conducted at 12 facilities in 3 countries. Products are mainly sold in Europe, but also North America and Japan. Capital employed Operating cash flow Average number of employees SCA s sales per region 10 % 32 % 15 % Europe, 78% Americas, 13% 35 % 31 % 33 % Rest of the world, 9% 25 % 16 % 44 % 30 % 21 % 8 %

26 The year at a glance Net sales amounted to SEK 110,449m (105,913). Profit for the year totalled SEK 5,598m (7,161). Earnings per share amounted to SEK 7.94 (10.16). Proposed dividend is SEK 3.50 (4.40) per share. Earnings, dividend and cash flow per share SEK 12 6 SEK Net sales and operating margin SEKm 12 % , , , , , Earnings Dividend Net sales Operating margin Operating cash flow Key figures SEK EUR 1) SEK EUR 1) SEK EUR 1) Net sales, SEKm/EURm 110,449 11, ,913 11,456, 101,439 10,972, Operating profit 8, ,147 1,098 8, Operating margin, % Profit before tax, SEKm/EURm 6, , , Profit for the year, SEKm/EURm 5, , , Profit for the year, SEKm 2) 5,598 6,908 5,467 Earnings per share, SEK 7:94 10:16 7:75 Earnings per share, SEK 2) 7:94 9:80 7:75 Cash flow from current operations per share, SEK 5:42 6:42 3:95 Dividend, SEK 3) 3:50, 3) 4:40 4:00 Strategic investments, incl. acquisitions, SEKm/EURm 4, , , Equity, SEKm/EURm 67,252 6,147 64,279 6,792 58,963 6,518 Return on capital employed, % Return on equity, % Debt/equity ratio, multiple 0,70 0,58 0,62 Average number of employees 51,999 50,433 51,022 1) See pages 36 to 40 for exchange rates. 2) Excluding items affecting comparability. 3) Proposed dividend. Contents SCA at a glance Introduction Flap CEO s message 2 The SCA share 4 Value creation 6 Board of Directors Report SCA Group Operations and structure 10 Acquisitions, investments and divestments 11 Other Group information 12 Sales and earnings 13 Operating cash flow 14 Financial position 15 Business areas Personal Care 16 Tissue 20 Packaging 24 Forest Products 28 Other Group information Raw materials, risk exposure 32 Sustainability 35 Financial statements SCA Group Income statement 36 Consolidated statement of recognized income and expense 36 Operating cash-flow statement 37 Cash-flow statement 38 Balance sheet 40 Parent Company 41 Notes 43 Proposed distribution of earnings 79 Audit report 80 Corporate Governance Corporate Governance Report 81 Board of Directors and Auditors 86 Corporate Senior Management 87 SCA data Multi-year summary 88 Comments to the multi-year summary 89 Production capacity 90 Definitions and key ratios 91 Glossary 91 Annual General Meeting and Nomination Committee 92 SCA Annual Report 2008

27 Welcome to the new Expanded and improved an entire world of important information about SCA just a click away. SCA s aim is to continuously develop making it the foremost source of information and news for all of SCA s stakeholders. On the website, all important information concerning the Group and operations shall be readily available to everyone. essentials to get to know the world of SCA 1 The year s most significant events in an interactive time axis 2 There will be some changes on our website this year, and a number of these take place in conjunction 1 3 More in-depth information concerning relevant data and links to these with the publication of the Group s Annual Report for The content in the printed version of the Annual Report, which has become increa- 2 3 Quarterly updates during the year singly comprehensive in recent years, has been concentrated and the report now has fewer pages. Meanwhile, the website is being expanded to include a range of new functions that enable the visitor 1 to quickly and easily find relevant information. By utilising all the possi bilities of the Internet, encom- Graphic historical overview per item directly in the table 3 passing text and images combined with enhanced interactivity and 2 2 rapid updates, it is SCA s ambition for an increasing number of its stakeholders to derive benefit from Notes to separate items are displayed adjacent to the table 1 Look out for news during the year. 3 More detailed financial information The following symbol in the annual report refers to further information at SCA Annual Report

28 Introduction CEO s message Strength and stability in difficult times In 2008, conditions changed dramatically for many companies in the wake of the global finance crisis and the weaker economy, and this was also true for SCA. While some of our segments more sensitive to economic fluctuations, such as packaging and forest products, experienced a weakening trend, we saw proof of strength in our hygiene products business in the face of increasingly difficult times. Our objective is to strengthen our cash flow by a couple of billion SEK in the next two years. We can look back at a year that included a number of admirable achievements. We continued to expand our sales of hygiene products in prioritised emerging markets by 16% and thus continued to strengthen our positions. Our tissue business improved its operating profit by a full 38%. Behind this lies the successful integration of our 2007 European tissue acquisition and other efforts to enhance profitability. Growth for Personal Care products totalled 6%, in which our primary segment, incontinence care with the world-leading brand Tena, expanded by 7% during the year. It was mainly our packaging business that reported a significant drop in earnings. Producer inventory levels of containerboard were already high at the beginning of the year. The decline in the demand scenario for corrugated board accelerated and, in the fourth quarter, several industrial segments deteriorated sharply. These factors have entailed an ever-growing pressure on prices. SCA has taken a range of measures, one of which was to reduce containerboard production by 149,000 tonnes. During the year, parts of the UK packaging operations were divested to focus on higher value-added products. Within the forest products business area, sawmill operations declined significantly compared with the record earnings in the preceding year. Demand for publication papers was stable. Rising costs for raw material and energy had an adverse impact on earnings. However, turbulent times can also create new business opportunities. In such an industry environment, SCA s fundamentally strong ability to work under pressure provides a stable platform for the strategic short and medium-term initiatives we are now taking to emerge from the recession as a stronger company. Due to the unusually large degree of uncertainty in future assessments, our focus in the next two years will be on costs, cash flow and capital efficiency, while we will continue with crucial consumer and customer-oriented innovation. 1. Costs and cash flow In 2008, we focused on reducing operating capital through a review of inventory, payment days, and so forth. Our efforts have already generated results. We will reduce the 2009 level for capital expenditure compared with 2008 by postponing a number of large investments. We are prepared to implement restructuring measures to optimise the bulk of our assets and to reconsider our market positions in certain markets and product categories. We are concentrating our growth efforts to areas with the best conditions for profitability. Our objective is to strengthen our cash flow by a couple of billion SEK in the next two years. 2. Capital efficiency As part of our capital-intensive operations, we are conducting ongoing programmes and supplementing these with new programmes. Packaging s Lean Production programme is to be rapidly expanded to an increasing number of facilities, which decisively enhances productivity and profit ability. The programme also reinforces our competitiveness by providing a clearer customeroriented approach. 2 SCA Annual Report 2008

29 Introduction CEO s message Within Forest Products, which has long reported world-class productivity figures, 84 different improvement projects are currently under way. These projects will reduce tied-up capital. The integration of facilities that were part of the Group s 2007 acquisition is currently taking place within the European tissue business and this will enable continued streamlining. 3. Consumer and customer-oriented innovation Innovation is a priority area for SCA. In recent years, the Group has made significant investments in increased consumer insight, product research and development, and design capacity. This is the driving force for much of our business and has given us leading positions in several product categories, such as incontinence care with the Tena brand and AFH with the Tork brand. For the latter of these brands the company has recently launched an entirely new design line. For the packaging business, product development and design are central elements in the customer offering. Innovation and product renewal will be one of our key competitive advantages. The three focus areas are supported by clearlydefined objectives that prioritise return on capital employed. The Group s average and annual target for a business cycle is 13%. While the demanding challenges facing our business environment comprise the impetus behind our efforts in 2009, our most critical motives lie in the future. SCA has a number of highly attractive strengths, ranging from our stable ownership to forest holdings, where we have an integrated, highly efficient value chain that optimally utilises our own forests and generates favourable results. In addition, SCA has a prominent sustainability profile and most of our business areas hold leading market positions. Europe accounts for 80% of sales and 85% of operating profit and is thus not only our obvious home market, but also a strength factor. This is particularly true in terms of our hygiene operations. SCA is currently one of the world s three leading hygiene products companies. The Group s share of sales of hygiene products has gradually increased to 55%. This is a position shift that we must continue to pursue. The hygiene business offers us higher and more stable earnings and a more reliable value trend for our shareholders. This work will be characterised by two main themes: strengthening SCA s positions in the European home market and making further investments in selected growth markets such areas as Eastern Europe and Russia, and certain markets in Latin America, Southeast Asia and the Middle East. Our brand portfolio will be a key factor. We intend to continue making investments in local production, product development and marketing in these countries. Our focus is to increase the proportion of markets in which we hold not less than a 20% market share. This provides critical mass for sustainable competitiveness. In summary, I would like to emphasise that SCA has an extraordinary opportunity to utilise its fundamental strength and stability in a year such as 2009, which will be a test for all involved. It is hardly possible to speculate about future business trends at this point. However, it is worth once again highlighting the fact that SCA has a significant portion of its production focused on products that are required and used everyday. We know that sooner or later the industrial climate will turn around and customer demand will increase. When this happens, we will be prepared with more innovative products, familiar and attractive brands, and talented and skilled employees dedicated to creating continued value for our consumers, customers, shareholders and employees. Jan Johansson President and CEO SCA Annual Report

30 Introduction The SCA share The SCA share in 2008 The 2008 closing price on the Nasdaq OMX Stockholm for SCA s B shares was SEK (114.50), corresponding to a market capitalisation of SEK 47bn (81). SCA s market capitalisation corresponds to approximately 2% (2) of the total market capitalisation on the Nasdaq OMX Stockholm. Since the beginning of 2008, the share price has declined by 42%. During the same period, the Nasdaq OMX Stockholm fell by 39%. The highest closing price for SCA s B shares during the year was SEK , which was noted on 7 April. The lowest price was SEK on 28 October. The proposed dividend is SEK 3.50 per share (see below). Viewed over a five-year period, the SCA share has demonstrated stronger performance than comparable industry indexes, but has developed weaker than the Nasdaq OMX Stockholm. Trading in SCA shares SCA shares are listed and traded primarily on the Nasdaq OMX Stockholm, and as American Depository Receipts (ADR level 1) in the US through the Bank of New York. In addition to indexes directly linked to the Stockholm exchange, SCA is included in other indexes, such as the Dow Jones STOXX Index, FTSE Eurotop 300 and MSCI Eurotop 300. SCA is also represented in several sus tain ability indexes. One such index is the FTSE4Good index. Following the submission of an application by SCA, the Group s B share was delisted from the London Stock Exchange on 29 May 2008 pursuant to a decision by the Financial Services Authority (FSA). SCA s B share had been listed on the London Stock Exchange since 1983, but trading in recent years in London corresponded to less than 1% of the total turnover of the company s B shares and, consequently, the decision was made to delist. Liquidity In 2008, the volume of SCA shares traded was 849 million (917), representing a value of approximately SEK 72bn (118). Average daily trading for SCA on the Nasdaq OMX Stockholm amounted to 3.4 million shares, corresponding to a value of SEK 286m (436). Foreign ownership Some 59% (57) of the share capital is owned by investors registered in Sweden and 41% (43) by foreign investors. The US and the UK account for the highest percentage of shareholders registered outside Sweden, with 21% and 11% respec tively. Dividend The Board of Directors has proposed a dividend to shareholders of SEK 3.50 per share for The 2008 dividend represents a dividend yield of 5.2% per share, based on SCA s share price at the end of the year. SCA s dividend policy is described on page 8. Ticker names Nasdaq OMX Stockholm SCA A, SCA B New York (ADR level 1) SVCBY Price trend and share trading 2008 Price trend and share trading SEK Thousand shares SEK Million shares , , , , , , Jan. Feb. March April May June July Aug. Sep. Oct. Nov. Dec. SCA B Daily trading OMXSPI SCA B Trading per quarter OMXSPI 4 SCA Annual Report 2008

31 Data per share All earnings figures include non-recurring items. SEK per share unless otherwise indicated Earnings per share after full tax: After dilution Before dilution Market price for B share: Average price during the year Closing price, 31 December Cash flow from current operations 1) Dividend ) Dividend growth, % 3) Dividend yield P/E ratio 4) Price/EBIT 5) Beta coefficient 6) Pay-out ratio (before dilution), % Equity, after dilution Equity, before dilution Average number of shares after dilution (millions) Number of registered shares 31 December (millions) Number of shares after full conversion (millions) ) See definitions of key ratios on page 91. 2) Board proposal. Shareholders by country, capital Sweden, 59% US, 21% UK, 11% Luxembourg, 3% Other, 6% Shareholders by category, capital Institutions, 86% Private individuals, 14% Source: Euroclear 3) Rolling 10-year data. 4) Share price at year-end divided by earnings per share after full tax and dilution. 5) Market capitalisation plus net debt plus minority interests divided by operating profit. (EBIT = earnings before interest and taxes). 6) Share price volatility compared with the entire stock exchange (measured for rolling 48 months). SCA s ten largest shareholders According to Euroclear s official share register for directly registered and trustee registered shareholders at 31 December 2008, the following companies, foundations and mutual funds were the ten largest registered shareholders based on voting rights (before dilution): Shareholder No. of votes % No. of shares % AB Industrivärden 508,200, ,800, Handelsbanken* 221,541, ,196, SEB* 103,920, ,011, Skandia 59,071, ,214, Alliance Bernstein 58,104, ,104, Alecta 44,820, ,140, Skrindan** 36,550, ,655, Swedbank* 23,232, ,220, Nordea* 19,011, ,212, Andra AP-fonden 12,619, ,289, * Including mutual funds and foundations. Source: Euroclear ** Skrindan includes Maths O. Sundqvist s holding. Shareholder structure Holding No. of shareholders No. of shares Holding % Votes % ,815 8,380, ,143 10,596, ,001 2,000 9,512 13,869, ,001 5,000 6,811 21,557, ,001 10,000 2,281 16,227, ,001 20, ,505, ,001 50, ,664, , , ,277, , ,030, Total 79, ,110, Source: Euroclear Percentage of foreign ownership % Share distribution 31 December 2008 Series A Series B Total shares Number of registered shares 110,940, ,169, ,110,094 of which treasury shares 2,767,605 2,767,605 Issues, etc Since the beginning of 1993, the share capital and the number of shares have increased due to issues of new shares, conversions and splits, as detailed below: More information at No. of shares Increase in share capital, SEKm 1993 Conversion of debentures and new subscription through Series 1 warrants 4,030, Cash payment, SEKm Series A Series B Total New share issue 1:10, issue price SEK 80 17,633, , ,145, ,821, ,967, Conversion of debentures 16, ,145, ,837, ,983, Conversion of debentures 3,416, ,145, ,254, ,399, New share issue 1:6, issue price SEK ,899, , ,133, ,166, ,299, Conversion of debentures 101, ,626, ,775, ,401, New share issue, private placement 1,800, ,787, ,414, ,201, New share issue through IIB warrants ,701, ,500, ,202, Conversion of debentures and subscriptions through IIB warrants 2,825, ,437, ,590, ,027, Conversion of debentures 9, ,427, ,608, ,036, Split 3:1 470,073, ,905, ,204, ,110,094 SCA Annual Report

32 Introduction Value creation Value creation Value creating business idea through growth in hygiene SCA s business idea is to develop, produce and market increasingly valueadded products and services within Personal Care, Tissue, Packaging and Forest Products. SCA s products simplify the everyday lives of hundred of millions of people around the globe. They also generate strong cash flows that enable favourable dividend growth and increased value for the SCA share. Growth in hygiene % Hygiene Packaging/Forest Products 2008 In the past decade, the Group has gradually shifted the balance toward its hygiene products operations. This reallocation was conducted to reduce the effects of a cyclical demand scenario and is a path that the Group will pursue. Demand for hygiene products is stable in industrial countries and is rising in emerging markets in pace with the increase of disposable income and use of the products. Since 2008, SCA conducts business in two blocks: hygiene products on the one hand and forest products and packaging on the other. A Global Hygiene Category (GHC) was established during the year to create the conditions for the best possible development of the hygiene businesses based on their respective circumstances. For further information concerning GHC, see page 10. Business in two blocks Personal Care Keeping dry SCA has world-leading expertise and innovative products that keep babies dry, offer women comfortable protection during menstruation and make everyday life simpler for people with incontinence. SCA s baby diapers, feminine care and incontinence products are available worldwide. Tissue Keeping clean SCA is Europe s largest supplier of tissue. Keeping your house and belongings clean and washing and drying hands are the simplest and most effective ways to prevent the spread of disease. Packaging Keeping safe SCA is one of Europe s leading suppliers of packaging solutions and also conducts operations in Asia. The Group develops smart, holistic solutions that make transport less expensive. SCA focuses on creative design that offers customers good point-of-sale display and facilitates everyday life for consumers. Forest Products Keeping up-to-date SCA produces publication papers and solid-wood products that are continuously developed to offer higher value-added. The Group s substantial forest holdings are a strategic asset and form the basis of the sustainable development of its integrated industrial operations. Market-driven strength factors Customer and consumer insight Understanding customer requirements and quickly realising the consequences of new consumer needs and lifestyles is of decisive importance for a company such as SCA. This insight is converted into patented solutions and new products on the shelves of the stores. Regional presence with global strength Many of SCA s products cannot sustain the high costs of long-distance transport. Accordingly, production is mainly conducted at a local level. Nevertheless, SCA has significant economies of scale and opportunities to exchange know-how and ideas concerning consumers and customers in various parts of the world. This occurs within such areas as research and development, technology, brand positioning and concept development. Sustainable development Sustainable development has been a key part of SCA s business model and product offering for many decades. The sustainability policy and Code of Conduct stipulate how the Group addresses environmental and social issues, which create long-term value for shareholders and other stakeholders. 6 SCA Annual Report 2008

33 Introduction Value creation Financial targets In light of the Group s greater focus on capital efficiency, SCA has set the target for ROCE at a Group and business area level. Assuming that the capital markets and economy stabilise toward the end of 2010, the Group shall achieve a return on capital employed of 13%, which is the target for average annual return over an economic cycle. Group Personal Care ROCE 30 % Packaging ROCE 10 % ROCE 13 % Tissue ROCE 13 % Forest Products ROCE 11 % Intensified strategic focus The current recession and the financial uncertainty have meant that SCA has adapted its short-term plans to the prevailing situation. The priority is a turn around of the Group s cash-flow trend and to continue to strengthen the Group s successful positions in hygiene products throughout the world. This is particularly relevant for the European home market, which accounts for a total of 80% of the Group s sales and 85% of operating profit. The action plan addresses lower growth and more difficult times, which impact expansion plans insofar as markets in which SCA does not already have an established position are assigned a lower priority. Lower costs and increased cash flow Through increased control of inventory and terms of payment, working capital is reduced. Investment levels are lowered through repriori tisation or postponement. A more strict prioritisation of growth areas (geographic and categories) reduces the pressure on costs. Capital efficiency In a capital-intensive operation such as those conducted by SCA, efficient facilities with high production and low cost levels are a decisive factor. Several systems and programmes are used to streamline the organisation and equipment in order to generate optimal efficiency with a focus on the Packaging, Forest Products and Tissue business areas. Innovations For the consumer-centric hygiene products business, consumer insight and innovation is the key factor that drives sales. SCA, a holder of leading global or regional positions in its categories, continues to invest to develop innovation and product development. Growth Within the hygiene products business, significant growth opportunities exist as a result of an increase in the disposable income of a greater number of people living in developing countries. Meanwhile, the use of hygiene products is low, which further supports increased growth. SCA aims to grow at a more rapid pace than the market in selected segments and in emerging markets, such as Latin America, Russia/ Eastern Europe, the Middle East and Southeast Asia. SCA Annual Report

34 Introduction Value creation Value creation SCA measures and evaluates profitability in operating activities as return on capital employed (ROCE). The target for ROCE in the Group has been set at 13% and varies among the business areas based on their different conditions (see pages 4-5). Strategic investments SCA evaluates all strategic investments (company acquisitions or expansion investments) using a cash-flow based control model. The present value of future cash flows are calculated and discounted by the cost of capital. SCA requires that the present value must exceed the investment expenditure by a margin. This margin is set specifically for each investment and depends on the business to which it relates, the economic life of the investment and other factors. Required rate of return on operating activities SCA s required rate of return on operating activities corresponds to the financial targets and is based on return on capital employed (ROCE). borrowing costs and tax rates in other countries change the return requirement for operations in those countries. Dividend policy SCA aims to provide long-term stable and rising dividends. Over a business cycle, approximately one-third of cash flow from current operations (after interest expenses and tax) is normally allocated to dividends. If, in the long term, cash flow from current operations exceeds what the company can place in profitable expansion investments, the surplus shall be used to amortise loans or is returned to shareholders through higher dividends or share repurchases. In light of the prevailing uncertainty regarding trends in the economy and the uncertainty associated with the financial systems, the Board decided to propose a dividend of SEK 3.50 for the 2008 financial year, corresponding to a decrease of SEK 0.90 compared with Accordingly, dividends have risen by an average of 6% per year over the past decade. Poor s. During the autumn, Moody s and Standard & Poor s changed their forecast for SCA from a stable to a negative outlook. For more detailed information about SCA s financial risk management, see Note 2 on page 48. Incentive programme SCA s incentive programme is designed to support the company s objective of creating shareholder value. The programme for senior executives has two components: achievement of cash-flow, growth and earnings targets, and the performance of SCA shares compared with an index consisting of SCA s largest global competitors. For more information about the structure of the programme, see Note 7 (Personnel and Board costs), on page 59. Strategic investments, acquisitions and divestments SEKm 12,000 Required rate of return on investments SCA s required rate of return on investments is Capital structure SCA s debt/equity ratio measured as net debt 10,000 8,000 determined by the capital market s estimated return requirement on an investment in SCA shares in relation to recognised equity was 0.70 at 31 Decem ber This is on a par with SCA s long- 6, 000 and current long-term interest rates. The return requirement, the weighted average cost of capital (WACC), based on SCA s capital structure from term target of 0.7. The debt/equity ratio target of 0.7 was chosen taking into account SCA s business risk, the composition of the product portfolio 4, 000 2,000 a debt/equity ratio of 0.7, was calculated at yearend 2008 as 7.2%. This means that all invest- and the substantial forest holdings. Periodically, the debt/equity ratio may deviate from the target. 0 ments must over time generate an annual operat- Over the past decade, the debt/equity ratio has 2, 000 ing cash flow after tax, but before interest expense, of at least 7.2% of the investment in order to be value-creating and thus meet market demands. The return requirement level above varied between 0.39 and SCA has a credit rating for long-term borrowing of Baa1/BBB+ and short-term borrowing of P2/A2 from Moody s and Standard & Poor s, respectively, and a short-term 4, Personal Care Tissue Packaging Forest Products applies to investments in Sweden. Different credit rating of K1 in Sweden from Standard & Divestments Key ratios Dividend per share Operating surplus margin (EBIT) Result 1) (%) Operating cash flow Result 1) (SEKbn) Return metrics Result, capital employed 1) (%) Result, equity 1) (%) Financial metrics Debt/equity ratio (multiple) Market adjusted debt/equity ratio (multiple) Debt payment capacity (%) ) Excluding items affecting comparability. SEK Average cumulative growth: 6% SCA Annual Report 2008

35 Board of Directors Report Page Operations and structure 10 Acquisitions, investments and divestments 11 Other Group information 12 Sales and earnings 13 Operating cash flow 14 Financial position 15 Personal Care 16 Tissue 20 Packaging 24 Forest Products 28 Raw materials, risk exposure 32 Sustainability 35

36 Board of Directors Report Svenska Cellulosa Aktiebolaget SCA (publ), Corp. Reg. No , registered office in Stockholm Operations and structure SCA is a global consumer goods and paper company that develops, produces and markets personal care products, tissue, packaging, publication papers and solid-wood products. SCA offers products that make everyday life for people considerably easier. Based on customer and consumer needs, new and more value-added products are constantly being developed for consumers, institutions, industry and the retail trade. SCA seeks to increase the percentage of value-added products and the products consist almost exclusively of renewable and recyclable materials. Although Europe is SCA s main market, the Group also holds strong positions in North America, Latin America and Asia Pacific. Expansion takes place through organic growth and acquisitions, primarily within personal care and tissue. SCA owns approximately 2.0 million hectares of productive forest land, which guarantees half of the Group s timber supplies and enables efficient raw material integration and effective cost control. SCA conducts extensive sawmill operations as a natural complement to the forest operations. Organisation SCA consists of four business areas Personal Care, Tissue, Packaging and Forest Products. The business areas are organised in six business groups. The SCA Personal Care Europe business group manufactures and sells personal care products in Europe and Africa. SCA Tissue Europe s operations involve manufacture and sales of consumer and AFH tissue in Europe. Also located in Europe is the SCA Packaging Europe business group, which manufactures and sells packaging solutions, and the SCA Forest Products business group, which manufactures publication papers, pulp, timber and solid-wood products. The SCA Asia Pacific business group manufactures and sells packaging, personal care products and tissue. The SCA Americas business group includes both tissue and personal care products. In 2008, the Global Hygiene Category (GHC) was established to create the conditions for global growth in the hygiene businesses. The unit will focus on long-term strategies for all segments in tissue and personal care products. In order to capitalise on synergies among the business areas, GHC is responsible for customer and consumer insight, innovation, technology processes and brand development. Important events during the year During the year, SCA implemented and approved a range of key expansion investments in such countries as Russia, Mexico and the Netherlands. The Group divested parts of its UK packaging operations to focus on higher value-added products. The integration of the European tissue business acquired in 2007 was concluded and resulted in, for example, synergy effects and capacity reductions in the UK. A detailed account of acquisitions, investments and divestments during the year can be found on page 11. In addition to acquisitions, investments and divestments implemented during the year, significant events for each business area are detailed on pages Organisation CEO and President Corporate Staffs Global Hygiene Category (GHC)* SCA Personal Care Europe SCA Tissue Europe SCA Americas SCA Asia Pacific SCA Packaging Europe SCA Forest Products * GHC was established in 2008 to manage innovation, brand strategy and technology for the Group s hygiene operations. 10 SCA Annual Report 2008

37 Board of Directors Report SCA Group Acquisitions, investments and divestments SCA increased ownership in Chinese tissue company Vinda On 29 March 2007, SCA acquired an initial holding of 20% of the shares in the Hong Kong-based tissue company Vinda. This shareholding was later diluted to 14% when Vinda was listed through an IPO on the Hong Kong stock exchange in July Vinda, one of the leading brands with modern assets, is among the three largest companies within the rapidly growing tissue market in China. In February 2008, SCA increased its ownership from 14% to 19%. The partial acquisition amounted to SEK 119m. SCA invests in increased capacity within incontinence care in the Netherlands SCA is the world-leading provider of incontinence care products. To keep pace with the strong growth in demand for heavy incontinence care, the Group decided to invest in increased capacity in the Netherlands. At the plant in Hoogezand, SCA is investing in a new production line for the Tena Pants incontinence product to support the strong growth in Europe, where sales in the Pants segment are outpacing global growth. The investment in Hoogezand amounts to SEK 155m, and the plant is scheduled to start operation at the end of At the facility in Gennep, SCA is investing SEK 184m in a new production line for the Tena Flex incontinence product, which is also designed to satisfy rising growth in Europe. Flex products are mainly sold to institutions and nursing homes and development of the segment has come furthest in Europe, where SCA is market leader. The new line will be started up in the third quarter of SCA invests in solid-wood products During the year, SCA decided to invest in an automatic sorting system at the sawmill in Tunadal. This investment, corresponding to SEK 210m, will reduce production costs and increase production volume, while also enhancing quality and increasing the yield of finished products from the consumed timber volume. The main markets for Tunadal s products are Scandinavia, the UK and France. SCA invests in a new tissue machine in Latin America SCA s operations in Colombia, Ecuador, Peru and Venezuela are conducted through the 50%-owned venture capital company Productos Familia S.A., which sells tissue, baby diapers, feminine care and incontinence care products. In response to a robust sales trend for tissue products, the company is now investing in a new tissue machine in Colombia. SCA s share of the investment cost amounts to USD 32m, corresponding to SEK 208m. The investment is conducted entirely within the framework of Productos Familia and will not require any new shareholder contributions. SCA expands consumer products in Russia The Russian market for personal care products is undergoing rapid growth. Since 1995, SCA s sales of baby diapers (Libero) and feminine care products (Libresse) have grown continuously, increasing the need for local production. Against this background, SCA decided to open its own production facility in the Tula region, south of Moscow, to meet rising consumer demand. Purchasing power is on the rise in Russia, particularly in the Moscow region. An increasing number of families with children are using disposable diapers and the emergence of hypermarkets and superstores is increasing the availability of these products and changing consumer behavior. The Russian venture is long-term and will gradually include all product groups in SCA s consumer portfolio for personal care products: feminine care, baby diapers and incontinence care. The investment is estimated to amount to about SEK 450m. SCA approved significant investment in Mexico In a move to improve its offering to consumers, while at the same time strengthening competitiveness and profitability, SCA decided to invest in a new tissue plant in Mexico. The plant, which will be located near the key markets in and around Mexico City, will be integrated and highly efficient and will provide the company with a good opportunity to enhance product quality and thereby improve SCA s profitability and offering to consumers. Mexico has a stable economy, with a rapidly growing middle-class, low inflation and robust economic growth. Mexico is one of SCA s identified growth markets. Currently, SCA s sales of hygiene products in Mexico and Central America total SEK 2,900m (USD 458m), of which about two thirds is attributable to tissue. The tissue market in Mexico is well consolidated and SCA is currently second, with a market share of 18%. Producer brands, including SCA s, are totally dominant on the Mexican convenience goods market. In a first phase, a tissue machine will be built with a capacity of 60,000 tonnes per year. The project also comprises a recycled fibre plant, a converting hall with three converting lines for toilet paper as well as a distribution center. The investment amount is estimated at SEK 1,525m. SCA divests parts of its UK packaging operations and plans closure of New Hythe mill In 2008, SCA divested its conventional corrugated manufacturing business in the UK and Ireland to the Spanish company SAICA. The purchase price received amounted to SEK 1,145m, following deductions for divestment costs. SCA will retain ownership of and continue to develop the specialised value-added packaging operations in the UK and Ireland, which demonstrate favour able profitability and strengthen SCA s overriding strategy, focusing on higher value added. During the year, SCA also announced its inten tion to close the testliner mill in New Hythe, in the UK, by mid Other During the year, SCA took over the remaining two units in the acquisition of Procter & Gamble s Euro pean tissue paper operations, Orléans, France and Manchester, in the UK. Accordingly the acquisition has been concluded. The purchase consideration for Orléans and Manchester amounted to SEK 529m and SEK 1,150m, respectively, and was paid on 1 April and 1 July. As a result of the integration work within SCA s European tissue operations, the Group closed capacity in the UK corresponding to 30,000 tonnes during the year. To comply with the European Commission s conditions for the acquisition of the European tissue operations, the Softis brand in Germany and Austria was sold during the first quarter of year together with the associated patents and machines to the Italian tissue company Sofidel. SCA Annual Report

38 Board of Directors Report SCA Group Other Group information Environmental impact SCA conducts 14 operations for which a permit is required and six that are under obligation to submit reports in Sweden. Operations for which permits are required or reporting is mandatory account for 17% (17) of the Group s net sales. Six permits relate to the manufacture of pulp and paper. These operations impact the environment through emissions to air and water, solid waste and noise. Seven permits relate to the production of solid-wood and value-added products, and biofuels. These operations affect the number of business group companies and to perform Group-wide management and administrative functions. In 2008, the Parent Company had operating income of SEK 126m (142) and reported a loss before appropriations and tax of SEK 539 (loss: 418). During the year, the Parent Company s net investments and divestments in shares and participations in companies outside SCA amounted to SEK 0m (expense: 14). Investments in property and plant totalled SEK 176m (120) during the year. Cash and cash equivalents at year-end were SEK 0m (0). environment through noise and emissions to air and water. One permit relates to the manufacture of fuel pellets. This operation affects the environment through emissions to air and water, as well as noise. The operations required to submit reports comprise the production of corrugated board packaging (three plants), EPS packaging (two plants), and display packaging (one plant). The production of corrugated board packaging, EPS packaging and display packaging impacts the external environment through emissions to air and water and by generating solid waste. Treasury shares In 2001, SCA issued a total of 1,800,000 shares for cash in a private placement. The shares were subsequently acquired by SCA to be distributed to senior executives and key individuals included in the employee option programme described in Note 7. Shares transferred during the year comprise shares that were redeemed by employees in accordance with the rules in SCA s employee option programme. Received compensation for the transferred shares constitutes the payments made to SCA for the shares. Payments pertaining to the Research and development Research and development costs amounted to SEK 612m (595) during the year, which is equivalent total holding on 1 January 2002 and 31 December 2008, respectively, consist of amounts paid by SCA for the shareholdings on the date in question. to 0.6% of the Group s net sales. Research and development is conducted both centrally and locally in the various business groups. The central activities are carried out in the form of materials and technology R&D, while the local units work with product development, often in direct cooperation with customers. Distribution of shares During the year, 1,965,000 Class A shares were converted into Class B shares. The proportion of Class A shares was 15.7% at year-end. As a result of redemption of employee options, the number of treasury shares decreased during the year to 2,767,605. Calculated in accordance with IFRS Parent Company The Group s Parent Company, Svenska Cellulosa Aktiebolaget SCA (publ), owns most of the forest land and other real estate relating to forestry recommendations, the effects of outstanding employee option programmes represent a maximum dilution of 0.01%, which is taken into account when calculating earnings per share for the year. oper ations, and grants felling rights for standing forest to the subsidiary SCA Skog AB. The Parent Company is otherwise a holding company, whose key tasks are to own and manage shares in a Dividend In light of the prevailing uncertainty regarding trends in the economy and the uncertainty associ- Holding of treasury shares Number Nominal amount Percentage of share capital Paid/received compensation Total holding 1 Jan ,800,000 18,000, ,090,000 Transferred in , , ,750,757 Transferred in , , ,972,803 Transferred in , , ,135,024 Transferred in , , ,496,430 Transferred in ,145 3,491, ,680,700 Transferred in ,902 2,015, ,751,693 Received from 3:1 split 2,154,576 Transferred in ,207 1,290, ,491,756 Total holding 31 Dec ,767,605 9,225, ,271,477 ated with the financial systems, the Board of Directors has decided to propose a dividend of SEK 3.50 per share to the Annual General Meeting. This proposal represents a reduction of SEK 0.90 per share and represents 44% of earnings per share in The dividend is expected to total approximately SEK 2,458m (3,089). Accordingly, dividend growth in the most recent ten-year period has amounted to 6%. The Board s assessment is that the proposed dividend will provide the Group with the scope to fulfill its obligations and make the required investments. The record date for entitlement to receive dividends is proposed as 7 April Guidelines for remuneration to senior executives The Board has decided to propose to the 2009 Annual General Meeting the following (unchanged) guidelines for determining salaries and other remuneration for senior executives to apply for the period following the Annual General Meeting. Remuneration to the CEO and other senior executives will be a fixed amount (base salary), possible variable remuneration, additional benefits and pension. Other senior executives include the executive vice president, business group managers and equivalent and central staff managers. The total remuneration is to correspond to market practice and be competitive in the senior executive s field of profession. Fixed and variable remuneration is to be linked to the executive s responsibility and authority. For the CEO, as well as for other senior executives, the variable remuneration is to be limited and linked to the fixed remuneration. The variable remuneration is to be based on the outcome of predetermined objectives and, as far as possible, be linked to the increase of value of the SCA share, from which the shareholders benefit. In the event of termination of employment, the notice period should normally be two years should the termination be initiated by the company, and one year, when initiated by the senior executive. Severance pay should not exist. Pension benefits are to be either defined benefit or defined contribution, or a combination of both, and entitle the senior executive to pension from the age of 60, at the earliest. To earn the pension benefits, the period of employment must be long term, at present 20 years. When resigning before the age entitling to pension, the senior executive will receive a paid-up pension policy from the age of 60. The pension is not to be based on variable remuneration. Matters of remuneration to the senior executives are to be dealt with by a remuneration committee and, as regards the President, be resolved by the Board of Directors. The Board s proposal concurs with the most recent guidelines adopted by the 2008 Annual General Meeting. See also Note SCA Annual Report 2008

39 Board of Directors Report SCA Group Sales and earnings Net sales increased by SEK 4,536m compared with the preceding year and amounted to SEK 110,449m (105,913). Higher prices, primarily for tissue and aquisitions increased net sales by 5% or approximately SEK 4,857m. Net sales SCA s sales amounted to SEK 110,449m compared with SEK 105,913m in the preceding year. The increase was greatest in Tissue, where prices were raised during the year. Sales of Personal Care products also improved as a result of higher prices, but growth was primarily volume-related. Acquisitions contributed 3%, while the divestment of packaging operations in North America, the UK and Ireland, as well as the sale of the Softis brand reduced net sales by 1%. The total sales improvement due to higher prices, volume increases and acquisition effects totalled SEK 5,875m. Exchange-rate fluctuations had a positive impact on net sales of 1%. Earnings Excluding the positive items affecting comparability in the preceding year amounting to SEK 300m, operating profit declined by SEK 1,293m and amounted to SEK 8,554m, compared with SEK 9,847m in the preceding year. Tissue operations strengthened operating profit by 38%, while Personal Care, Forest Products and packaging operations recorded reduced operating profit of 2%, 23% and 44%, respectively. Higher prices and volumes failed to offset the rise in manufacturing costs. A better product mix and price hikes improved earnings by SEK 2,400m, while the rising cost of raw materials and energy adversely impacted earnings by SEK 2,300m and SEK 1,200m, respectively. The contribution made to earnings by the European tissue operations acquired in 2007 amounted to approximately SEK 400m in Financial items rose by SEK 407m and profit before tax declined by SEK 2,000m, amounting to SEK 6,237m, a reduction of 24% compared with the preceding year. The average tax rate for current earnings was 16.0%. Together with nonrecurring items, mainly due to reduced corporate income tax in Sweden, the Group s effective tax rate was 10.2%. Profit for the year amounted to SEK 5,598m, a reduction of SEK 1,563m compared with the preceding year. Earnings per share amounted to SEK Key figures The Group s gross margin amounted to 18.8%, compared with 19.9% in the preceding year, and the operating margin was 7.7%, compared with 9.6% in 2007 (including items affecting comparability). Return on capital employed amounted to 8%, compared with 11% in the preceding year, and return on equity was 9% compared with 12% for the year-earlier period. The interest coverage ratio amounted to 3.7, compared with 5.3 in the preceding year. Summary income statement SEKm ) Net sales 110, , ,439 Gross profit 20,765 21,101 19,071 Operating profit 2) 8,554 10,147 8,505 Financial items 2,317 1,910 1,672 Profit before tax 6,237 8,237 6,833 Tax 639 1,076 1,366 Profit for the year 5,598 7,161 5,467 1) The calculation of gross profit is pro-forma, based on the relation in ) Including items affecting comparability of SEK 300m. Sales growth 4.3 % EBIT margin 7.7% Net sales, share of Group Personal Care, 21% Tissue, 34% Packaging, 30% Forest Products, 15% Operating profit and operating margin SEKm 12 % Earnings per share after dilution SEK 12 10, , , , , Operating profit Operating margin SCA Annual Report

40 Board of Directors Report SCA Group Operating cash flow Cash flow from current operations, that is operating cash flow after financial items and paid tax, declined by 15% and amounted to SEK 3,810m (4,508). The decrease was mainly an effect of a lower operating cash surplus for Packaging and Forest Products. Operating cash surplus was down 9% compared with the preceding year and amounted to SEK 13,869m (15,286). Tied-up working capital was low and amounted to a negative SEK 19m (neg: 1,299), despite the increase in inventories within, among other areas, Personal Care products to enable the reorganisation in production for the new generation of baby diapers. Tied-up working capital increased in Tissue primarily due to higher accounts receivables resulting from price hikes. Both Packaging and Forest Products reduced tied-up working capital. Despite the slight change in working capital in the cash flow, working capital increased primarily as a result of exchangerate fluctuations and acquisitions. Working capital in relation to sales remained unchanged at 11%. Current capital expenditures were somewhat higher than in the preceding year and amounted to SEK 5,353m (5,165), slightly less than 5% of sales. Current capital expenditures in relation to planned depreciation declined and amounted to 86% (92). The operating cash flow declined somewhat and amounted to SEK 7,813m (8,127). Financial items increased by SEK 407m and amounted to an expense of SEK 2,317m (exp: 1,910). The increase was an effect of a higher net debt and higher interest rates. Tax payments were on par with the preceding year and amounted to SEK 1,702m (1,719). Cash flow from current operations declined 15% and amounted to SEK 3,810m (4,508). Strategic investments and acquisitions amounted to SEK 4,873m (5,887). The year s expenditure pertained primarily to the second and third part-payment for the European tissue operations, the installation of the second paper machine at the tissue plant in Barton, US, investments for the hygiene operations in Russia and an increase in holdings in the Chinese tissue company, Vinda. Divestments during the year amounted to SEK 1,140m (2,852), mainly attributable to the divestment of packaging operations in the UK and Ireland. The dividend to shareholders amounted to SEK 3,128m (2,939). Net cash flow for the year was a negative SEK 3,023m (negative: 1,411). Net debt Net debt at year-end amounted to SEK 47,002m (37,368). Net debt was adversely impacted by the net negative cash flow of SEK 3,023m, by the market valuation of pension assets, pension obligations and financial instruments of SEK 3,523m and by exchange-rate fluctuations due to the weakening of the Swedish krona of SEK 3,088m. The debt payment capacity declined to 26% (35). Summary operating cash flow statement Capital expenditures SEKm 8,000 6,400 4,800 3,200 1, Strategic capital expenditures 2006 Current capital expenditures, net Depreciation according to plan Operating cash flow, share of the Group Personal Care, 32% Tissue, 31% Packaging, 16% Forest Products, 21% SEKm Operating cash surplus 13,869 15,286 14,123 Change in working capital 19 1, Current capital expenditures, net 5,353 5,165 5,672 Restructuring costs, etc ,353 Operating cash flow 7,813 8,127 6,304 Financial items 2,317 1,910 1,672 Tax payments, etc. 1,686 1,709 1,680 Cash flow from current operations 3,810 4,508 2,772 Strategic investments, net 3,733 3,035 1,234 Cash flow before dividend 77 1,473 1,538 Operating cash flow by business area SEKm 3,200 2,400 1, Personal Care Tissue Packaging Forest Products Cash flow, Group SEKm 8,000 6,000 4,000 2, ,000 4,000 6,000 8,000 10,000 12,000 Divestments 2004 Cash flow from current operations Strategic capital expenditures Company acquisitions 2005 Strategic restructuring costs Capital expenditures 1) 86 % 1) Current capital expenditures in relation to depreciation Change operating cash flow -4 % Cash flow before dividend 14 SCA Annual Report 2008

41 Board of Directors Report SCA Group Financial position Assets and capital employed The Group s total assets rose 10% compared with the preceding year and amounted to SEK 158,968m (145,050). Non-current assets increased by SEK 8,552m, of which completed company acquisitions contributed an increase in goodwill of SEK 297m. Other tangible and intangible assets rose by SEK 1,212m as a result of company acquisitions and declined SEK 1,025m as a result of divested operations. Current and strategic investments in fixed assets amounted to SEK 8,378m and depreciations for the year to SEK 6,199m. Exchange-rate fluctuations pertaining to intangible and tangible assets increased the value of assets by SEK 5,808m. Current assets were up SEK 5,366m to SEK 42,603m (37,237) primarily as a result of increased cash and cash equivalents, but also due to higher working capital tied up in inventories and accounts receivable. Working capital amounted to SEK 11,818m (11,623). Capital employed was 12% higher than in the preceding year and totalled SEK 114,254m (101,647). A distribution of capital employed by currency is shown in the adjacent table. The value in Swedish kronor of the Group s foreign net assets at year-end was SEK 45,542m (36,482). Equity During the period, consolidated equity rose SEK 2,973m to SEK 67,252m (64,279). Net profit for the period increased equity by SEK 5,598m, while dividends reduced equity by SEK 3,128m. Equity decreased due to the remeasurements to market value after tax of the net pension liability of SEK 2,385m, and financial instruments by SEK 782m. Exchange-rate fluctuations, including net investment hedging in foreign countries and so forth, increased equity by SEK 3,670m. net debt was adversely affected by the market valuation of pension assets and obligations, as well as the market valuation of financial instruments in the amount of SEK 3,523m. Exchangerate fluctuations resulting from the weakening of the Swedish krona generated an upward adjustment of net debt by SEK 3,088m. Key figures The debt/equity ratio was 0.70 (0.58) and the visible equity/assets ratio was 42% (44). Return on equity (ROE) and capital employed (ROCE) amounted to 9% (12) and 8% (11), respectively. Consolidated capital employed by currency The capital turnover rate was 1.04 (1.10). At year-end, working capital amounted to 11% of net sales. SEKm 2008 % 2007 % 2006 % EUR SEK USD GBP Other Total The four largest currencies represent 81% (82) of consolidated capital employed. Consolidated balance sheet Capital employed, share of Group Personal Care, 10% Tissue, 35% Packaging, 25% Forest Products, 30% SEKm Intangible assets Property, plant and equipment Other non-current assets Total non-current assets Current assets Total assets Equity Non-current liabilities Current liabilities Total equity and liabilities Working capital Capital employed Net debt ROCE 8 % Working capital 1) 11% 1) Working capital as percentage of net sales Financing The Group s interest-bearing gross debt at yearend amounted to SEK 52,029m (42,190). The maturity period was 3.0 years. The increase in gross debt was due to such factors as strategic investments and effects from exchange-rate fluctuations. Due to the turbulent financial market during the year, the Group decided, as an extra precaution, to increase cash and cash equivalents by raising non-current financial borrowings. Net debt at year-end amounted to SEK 47,002m, compared with SEK 37,368m at the beginning of the year. The net cash flow was negatively impacted by SEK 3,023m. Furthermore, Debt/equity ratio and debt payment capacity multiple % Debt/equity ratio, multiple Debt payment capacity, % Return on capital employed and equity % Return on capital employed Return on equity SCA Annual Report

42 SCA Annual Report 2007

43 sdf asdf jk lsd fo sdf lkj df sdjwer wei sdf l sdfj skj dfop sd lfkj sdlfks jif dslfjk sdfjkas slkdfj dfsoi sdfklja södlfk dfjs sdfök söfk sdfklja södlfk dfjs sdfök söfk sdfklja södlfk dfjs sdfök söfksdfkj sdoie kj sdlfkj do sföodfk såp fslödkf sf sdfjkas slkdfj dfsoi sdjfh askdjfh s DSF SODFIU SLDKJ sdfjkas slkdfj dfsoi sdjfh askdjfh s DSF SODFIU SLDKJ dfkss dkfsdaasdkja SDj s ölk e SCA in the world Newspaper FRANK Europe sdfjkas slkdfj dfsoi sdjfh askdjfh s sdfjkas slkdfj dfsoi sdjfh DSF SODFIU SLDKJ SLIUF askdjfh s DSF SODFIU SLDKJ SDLFJ SDLFKJS DIFU SKLDJF SLIUF SDLFJ SDLFKJS DIFU LSKDJF SIDUF J SDÖALKSD SKLDJF LSKDJF SIDUF J lksjd fios dflksjd fius lkdjf lösjkf SDÖALKSD lksjd fios dflksjd posd fskljf ldkjf soif skjf öjk aslgja fius lkdjf lösjkf posd fskljf ldkjf wöek sådof lsdkg ldg rpog alskdg soif skjf öjk aslgja wöek sådof öasdkg paiosj gjkshd glaksj dgijua lsdkg ldg rpog alskdg öasdkg dklgj alskjd gasodg df i sdf l sdfj skj paiosj gjkshd glaksj dgijua dfop sd lfkj sdlfks jif dslfjk sdfjkas dklgj a slkdfj dfsoi sdjfh askdjfh s DSF SODFIU SLDKJ SLIUF SDLFJ kjd gasodg df i sdf sdfjkas SDLFKJS DIFU SKLDJF LSKDJF slkdfj dfsoi sdjfh askdjfh s DSF SIDUF J S SODFIU SLDKJ SLIUF SDLFJ sdfjkas slkdfj dfsoi DÖALKSD lksjd fios dflksjd fius sdjfh askdjfh s DSF SODFIU lkdjf lösjkf posd fskljf ldkjf soif skjf SLDKJ SLIUF SDLFJ öjk aslgja wöek sådof lsdkg ldg rpog SDLFKJS DIFU SKLDJF alskdg öasdkg paiosj gjkshd glaksj LSKDJF SIDUF J dgijua dklgj alskjd gasodg df i sdf l SDÖALKSD lksjd fios dflksjd sdfj skj dfop sd lfkj sdlfks jif dslfjk fius lkdjf lösjkf posd fskljf ldkjf sdfjkas slkdfj dfsoi sdjfh askdjfh s soif skjf öjk aslgja wöek sådof DSF SODFIU SLDKJ SLIUF lsdkg ldg rpog alskdg öasdkg SDLFJ SDLFKJS DIFU SKLDJF sdfjkas slkdfj dfsoi sdjfh askdjfh s DSF SODFIU SLDKJ SLIUF SDLFJ SDLFKJS DIFU SKLDJF LSKDJF SIDUF J SDÖALKSD lksjd fios dflksjd fius lkdjf lösjkf posd fskljf ldkjf soif skjf öjk aslgja wöek sådof lsdkg ldg rpog alskdg öasdkg paiosj gjkshd glaksj dgijua dklgj alskjd gasodg df i sdf l sdfj skj dfop sd lfkj sdlfks jif dslfjk sdfjkas slkdfj dfsoi sdjfh askdjfh s DSF SODFIU SLDKJ SLIUF SDLFJ SDLFKJS DIFU SKLDJF LSKDJF SIDUF J SDÖALKSD lksjd fios dflksjd fius lkdjf lösjkf posd fskljf ldkjf soif skjf öjk aslgja wöek sådof lsdkg ldg rpog alskdg öasdkg paiosj gjkshd glaksj dgijua dklgj alskjd gasodg df i sdfa sdf sdf 2 Europe Europe North America Latin America Personal Care Tissue Market position Share of the Group Market position Share of the Group Europe USA Global Products Incontinence care Baby diapers 2 3 Feminine care 3 5 Net sales 21 % Operating profit 29 % Europe USA Global Products Consumer tissue 1 4 Tissue for bulk consumers AFH Net sales 31 % Operating profit 17 % Sales in some 90 countries worldwide. The business area comprises three product segments: incontinence care, baby diapers and feminine care. Production is carried out at 21 plants in 18 countries. Sales in some 80 countries worldwide. Tissue consists of toilet and household paper, facial tissue, handkerchiefs and napkins. Production is carried out at 35 facilities in 19 countries.

44 Eastern Europe Asia Asia Pacific Packaging Forest Products Market position Share of the Group Market position Share of the Group Products Europe Corrugated board packaging 2 Container board 2 Net sales 31 % Operating profit 26 % Products Europe Publication papers 6 Solid-wood products 8 Private forest holdings 1 Net sales 17 % Operating profit 28 % Sales to some 50 countries in Europe and Asia. SCA is a full-service supplier of packaging solutions and offers both transport and consumer packaging. Production is carried out at over 300 facilities in some 30 countries. Sales primarily in Europe but also in North America and Japan. Production comprises publication papers, pulp and solid-wood products.

45 The year at a glance Contents Net sales amounted to SEK 105,913m (101,439). Profit for the year amounted to SEK 7,161m (5,467). Earnings per share amounted to SEK (7.75). SCA strengthened its product offering within all segments with new innovative products. Revaluation of the forest assets and efficiency enhancement measures of a one-time nature improved earnings by a net amount of SEK 300m. Proposed dividend is SEK 4.40 (4.00) per share. Earnings, dividend and cash flow per share SEK SEK 6 Earnings Operating cash flow Dividend Net sales and operating margin SEKm 120, ,000 80,000 60,000 40,000 20, Net sales Operating margin 2006 % introduction SCA at a glance 1 CEO s message 3 Value creation 6 Strategic growth markets 11 SCA shares 12 Board of directors report SCA Group 14 Acquisitions, investments and divestments 15 Sales and earnings 18 Operating cash flow 20 Financial position 22 Other information 24 Business areas Personal Care 26 Tissue 34 Packaging 40 Forest Products 46 Other Group information Customer and consumer insight 52 Sustainable development 53 Risk management, significant risks and uncertainties 55 Main raw materials, energy and transport 57 Financial statements SCa group Income statement 59 Consolidated statement of recognized income and expense 59 Operating cash flow statement 60 Balance sheet 61 Cash flow statement 62 Parent company 64 Notes 67 Proposed distribution of earnings 102 Audit report 103 Key figures SEK EUR 1) SEK EUR 1) SEK EUR 1) Net sales, SEKm/EURm 105,913 11, ,439 10,972 96,385 10,398 Profit before tax, SEKm/EURm 8, , Profit for the year, SEKm/EURm 7, , Profit for the year, SEKm 2) 6,908 5,467 4,435 Earnings per share, SEK Earnings per share, SEK 2) Cash flow from current operations per share, SEK Dividend, SEK 3) Strategic investments incl. acquisitions, SEKm/EURm 5, , , Equity, SEKm/EURm 64,279 6,792 58,963 6,518 57,110 6,061 Return on equity, % Debt/equity ratio, multiple Average number of employees 50,433 51,022 51,902 1) See pages 60 and 61 for exchange rates. 2) Excluding items affecting comparability. 3) Proposed dividend. coroporate governance Corporate governance report 104 Board of Directors and auditors 110 Corporate Senior Management 112 Organization 113 SCA data Group overview 115 Multi-year summary 116 Comments to the multi-year summary 117 Quarterly data Business areas 118 Quarterly data Group 119 Group by country 119 Production capacity 120 Definitons and key ratios 121 Glossary 122 Annual General Meeting and Nomination Committee 124

46 SCA at a glance A global consumer goods and paper company SCA creates value through knowledge of the needs of customers and consumers, a regional presence and efficient production. We develop, produce and market personal care products, tissue, packaging, publication papers and solid-wood products. We operate in more than 90 countries. More than half of our sales comprise consumer products where the end-users are private individuals and households. Every day our products reach hundreds of millions of people around the world. The products are sold under global brands, such as TENA and Tork, as well as strong regional brands including Zewa, Tempo, Libero, Drypers and Saba. Sales are increasing in emerging markets. Our packaging solutions are mainly used to transport food, industrial products and consumer durables. They are also used in pointof-sale packaging for product promotion to end-consumers in the store. In our forest products operations key products include highquality newsprint and magazine paper. SCA has annual sales of SEK 106bn (approximately EUR 11.5bn) and approximately 50,000 employees. SCA Data Corporate governance Financial statements Board of Directors Report Introduction Net sales by business area Operating profit by business area Group s largest markets SEKm Forest Products 17% Packaging 31% Personal Care 21% Tissue 31% Forest Products 28% Packaging 26% Personal Care 29% Tissue 17% Germany UK US France Sweden Italy Netherlands Spain Denmark Australia Mexico Belgium 0 3,000 6,000 9,000 12,000 15,000 SCA s value creation Consumer products Strengths Strategy Increased value for SCA s stakeholders See complete value creation model on pages 6 and 7. sca annual report

47 2 sca annual report 2007

48 CEO s message SCA has the strength to set terms for the future 2007 was another year of improvements for SCA. Sales and earnings increased as did margins. This was an important confirmation in a business environment where the challenges are now steadily intensifying. SCA can continue to go on the offensive and develop its global strategies from a position of strength. Over the next few years parts of the industry will face difficult times. For SCA, the opportunities are considerably greater than the threats we have expertise, consumer and customer insight, we have the products and the market positions and we have the financial resources to be there and set the terms for our own future. As a result of a good performance from all employees, SCA improved its earnings during Higher prices primarily for corrugated board but also for tissue and solid-wood products as well as higher volumes and acquisitions, increased net sales by 8%. Net sales were negatively affected by divestments by 3% and exchange rate fluctuations by 1%. Profit before tax increased by 16% to SEK 7,937m (excluding items affecting comparability). This result generated a rise in earnings per share of 26% to SEK and the Board can therefore propose an increase in the dividend from SEK 4 to SEK One important detail was that the margin (EBITDA) strengthened from 14.5% to 15.1% (excluding items affecting comparability). This improvement was mainly due to price increases as well as higher volumes and a successive improvement of the product mix. The rationalization programmes carried out over the past three years led to stronger earnings, but we are working continuously with additional efficiency enhancements. The improvements within Packaging were particularly gratifying, but Tissue and Forest Products also performed well. Personal Care continued to develop at a good and stable level of profitability. These improvements were achieved in a cost situation that sharpened during the year when we saw substantial price increases for raw material such as wood, pulp and recovered fibre. Additional efficiency enhancements But we live in a highly dynamic world with major and rapid changes, rising pressure from competitors and demanding consumers and customers. This is why we need further efficiency enhancements so that competitiveness can continue to be strengthened now that the earlier programmes have been completed. The new measures will run over three years. They involve discontinuing capacity with weak profitability within Packaging as well as within Tissue. This will be facilitated by the excellent synergies we will gain from the integration of the acquisition of Procter & Gamble s European tissue operations which was completed in October. We are also carrying out a review of the sawmills in order to increase productivity but also to adjust capacity to a weaker market. The total cost is SEK 4,900m which was charged against earnings in the fourth quarter of At the same time, earnings were affected by the revaluation of our forest assets by approximately SEK 5,200m following a physical count and a review of price trends. We continue to have a conservative valuation of our forests, one of the largest holdings in Europe. The combination of these measures is an offensive move. This is most obvious within Tissue where the acquisition of P&G s tissue operations in Europe further strengthens our market leadership. There are important synergies in the market, such as within sales and marketing, and within the supply chain. In total we estimate that these will have full effect after three years and will then amount to approximately SEK 700m per year. But the other measures we are taking will also release resources which we can use for growth within more profitable areas. Strategic overview It is with enthusiasm but also with humility, that I now shoulder my responsibility as CEO of SCA. The more I learn, the more impressed I am by the expertise of my colleagues and the growth opportunities offered by the Group s good global positions. SCA has an excellent starting point from which to accelerate the pace of value creation for consumers, customers and shareholders. Together with the Board and management, I have therefore set in motion a strategic overview to see how we can make faster progress. Without anticipating this work, I would like to point out some important themes for the Group s development. SCA s strategies receive strong support from several positive factors in our business environment megatrends that provide the long-term conditions for our value creation. First and foremost I would like to say that paper has a bright future. No other material is so suitable for taking care of everyday, personal, bodily hygiene. It s fast, it s simple, it s effective and it s renewable. With millions of people now leaving or about to leave subsistence level poverty behind them as a result of market economy, expanding global trade and new jobs, we notice that one of the highest priorities in the emerging countries is increased personal hygiene. In the developed economies this is more about improved hygiene and comfort. Here we can expect growth to be lower with some significant exceptions. It is obvious, for example, that factors such as the rapidly ageing population will lead to a substantial increase in the need for personal care where incontinence and other failing bodily functions require continually improved solutions. Rising prosperity also leads to improved household hygiene, higher demands for clean environments, workplaces, eating places and health care institutions. The effects of better hygiene are not confined to a better life they also prolong life and save life few individual everyday products are so effective at keeping illness and infections at bay as our personal care and tissue products. Wood fibre is also suitable for modern and effective packaging and transport solutions, a prerequisite for the constantly rising trade and integration in the global economy. Worldleading brands in the electronics industry would not have such good brand exposure and attractively priced products without effective and smart packaging solutions which also meet high requirements for environmental performance. SCA Data Corporate governance Financial statements Board of Directors Report Introduction sca annual report

49 CEO s message We have expertise, consumer and customer insight, we have the products and the market positions and we have the financial resources to be there and set the terms for our own future. And then we have forest products in the form of sawn timber, solid-wood products, pulp and publication papers, products that are continually attracting new generations of consumers and customers. Here we have good competitiveness with regard to quality, growing demand for natural materials and the pleasure of being inspired by words and pictures on paper. The forest is also an asset to manage and its value has acquired further dimensions in a world that is going to demand significant efforts within energy and elsewhere in order to achieve climate neutrality and sustainable development. During the year, for example, we started a cooperation with the Norwegian energy company Statkraft for an expansion of wind power which will provide about 2,800 TWh when completed. Plans also include examining the feasibility of new hydropower production was the year when the debate about climate change and sustainability ceased to be a question confined to politicians and business and found its way into the consciousness of the majority of people in the industrialized world. For SCA, sustainability issues are not in any way new. Sustainability has long been an integrated part of our operations and we were early to take the initiative with the Group target from 2001 to reduce carbon dioxide emissions, to invest in green electricity and to certify our forests. We believe that a conscious approach to sustainability reduces our risks and builds long-term competitiveness. The investments we make to improve energy efficiency and reduce environmental impact are made with a long-term perspective. Focus on consumer products The strategic analysis is aimed at strengthening growth and profitability and designed to achieve a careful evaluation of where we can use our resources in the best way to increase value creation for our stakeholders. Megatrends show that we have a good, stable and long-term sustainable strategic platform. This is a tremendous strength in times of high transformation pressure when asset values and value relations are changing fast. SCA will be one of the leaders in this transformation and play an active part in setting the terms for its own future. It is of utmost importance that the hygiene company SCA continues its long journey towards consumer products within Personal Care and Tissue. The organic growth rate will continue to be strengthened with a greater focus on consumer-oriented innovation and product development. Here we must further hone our knowledge of consumer preferences, particularly in the sophisticated mature markets and equally understand retail chains and bulk consumers even better. They live in an intensely tough competitive situation and are now looking for increasing support from their suppliers for the development of new products and an ever broader service commitment. SCA has made considerable progress in more in-depth customer and consumer insight and has a welldeveloped cooperation with international chains. We will continue along the route we have staked out and intensify our efforts. Strong brand focus One future issue with high priority is to build even stronger brands. The international trend is also global brands and SCA s product areas are no exception. We have some fine successes to point to with Tena for incontinence products, Tork for AFH tissue and the new, thin SecureFit for our feminine care products. SCA s renewal of its brand strategies prioritizes own brands and means that a growing number within the different product categories will be collected on global platforms. This will provide synergies in research and development, innovation, production and economies of scale with strategically managed product launches. This also gives us the choice to decide which brands we should focus on and which we should leave over time. At the same time we must be vigilant about the various regional and social differences in customer and consumer preferences in order to make the most of established positions and handle differentiation in harmony with developments in consumer taste. 4 sca annual report 2007

50 Sharpened growth strategies When deciding where we can make best use of our resources we must clarify our growth strategies within all business areas both within categories and for geographic expansion. Competition for the good growth in the new markets is already tough. It is a question of deciding even more carefully where to enter and continually examining whether we should stay. There are growing requirements for even faster reactions in order to catch on to new trends in demand and invest and disinvest for higher profitability. We carried out one such transfer of resources when SCA divested its North American packaging operations in We may need to carry out more such deals when we increasingly prioritize future growth activities. Eastern Europe is a priority here. We have built up efficient production structures in this region that provide hubs for several key product categories. Our Zewa brand is a clear market leader within tissue in Russia, a good position for further expansion. In China, we first went in with packaging in order to serve global customers, a market with intense competition. This gigantic market and India, both with growth in double digits, are naturally of major strategic interest particularly for personal care products. We have acquired a strategic holding in the Chinese tissue manufacturer Vinda, one of the big four. In our forest industry we have an integrated value chain with high efficiency that makes optimal use of our own forests and provides good results. The steady shift towards increasingly developed products in profitable segments, within both publication papers and solid-wood products, is the right way to go in order to increase the value of these operations. But as for all SCA s operations, structural and operational efficiency must constantly be tested against future demands and the Group s overall development needs. As I have already mentioned, this year we are carrying out efficiency enhancements at our sawmills in order to meet a less favourable market scenario. Efficiency and costs an everyday task SCA is a large group with operations in many markets and product areas. We continuously review our internal processes and try to simplify and improve the efficiency of the way we work. Once again, fast adjustment to the demands of consumers and customers will shape the winners of tomorrow. The board and management of SCA have a tradition of daring to implement well-timed, far-reaching measures to keep costs in check. We were first in the industry three years ago to cut back capacity primarily within Packaging and Tissue, which we are now consolidating with further rationalization within Tissue. There must be no doubt that SCA will have world-class efficiency and productivity, which means that productivity improvements and restructuring of the production apparatus are everyday tasks. To sum up, I would like to say that SCA has an excellent starting point from which to grow further with profitability and create competitive values for shareholders, consumers, customers and employees with environmental and social responsibility as our hallmarks. SCA is a company with double roots in both forest industry and consumer markets. Prospects At the time of writing, market trends for 2008 remain good with continued high demand within most product areas. The exception is solid-wood products which following a record year in 2007 are encountering weaker demand. But the financial anxiety, originating in the American mortgage crisis in the second half of 2007, creates some uncertainty. So far, the effects of these changes are difficult to assess. Jan Johansson President and CEO One future issue with high priority is to build even stronger brands. The international trend is also global brands and SCA s product areas are no exception. SCA Data Corporate governance Financial statements Board of Directors Report Introduction sca annual report

51 Value creation Consumer products Closer to the consumer The concentration on growth within Personal Care, Tissue and Packaging has gradually shifted the balance towards consumer products. This shift is intended to reduce the effects of cyclical demand and has therefore reduced operational risks. Sales breakdown, SCA Group % Other Forest Products Packaging Hygiene Products 2007 During the year Procter & Gamble s European tissue operations were acquired and the North American packaging operations were sold. Strengths Customer and consumer insight In all business areas, SCA will increase the innovation rate for new products and services, taking sustainable development into account. Leading market positions and the Group s major resources make SCA an attractive partner when customers increasingly seek complete solutions for the development of both products and services. Regional presence with global skills SCA s focus means that the most efficient production and distribution takes place in regional markets close to customers. Many of SCA s products cannot sustain the high costs of long-distance transport. While production is local, most of the product offerings are global. SCA s size and geographic spread also provide significant economies of scale within research and development, brand positioning and concept testing. Efficient production SCA has a long tradition of continuous, sustainable improvement in the production structure and realization of the Group s synergies throughout the production chain. This was intensified in recent years by the efficiency enhancement programmes. SCA s own raw material base allows cost control through efficient raw material integration. Sustainable development Sustainable development has been a key part of SCA s business model and product offering for many years. SCA s sustainability policy and Code of Conduct stipulate how the Group addresses environmental and social issues which create value over time for shareholders and other stakeholders. SCA s mission is to develop, produce and market value-added products and services within Personal Care, Tissue, Packaging and Forest Products. SCA s products simplify the everyday lives of hundred of millions of people around the globe. They also generate strong cash flows that enable good dividend growth and raise the value of SCA shares. 6 sca annual report 2007

52 Strategy Higher value-added SCA endeavours to develop and launch products with a higher valueadded content within all segments. Development starts by understanding the needs and preferences of customers and consumers as well as adapting this insight to new products with new functions. This also means that SCA s role is changing from that of an easily replaced supplier to a strategic partner, which not only produces but also accepts responsibility for product development and complete solutions. Increased sales in emerging markets Geographically most of SCA s sales are concentrated in Europe and North America. As a result of acquisitions and good organic growth an increased portion of sales will take place in markets in Eastern Europe, Latin America and Asia. These prioritized growth markets today account for more than 16% of sales compared with 7% ten years ago. Increased value-added Some products that are contributing to higher value-added in the Group. Sales in emerging markets % Emerging markets Mature markets Sales in the growth markets of Eastern Europe, Latin America and Asia account for 16% of SCA s sales. 16% Increased value for SCA s stakeholders Profitable growth drives value in SCA. Annual organic growth is estimated to amount to 3 4%, mainly driven by strong growth for incontinence products and increased presence in emerging markets. In addition to organic growth, SCA will grow through complementary company acquisitions. Profitability is the second key component for value creation. In 2007, SCA achieved an EBITDA margin of 15.1% excluding items affecting comparability. SCA Data Corporate governance Financial statements Board of Directors Report Introduction Business areas Personal Care Keeping dry SCA has world-leading expertise and innovative products that keep babies dry, offer women comfortable protection during menstruation and make everyday life simpler for people with incontinence. Our baby diapers, feminine care and incontinence products are available worldwide. Packaging Keeping safe SCA is a world-leading supplier of packaging solutions and develops smart holistic solutions which make transport less expensive. We focus on creative design that offers customers good point-of-sale display and makes things easier for consumers. Tissue Keeping clean SCA is Europe s largest supplier of tissue. Keeping things tidy, washing and drying hands are the simplest and most effective ways to prevent the spread of disease. Forest Products Keeping up-to-date SCA produces publication papers and wood products that are continually developed to offer higher value-added. Our substantial forest holdings are a strategic asset and form the basis of sustainable development of our integrated industrial operations. sca annual report

53 Value creation Strategic control SCA uses a cash-flow based model to measure the profitability of new expansion investments. Strategic investments SCA evaluates all strategic investments (company acquisitions or expansion investments) with a cash-flow based model. All investments must provide a return that exceeds the cost of capital. Future cash flows are calculated and discounted by the cost of capital. This provides a present value for the estimated future cash flow. If the present value is higher than the expenditure for the investment, the investment is value-creating. SCA requires that the present value must exceed the investment expenditure by a margin. This margin is set specifically for each investment and depends on the business to which it belongs, the economic life of the investment and other factors. SCA s REQUIRED RATE OF RETURN SCA s required rate of return on investment is determined by the capital market s deemed return requirement on an investment in SCA shares and current long-term interest rates. The return requirement, the weighted cost of capital (WACC), based on SCA s capital structure from a debt/equity ratio of 0.7, was calculated at year-end of 2007/2008 as 6.8%. This means that all investments must over time generate an annual operating cash flow after tax, but before interest expense, of at least 6.8% of the investment in order to be value-creating and thus meet market demands. The return requirement level above applies to investments in Sweden. Different borrowing costs and tax rates in other countries change the return requirement for operations in those countries. Dividend policy SCA aims to provide stable and rising dividends over time. Over a business cycle, approximately one-third of cash flow from current operations (after interest expenses and tax) is normally allocated to dividends and two-thirds to value-creating strategic investments. If cash flow from current operations exceeds over time what the company can place in profitable expansion investments, the surplus is returned to shareholders through higher dividends or share repurchases. Over the past decade, dividends have increased by an average of 9% per year and the proposed dividend for the 2007 financial year is SEK 4.40, representing an increase of 10% compared with Capital structure SCA s debt/equity ratio measured as net debt in relation to reported equity was 0.58 at 31 December This is below SCA s long-term target of 0.7. The debt/equity ratio target of 0.7 was chosen taking into account SCA s business risk and the composition of the product portfolio. Periodically, the debt/equity ratio may deviate from target. Over the past decade, the debt/equity ratio has varied between 0.39 and In addition to internal financing from cash flow from current operations, scope for additional strategic investments is also provided due to increased borrowing capacity while maintaining the debt/equity ratio. SCA has a credit rating for long-term borrowing of Baa1/BBB+ and short-term borrowing of P2/ A2 from Moody s and Standard & Poor s respectively, and a short-term credit rating of K1 in Sweden from Standard & Poor s. During the year Moody s changed its forecast for SCA from Baa1 with a negative outlook to Baa1 with a stable outlook. For more detailed information about SCA s financial risk management, see Note 2 on page 72. Incentive programme SCA s incentive programme is designed to support the company s objective of creating shareholder value. The programme for senior executives has two components: achievement of cash-flow, growth and earnings targets, and the performance of SCA shares compared with an index consisting of SCA s major global competitors. For more information about the structure of the programme, see Note 7 Personnel and Board costs, on page 83. Strategic investments, acquistions and divestments SEKm 12,000 10,000 8,000 6,000 4,000 2, ,000-4, Personal Care Tissue Packaging Forest Products Divestments Key ratios Operating surplus margin (EBITDA) Result 1) (%) Operating cash flow Result 1) (SEKbn) Return metrics Result capital employed 1) (%) Result equity 1) (%) Financial metrics Debt/equity ratio (multiple) Market adjusted debt/equity ratio (multiple) Debt payment capacity (%) ) Excluding items affecting comparability. Dividend per share 5 SEK Average cumulative growth: 9% sca annual report 2007

54 Personal Care Profitability and growth are good within Personal Care. In 2007 the business area achieved an EBITDA margin of 18% and an operating cash surplus of SEK 3,955m. Given the strong profitability level, the highest priority is to take advantage of growth opportunities which will lead to a higher rate of investment and increased marketing costs. With a retained margin, SCA s operations are expected to achieve organic growth of 5 7% per year, driven by rapid growth within incontinence care, an increased proportion of sales in emerging markets of baby diapers and feminine care products, and successful positioning and development of retailers brands. Key priorities within Personal Care are a high rate of product development, an increased proportion of production in low-cost countries, and higher sales in premium segments. Tissue Profitability within Tissue is not yet satisfactory. The business area achieved an EBITDA margin of 12% in 2007and an operating surplus of SEK 3,949m. The main reason for this weak result is tough competition within consumer tissue in Europe, while competition also intensified considerably in the Australian market. Tissue for bulk consumers (AFH) shows good profitability. In consumer tissue, SCA works with the following strategic priorities: increased proportion of sales of SCA s own brands, rationalization of the production structure, strategic partnerships to develop retailers brands, and a larger proportion of sales in profitable emerging markets such as Latin America and Russia. In line with this strategy, P&G s European tissue operations were acquired during the year. This acquisition strengthens SCA s own brand portfolio. SCA s tissue operations are expected to achieve total organic growth of 3 4% per year. Growth is considerably higher in emerging markets. Packaging In 2007, Packaging achieved an EBITDA margin of 12% and an operating surplus of SEK 4,212m. Sales growth in the prioritized growth regions, Eastern Europe and China, was 20% in Sales of complete packaging solutions within high-value segments account for the main increase. In total, SCA s packaging operations are expected to grow by 2 3% per year. Growth is considerably higher in the prioritized growth regions. Forest Products In 2007, Forest Products achieved an EBITDA margin of 22% and an operating surplus of SEK 4,194m. SCA expects to be able to strengthen margins in coming years by continuing to implement successful productivity work within the publication papers business, improving the energy balance from pulp production, and more rational forest management. For solidwood products a continuous transfer to more value-added products is under way. Growth within Forest Products is expected to reach 2 3% per year. Outcome 2007 * EBITDA margin 18 % Growth % EBITDA margin 12 % Growth % EBITDA margin 12 % Growth % EBITDA margin 22 % Growth % SCA Data Corporate governance Financial statements Board of Directors Report Introduction * Excluding items affecting comparability. sca annual report

55 10 sca annual report 2007

56 Strategic growth markets Good potential for continued growth An increasing part of SCA s growth will take place in the fast-growing markets in Eastern Europe, Latin America and Asia. In 2007 the share of the Group s total sales in emerging markets was 16% compared with 7% ten years ago. The very high economic growth in these markets has fuelled a significant increase in prosperity, higher disposable incomes and increased demand for SCA s products. SCA s strategy is to grow both organically and through acquisitions. Depending on the conditions in the individual growth market, SCA invests in either a joint venture or a wholly owned subsidiary. SCA formed two joint ventures in 2007, one in India and one in the Middle East. The joint venture with SCA s Indian partner Godrej Consumer Products, will produce and sell feminine care products and baby diapers. SCA s joint venture in the Middle East and Egypt with the local partner Nuqul will manufacture and sell feminine care products. Market prospects are favourable with a large young female population and anticipated increased purchasing power in the region. In Tissue, SCA acquired a minority shareholding during the year in Vinda, one of the four largest players in the fast-growing Chinese tissue market, the second largest in the world. SCA has also increased its rate of investment within Packaging in Eastern Europe and China. Russia SCA enjoyed significant success in Russia during 2007 with a sales increase of 30% to SEK 1,854m. Russian households are using a large part of their growing disposable income to improve personal care standards, in the home and at work. Consumption is expected to grow in pace with increased incomes. Almost the entire market for personal care products and tissue consists of branded products, with several of the leaders belonging to SCA. Per capita use of SCA s personal care and tissue products is well below the average in Western Europe. Consumption of tissue per capita is almost ten times higher in Western Europe and use of baby diapers per child is about five times higher. SCA has strong market positions within personal care products with the brands Libero for baby diapers, Libresse for feminine care and TENA for incontinence care. In tissue, SCA is number one within both consumer and AFH tissue. SCA s Zewa brand has approximately 40% of the toilet paper market in Russia. In order to meet increased demand for tissue in Russia, SCA is building a new production plant south of Moscow. SCA Data Corporate governance Financial statements Board of Directors Report Introduction sca annual report

57 SCA shares Eventful stock market year 2007 The 2007 closing price on the Stockholm Stock Exchange for SCA s B shares was SEK which corresponds to market capitalization of SEK 81bn (84). SCA s market capitalization comprises approximately 2% of the total market capitalization on the Stockholm Stock Exchange. Since the start of 2007 the share price fell 4%. During the same period the Stockholm Stock Exchange fell by 6%. The highest closing price for SCA s B shares during the year was SEK which was noted on 22 March. The lowest price was SEK on 15 November. During 2007, SCA shares performed more strongly than comparable industry indexes and the Stockholm Stock Exchange as a whole. Viewed over a five-year period, however, development is weaker. Trading in SCA shares SCA shares are listed and traded primarily on the Stockholm Stock Exchange, but may also be traded on the London Stock Exchange (OTC) and as American Depository Receipts (ADR level 1) in the US through the Bank of New York. In addition to indexes directly linked to the Stockholm and London exchanges, SCA is included in other indexes such as the Dow Jones STOXX Index, FTSE Eurotop 300 and MSCI Eurotop 300. SCA is also represented in several environmental indexes where companies are evaluated based on their ability to combine financial growth with successful environmental work. One such index is the FTSE4Good index. Liquidity Turnover of SCA shares increased in The total volume of shares traded was 917 million shares, representing a value of approximately SEK 118bn (101). Average daily trading for SCA on the Stockholm Stock Exchange amounted to 3.7 million shares corresponding to a value of SEK 436m (401). Foreign ownership 57% (57) of the share capital is owned by investors registered in Sweden and 43% (43) by foreign investors. The US and the UK account for the highest percentage of shareholders registered outside Sweden, with 17% and 11% respectively. Dividend The Board of Directors has proposed a dividend to shareholders of SEK 4.40 per share for 2007, which is 10% higher than in The 2007 dividend represents a dividend yield of 3.8% per share, based on SCA s share price at the end of the year. Since its listing on the Stockholm Stock Exchange in 1950, SCA has never reduced the dividend. Over the past ten years the dividend has increased by an average of 9% per year. SCA s dividend policy is provided on page 8. Ticker names Stockholm Stock Exchange (the Nordic Exchange) London Stock Exchange (OTC) New York (ADR level 1) SCA A, SCA B SNKB SVCBY Price trend and share trading, 2007 Price trend and share trading, SEK 140 Thousand shares 12,000 SEK 300 Million shares , , , , , Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec. SCA B OMX Stockholm, All Share Daily Trading SCA B OMX Stockholm, All Share Trading per quarter 0 12 sca annual report 2007

58 Data per share Percentage of foreign ownership All earnings figures include non-recurring items. SEK per share unless otherwise indicated Earnings per share after full tax: After dilution Before dilution Market price for B shares: Average price during Closing price, 31 December Cash flow from current operations 1) Dividend ) Dividend growth, % 3) Dividend yield P/E ratio 4) Price/EBIT 5) Beta coefficient 6) Pay-out ratio (before dilution), % Equity, after dilution Equity, before dilution Average number of shares after dilution (millions) Number of registered shares 31 December (millions) Number of shares after full conversion (millions) ) See definitions of key ratios on page ) Board proposal. 3) Rolling 5-year data. 4) Share price at year-end divided by earnings per share after full tax and dilution. 5) Market capitalization plus net debt plus minority interests divided by operating profit. (EBIT = earnings before interest and taxes). 6) Share price volatility compared with the entire stock exchange (measured for rolling 48 months). SCA s ten largest shareholders According to VPC AB s official share register for directly registered and trustee registered shareholders as of 31 December 2007, the following companies, foundations and mutual funds were the ten largest registered shareholders based on voting rights (before dilution). Shareholder No. of votes % No. of shares % AB Industrivärden 508,200, ,800, Handelsbanken * 224,102, ,013, SEB * 115,594, ,404, Livförsäkringsaktiebolaget Skandia 50,944, ,513, Alecta 42,396, ,007, AB Skrindan 30,080, ,008, Nordea * 22,867, ,404, Swedbank * 22,200, ,189, AMF Pension 22,007, ,846, Andra AP-fonden 19,188, ,127, * Including mutual funds and foundations. Source: VPC AB Shareholder structure Holding Year % Shareholders by country Other 10% Luxemburg 5% UK 11% US 17% Shareholders by category Private individuals 11% No. of shareholders No. of shares Holding % Sweden 57% Institutions 89% Votes % ,678 2,607, ,853 5,182, ,000 13,515 9,892, ,001 2,000 9,401 13,513, ,001 5,000 6,872 21,479, ,001 10,000 2,215 15,585, ,001 20, ,985, ,001 50, ,216, , , ,175, , ,471, Total 75, ,110, Source: VPC AB SCA Data Corporate governance Financial statements Board of Directors Report Introduction Share distribution 31 December 2007 Series A Series B Total shares Number of registered shares 112,905, ,204, ,110,094 of which treasury shares 3,154,812 3,154,812 Issues, etc Since the beginning of 1993 the share capital and the number of shares have increased due to new issues, conversions and split as follows: No. shares Increase in share capital, SEKm Cash payment, SEKm Series A Series B Total 1993 Conversion of debentures and new subscription through Series 1 warrants 4,030, New issue 1:10, issue price SEK 80 17,633, , ,145, ,821, ,967, Conversion of debentures 16, ,145, ,837, ,983, Conversion of debentures 3,416, ,145, ,254, ,399, New issue 1:6, issue price SEK ,899, , ,133, ,166, ,299, Conversion of debentures 101, ,626, ,775, ,401, New issue, private placement 1,800, ,787, ,414, ,201, New issue through IIB warrants ,701, ,500, ,202, Conversion of debentures and subscriptions through IIB warrants 2,825, ,437, ,590, ,027, Conversion of debentures 9, ,427, ,608, ,036, Split 3:1 470,073, ,905, ,204, ,110,094 sca annual report

59 Board of Directors Report Svenska Cellulosa Aktiebolaget SCA (publ) Reg. No , registered office in Stockholm Scas operations and structure SCA is a global consumer goods and paper company that develops, produces and markets personal care products, tissue, packaging, publication papers and solid-wood products. SCA offers products that make everyday life considerably easier. Based on customer and consumer needs, new and more valueadded products are constantly being developed for consumers, institutions, industry and the retail trade. SCA seeks to increase the percentage of value-added products and the products consist almost exclusively of renewable and recyclable materials. Although Europe is SCA s main market, the Group also holds strong positions in some product areas in North America, Latin America and Asia Pacific. Expansion takes place through organic growth and acquisitions, primarily within personal care, tissue and packaging. SCA owns approximately 2.0 million hectares of productive forest land, which guarantees half of the Group s timber supplies and enables efficient raw material integration and good cost control. SCA conducts extensive sawmill operations as a natural complement to the forest operations. Organization SCA consists of four business areas Personal Care, Tissue, Packaging and Forest Products. The business areas are organized in six business groups. The SCA Personal Care business group manufactures and sells personal care products in Europe, the US, Canada and Africa. SCA Tissue Europe s operations involve manufacture and sales of consumer and AFH tissue in Europe. Also located in Europe are the SCA Packaging Europe business group, which manufactures and sells packaging solutions, and the SCA Forest Products business group, which manufactures publication papers, pulp, timber and solid-wood products. The SCA Asia Pacific business group manufactures and sells packaging, personal care products and tissue. The SCA Americas business group includes both tissue and personal care products. Important events during the year New CEO for SCA In September, the Board of Directors appointed Jan Johansson as the new President and CEO of SCA. Jan Johansson was previously President and CEO of Boliden AB and took up his position on 1 November. The former President and CEO, Jan Åström, left his position on 3 September. acquisitions, Investments and divestments The largest acquisition during the year was Procter & Gamble s European tissue operations. A detailed account is provided on pages Efficiency enhancements Synergy gains with P&G s European tissue operations are estimated at approximately SEK 700m per year. In addition, it was decided to carry out a number of actions designed to enhance competitiveness in the existing tissue operations as well as within Packaging and Forest Products. Including integration costs for the acquired P&G operations, total costs for efficiency enhancements amounted to SEK 4,873m. This amount included SEK 3,542m for impairments of non-current assets, SEK 111m for impairments of current assets, and SEK 1,220m for cash expenditure. The improvement in operating profit will have full effect after three years when it will amount to approximately SEK 1,400m per year, including synergies from the P&G acquisition. Savings attributable to the efficiency programme started in 2005 amounted to approximately SEK 390m in the fourth quarter of 2007, which represents an annual rate of almost SEK 1,600m. The planned savings of SEK 1,550m were therefore achieved. Revaluation of SCA s forest holdings SCA s forest assets were revalued by SEK 5,173m toward the end of the year. A new felling plan and higher timber prices in recent years were the reasons for the revaluation. Business areas and operating units Europe North and South America Asia Pacific Personal Care SCA Personal Care 1) Business areas Tissue Packaging SCA Tissue Europe SCA Packaging Europe SCA Americas SCA Asia Pacific Forest Products SCA Forest Products 1) The SCA Personal Care business group includes Europe, the US and Canada. = Business Groups the Group s operating units. 14 sca annual report 2007

60 Group Acquisitions, investments and divestments SCA acquired Procter & Gamble s European tissue operations The acquisition of P&G s European tissue operations, with a number of well-known and strong brands, marked a key step towards improving the profitability of SCA s European consumer tissue operations. This acquisition gives SCA access to several established quality brands such as Tempo, which is the market leader within handkerchiefs in Western Europe and Hong Kong. The acquisition also provides SCA with good opportunities to improve the supply chain and cost structure and to further optimize distribution and logistics for its retail customers. The acquisition of P&G s European tissue operations meant that SCA strengthened its position in 2007 as the leading player in Europe with a market share of approximately 26% within consumer tissue with strong brands within handkerchiefs, kitchen rolls and toilet paper. The acquisition will enable SCA to more quickly implement the strategic shift of its product portfolio towards an increasingly higher proportion of brand-related sales. The acquisition is carried out in three parts and the total purchase price amounts to SEK 4,725m (EUR 512m). The first part-acquisition relating to the brands, plants in Germany and Italy, and the operations in Hong Kong was paid for in October. The remaining two part-acquisitions relating to plants in the UK and France will take place when rebuilding and technical adjustments have been completed. This is expected to take place in the first half of The synergies from the ac- quisition are expected to have full effect after three years and will then amount to SEK 700m per year. The purchase of P&G s European tissue operations included the handkerchief brand Tempo but was subject to a requirement from the EU where SCA undertook to sell its own handkerchief brand Softis in Germany and Austria in order to comply with EU competition rules. At the beginning of 2008, SCA therefore sold the Softis brand together with related patents and machines to the Italian tissue company Sofidel. The sale included the right for Sofidel to use the Zewa brand under licence for three years. SCA is also entitled to sell Softis outside Germany and Austria in perpetuity. SCA acquired minority holding in the Chinese tissue company Vinda A market share of approximately 4% places Vinda among the four largest players within tissue in China. In 2007, SCA acquired a minority holding of 20% in Vinda which provides a key position in the fast-growing Chinese tissue market. The Vinda brand is one of the strongest tissue brands in China, the secondlargest tissue market in the world. The company has a strong position in consumer tissue and is a market leader. The purchase price amounted to SEK 330m. Vinda became a listed company in June 2007 in conjunction with which a new share issue was carried out which reduced SCA s holding to 14%. Vinda s market capitalization as at 31 December 2007 amounted to SEK 3,160m. SCA set up companies in the Middle East In 2007, SCA formed a joint venture, Fine Sancella Hygiene FZCO, with the Jordanbased industrial group Nuqul. The new company will manufacture and sell feminine care products in the Middle East and Egypt. Operations will be conducted in 18 countries in the region and the investment for SCA s share amounted to SEK 134m. Nuqul is a leading industrial group in the Middle East with operations that include tissue and personal care products. The group is market leader within tissue in the region and has a significant and fast-growing business in the personal care segment, with strong positions in all markets in the Middle East. The joint venture will have immediate access to Nuqul s production facilities and broad distribution network. SCA will contribute with its own product programme within feminine care, world-leading technology and marketing expertise. The joint venture gives SCA a unique platform from which to enter the Egyptian market and the major markets in the Middle East with feminine care products. SCA s sales in the personal care segment in Africa, the Middle East and South Asia (India, Pakistan and Afghanistan) currently amount to approximately SEK 490m. Market prospects are favourable with a young female population. Purchasing power among the population in the region is also expected to rise. SCA Data Corporate governance Financial statements Board of Directors Report Introduction sca annual report

61 Acquisitions, investments and divestments SCA and Godrej formed joint venture for personal care in India In 2007, SCA and Godrej Consumer Products Limited formed a joint venture for the manufacture and sale of absorbent personal care products, particularly feminine care and baby diapers, in India, Nepal and Bhutan. Godrej Consumer Products Limited is one of India s fastest growing companies within fast-moving consumer goods. The joint venture gives SCA a good platform from which to enter the Indian market with SCA s consumer products. The new company will have immediate access to Godrej s substantial distribution network. SCA will contribute with world-leading technology and well-known brands for the Indian market. SCA acquired the British company Severn Timber In May 2007, SCA acquired the British company Severn Timber. The company is a significant supplier of wood products to the British builders merchant market and processes solidwood products into planed and impregnated products at its facility in Welshpool in Wales. The purchase price amounted to SEK 83m on a debt-free basis. SCA Timber and Severn Timber previously cooperated for several years with processing, distribution and sales of wood products. The UK is one of SCA Timber s prioritized markets and SCA already has a wholesale business in Hull and a distribution centre in Stoke-on-Trent, SCA Timber Supply, for deliveries of wood products to DIY stores and other outlets. SCA expanded eastwards through several strategic investments In the Packaging business area, SCA is investing on a broad front in Eastern Europe and China. In 2007 a decision was made on expansion investments in two plants in Poland and one in Romania, together with two new corrugated board plants in China. These investments mark yet another step in plans to capture market shares in some of the largest growth markets in the world. The investments will enable SCA to meet customer demands more effectively and broaden the range of services. The investments in Poland are being made in Poznan and Olawa with approximately SEK 65m in each plant. In Poznan, the investment includes a design centre for printing and laminating with a focus on consumer and display packaging. In Olawa, corrugated board is produced today and the operations will now be expanded to allow SCA to benefit from the positive effects of the fast-growing Polish market. In Timisoara in eastern Romania, SCA invested approximately SEK 90m to upgrade the existing converting plant to a fully integrated corrugated board plant. This investment is part of the development of customer support throughout the region which includes other plants in Romania, as well as SCA Packaging s design centre in Budapest and sales and production in Hungary in order to achieve significant synergy gains. The plant will be ready in SCA s packaging operations in Nanjing, China, will be moved to a newly built factory close to the old one which facilitates continued volume growth. This investment will amount to approximately SEK 80m. A totally new packaging plant in Suzhou, close to Shanghai, was inaugurated in mid-april This investment amounted to SEK 135m. The plant will function as a full-service centre for customers since production of corrugated board as well as protective packaging will take place under one roof. This new modern facility will provide a strategic platform for continued expansion in China. SCA is also preparing for future expansion as the packaging operations in the Suzhou region grow. SCA increased competitiveness through US investment During the year SCA decided to invest in a new tissue machine in Barton, Alabama, US. The new paper machine in Barton is a natural measure to further improve competitiveness and facilitate continuous profitable expansion in the US and Canada. The new machine is scheduled to go into operation in summer sca annual report 2007

62 SCA to invest in wind power SCA and the Norwegian energy company Statkraft signed an agreement during the year to form a joint venture for a major investment in wind power in northern Sweden. The investment includes annual production of 2,800 GWh of wind power electricity divided among seven wind power farms on forest land in Västernorrland and Jämtland, an investment of SEK 16bn. Statkraft is providing funding while SCA will grant land for the wind power farms. The locations where SCA and Statkraft plan to build the wind power farms will be subject to environmental assessment and planning. Plans also include examining the feasibility of a careful and responsible expansion of hydropower using the waterfall rights at SCA s disposal. SCA decided to invest in stretch diapers In response to consumer demand, SCA launched a new stretch baby diaper during the year. Since 2005, SCA has invested SEK 500m in this development, including SEK 400m in the diaper production plant in Falkenberg, Sweden. SCA is already the leading player within baby diapers in the Nordic market. Consumers are quality conscious and SCA makes the necessary investments to be able to offer the required products. Investments in the plant in Falkenberg included both a new machine and rebuilding and upgrading of existing production equipment. SCA currently accounts for over 55% of diaper sales in the Nordic region, primarily under the Libero brand. SCA decided to invest in the Ortviken paper mill During the year SCA decided to expand production of mechanical pulp at the Ortviken paper mill, Sweden. The investment of approximately SEK 800m will allow paper production at Ortviken to continue to increase while enabling improvements in quality. The investment also involves separating pulp production and customizing it for the different paper grades. The investment will make it possible to prepare the pulp from the outset for the product for which it will be used. This will lead to improved product quality and lower production costs. The new equipment is scheduled to be installed and in operation by spring SCA decided to invest in a new corrugated board plant in France During the year, SCA decided to invest approximately SEK 425m in a new corrugated board plant outside Nantes in France. The new production plant will go into operation in 2009 and replace the present plant in the area. The new plant will enable SCA to raise its level of service to the companies in the region and offer customized packaging solutions including high-quality printing. The investment will also provide opportunities for expansion in the France Atlantique region where the food industry is an important customer group. The plant will be highly flexible and meet SCA s high sustainability requirements which also provide an improved working environment for SCA s employees. The investment in the new equipment in Nantes means that emissions, including carbon dioxide, will decrease. The new plant will also provide a major improvement in wastewater treatment. SCA sold its North American packaging operations During the year, SCA sold its North American packaging operations, comprising protective packaging, consumer packaging and temperature-assurance packaging solutions, to Metalmark Capital. The purchase price was SEK 2,826m. The deal was finalized and the operations deconsolidated in the first quarter of SCA Data Corporate governance Financial statements Board of Directors Report Introduction sca annual report

63 Group Sales and earnings Net sales increased by SEK 4,474m compared with the previous year and amounted to SEK 105,913m (SEK 101,439m). Higher prices, primarily for corrugated board, but also for tissue and solid-wood products, and higher volumes and acquisitions increased net sales by 8% or approximately SEK 8,600m. Net sales Sales were negatively affected by the sale of the North American packaging operations. Adjusted for this divestment, sales increased by 7%. The greatest increases were within Packaging and Tissue where prices rose during the year. Forest Products also showed improved sales due to higher prices while growth within Personal Care is primarily volume-related. The acquisition of P&G s European tissue operations, which were consolidated with effect from the fourth quarter, also contributed to the increase in sales. Exchange rate fluctuations had a negative effect on net sales of 1%. Operating profit was also affected positively by the revaluation of the Group s forest assets by SEK 5,173m. The increase is based on higher timber prices but with an unchanged discount rate of 6.25%. In addition to coordination and efficiency improvement measures in conjunction with integration of the P&G acquisition, SCA decided on a number of actions designed to enhance competitiveness in the rest of the tissue operations as well as within Packaging and Forest Products. Including integration costs for the acquisition, total efficiency enhancement costs amount to SEK 4,873m. The net effect of the revaluation and efficiency enhancements amounts to SEK 300m and all effects are reported within the segment Other. A lower net debt did not compensate for higher interest rates and financial items increased by SEK 238m. Profit before tax improved by SEK 1,404m and amounted to SEK 8,237m, an increase of 21% since The average tax rate for current earning was 22.3%. Together with non-recurring items mainly due to reduced tax rates in Germany and Italy, as well as entitlement to a future tax deduction in Poland, the Group s tax rate was 13.1%. Profit for the year amounted to SEK 7,161m, an increase of SEK 1,694m compared with the previous year. Earnings per share amounted to SEK Key ratios The Group s operating surplus margin amounted to 15.1%, excluding items affecting comparability, compared with 14.5% in the previous year and the operating margin improved from 8.4% to 9.6%. Return on capital employed amounted to 11% compared with 9% in the previous year and return on equity was 12% compared with 9% in the previous year. The interest coverage ratio amounted to 5.3 compared with the previous year. Earnings Operating profit improved by SEK 1,642m and amounted to SEK 10,147m compared with SEK 8,505m in the previous year. Packaging strengthened its operating profit by 28% while Forest Products and Tissue contributed with improvements in operating profit of 16% each. The improved earnings were primarily a result of higher prices and a better product mix. Summary income statement SEKm Net sales 105, ,439 Operating surplus 1) 19,818 14,665 Operating profit 2) 10,147 8,505 Financial items 1,910 1,672 Profit before tax 8,237 6,833 Tax 1,076 1,366 Profit for the year 7,161 5,467 1) Including items affecting comparability of SEK 3,842m. 2) Including items affecting comparability of SEK 300m. EBITDA margin 15.11)% 1) Excluding items affecting comparability Organic growth 5.3 % Net sales and operating margin Operating profit Earnings per share after dilution SEKm 120,000 % 12 12,000 SEKm 12 SEK 100, , , , , , , , , , Net sales Operating margin sca annual report 2007

64 Personal Care Net sales increased by SEK 829m and amounted to SEK 22,101m compared with SEK 21,272m in the previous year. The sales increase is primarily an effect of increased volumes of incontinence products to the European retail market where sales rose 13%. During the year sales in South America also increased for feminine care products and baby diapers. Sales of baby diapers also increased in Malaysia. Exchange rate fluctuations reduced net sales by 1%. Operating profit improved by SEK 161m and amounted to SEK 2,960m (2,799). Increasing volumes and higher prices improved operating profit by SEK 487m and SEK 214m respectively, or together 25%. Volume and price improvements were offset by increased costs for continued expansion in new markets in the form of marketing and organizational build-up as well as higher production costs, mainly due to rising raw material costs. Exchange rate fluctuations decreased operating profit by 1%. Sales (SEKm) 33,332 Share of the Group EBITDA (SEKm) 3,949 EBITDA margin 11.8 % Net sales 31% Tissue Sales (SEKm) 22,101 Share of the Group EBITDA (SEKm) 3,955 EBITDA margin 17.9 % Net sales Net sales increased by SEK 1,996m and amounted to SEK 33,332m compared with SEK 31,336m in the previous year. Price increases in Europe averaged approximately 5%. The acquisition of P&G s European tissue operations increased sales by 4%. In North America and Mexico, price and volume improvements were offset by negative exchange rate fluctuations. In total, exchange rate effects had a negative impact on net sales of approximately SEK 800m or 3%. Operating profit rose SEK 234m and amounted to SEK 1,724m (1,490), an increase of 16% compared with the previous year. Higher prices in Europe, North America and Latin America and the effects of the acquisition from P&G and lower energy costs were offset by higher raw material costs as well as increased depreciation and a temporarily lower capacity utilisation in North America due to a major rebuilding and increased selling costs. Exchange rate fluctuations cut operating profit by 3%. 21% SCA Data Corporate governance Financial statements Board of Directors Report Introduction Packaging Net sales increased by SEK 375m and amounted to SEK 33,728m compared with SEK 33,353m in the previous year. Adjusted for the sale of the North American packaging operations, net sales rose 10%. The rise is mainly explained by implementation of price increases for corrugated board as well as higher sales of consumer and display packaging. Exchange rate fluctuations had a marginal impact on net sales. Operating profit increased by SEK 579m and amounted to SEK 2,651m (2,072), an increase of 28%. The increase is due to higher prices, somewhat higher volumes and lower energy costs while raw material costs increased. Exchange rate fluctuations had a marginal impact on earnings. Sales (SEKm) 33,728 Share of the Group EBITDA (SEKm) 4,212 EBITDA margin 12.5 % Net sales 31% Sales (SEKm) 18,744 Share of the Group EBITDA (SEKm) 4,194 EBITDA margin 22.4 % Net sales 17% Forest Products Net sales increased by SEK 1,093m and amounted to SEK 18,744m (17,651). Higher prices for solid-wood products and pulp as well as newsprint were offset by negative exchange rate fluctuations which reduced net sales by 1%. Operating profit increased by SEK 394m or 16% and amounted to SEK 2,870m (2,475). Higher prices for solid-wood products and pulp as well as lower energy costs, partly an effect of the investment in the recovery boiler at the Östrand pulp mill, Sweden, were offset by higher raw material costs and slightly lower prices within the publication papers business. Exchange rate fluctuations reduced operating profit by 10%. sca annual report

65 Group Operating cash flow Cash flow from current operations, i.e. operating cash flow after financial items and paid tax, improved by 63% and amounted to SEK 4,508m. The improvement was mainly an effect of a higher operating cash surplus due to higher prices primarily for corrugated board, tissue and solid-wood products. Operating cash surplus increased by SEK 1,163m and amounted to SEK 15,286m compared with SEK 14,123m in the previous year. Operating cash flow improved by SEK 1,823m and amounted to SEK 8,127m (6,304). Cash flow improved for Packaging and Tissue while Personal Care and Forest Products showed a slightly lower cash flow. Higher tied-up working capital had a negative effect on operating cash flow of SEK 1,299m (794). Consolidated working capital in relation to sales amounted to 11% compared with 10% in the previous year. The increase in working capital was greatest within Packaging and was primarily an effect of implemented price increases. Current capital expenditures were somewhat lower than in the previous year and amounted to approximately 5% of net Cash flow, Group 10,000 5,000 SEKm sales. Current capital expenditures in relation to planned depreciation amounted to 92% compared with 100% in the previous year. Financial items increased by SEK 238m and amounted to SEK 1,910m. A lower net debt and higher dividends received did not compensate for higher interest rates. Tax payments were slightly lower than in the previous year and amounted to SEK 1,719m (1,770). Cash flow from current operations improved by SEK 1,736m and amounted to SEK 4,508m (2,772). Strategic investments and acquisitions amounted to SEK 5,887m (1,258), of which SEK 3,289m related to the first part-payment for the acquisition of P&G s European tissue operations, and SEK 330m related to the holding in the Chinese tissue company Vinda. Divestments during the period amounted to SEK Summary operating cash flow statement SEKm Operating cash surplus 15,286 14,123 Change in working capital 1, Current capital expenditures, net 5,165 5,672 Restructuring costs, etc 695 1,353 Operating cash flow 8,127 6,304 Financial items 1,910 1,672 Tax payments 1,709 1,680 Cash flow from current operations 4,508 2,772 Strategic investments, net 3,035 1,234 Cash flow before dividend 1,473 1,538 2,852m, mainly attributable to the packaging operations in North America. Dividend to shareholders amounted to SEK 2,807m. Net cash flow was SEK 1,411m ( 1,008). Net debt Net debt at year-end amounted to SEK 37,368m, an increase of SEK 969m. A negative net cash flow of SEK 1,411m and negative exchange rate fluctuations of SEK 571m were offset by remeasurements for pensions and financial instruments of SEK 1,013m. The debt payment capacity has improved in recent years and amounted to 35%. Change operating cash flow 29 % Capital expenditures 1) 92 % 1) Current capital expenditures in relation to depreciation 0 Operating cash flow by business area Capital expenditures 5,000 SEKm 4,000 SEKm 7,000 6,000 3,000 5,000 10,000 2,000 4,000 3,000 15, ,000 2,000 1,000 Divestments Cash flow from current operations Strategic capital expenditures Company acquisitions Strategic restructuring costs Cash flow before dividend Personal care Tissue Packaging Forest Products Strategic capital expenditures Current capital expenditures, net Depreciation according to plan sca annual report 2007

66 Personal Care Volume growth increased for Personal Care, primarily for incontinence products to the European retail sector where sales rose 13%. The operating cash surplus amounted to SEK 3,955m (3,778), an increase of 5% over Higher tied-up working capital and increased expenditure for maintenance investments decreased the operating cash flow. Operating cash flow amounted to SEK 2,918m compared with SEK 2,984m in the previous year. Due to the sales increase for baby diapers in 2006, full capacity utilization was reached and a decision was made to invest in additional production capacity. Sales of incontinence products also rose and in order to be able to exploit growth opportunities, SCA decided to invest in new production capacity. Operating cash flow Share of the Group Operating cash flow 28% Change 118 % Capital expenditures 1) 77 % Tissue Operating cash flow Share of the Group Operating cash flow The operating cash surplus improved by SEK 386m and amounted to SEK 3,914m (3,528). Despite raised prices and a considerably improved level of service to customers, working capital decreased during the year. Payments for efficiency enhancement programmes and current capital expenditures were slightly below the previous year s level. Operating cash flow amounted to SEK 2,404m (1,101), an improvement of SEK 1,303m. During the fourth quarter the first part-acquisition of operations from P&G was carried out. During the year SCA invested SEK 330m in the Chinese tissue company Vinda. Expenditures for strategic investments mainly related to construction of a new tissue production plant outside Moscow, Russia. 33% Change -2 % Capital expenditures 1) 72 % SCA Data Corporate governance Financial statements Board of Directors Report Introduction Packaging In Packaging, the SEK 411m improvement in operating cash surplus was offset by higher tied-up working capital of SEK 321m, mainly related to higher trade receivables. The operating cash surplus amounted to SEK 4,058m compared with SEK 3,647m in the previous year. Payments for efficiency enhancement programmes and current capital expenditures decreased compared with the previous year. Operating cash flow improved by SEK 827m and amounted to SEK 1,151m (324). The North American packaging operations were sold in 2007 and the sales proceeds amounted to SEK 2,826m. Expenditure for strategic investments mainly related to rebuilding the testliner machines in Lucca, Italy, and Aschaffenburg, Germany. These investments were carried out to enable the corrugated board business to grow with its customers and meet their demands for improved printability and quality. Operating cash flow Share of the Group Operating cash flow 13% Change 255 % Capital expenditures 1) 137 % Operating cash flow Share of the Group Operating cash flow 26% Change -12 % Capital expenditures 1) Forest Products Operating cash surplus amounted to SEK 3,798m (3,588) and operating cash flow was SEK 2,249m (2 549). Tied-up working capital increased during the year, an effect of higher prices and increased stocks of purchased timber. Maintenance investments increased slightly compared with the previous year. Expenditure for strategic investments related to the acquisition of Severn Timber, UK, and the investment in the extension of production of mechanical pulp at the Ortviken paper mill, Sweden. 83 % 1) Current capital expenditures in relation to depreciation. sca annual report

67 Group Financial position Consolidated capital employed by currency Debt/equity ratio and debt payment capacity Assets and capital employed The Group s total assets increased by 9% compared with the previous year and amounted to SEK 145,050m. Non-current assets increased by SEK 8,743m. The change was largely attributable to a revaluation of biological assets, standing forest, the value of which was increased by SEK 5,173m. In addition, completed company acquisitions contributed to an increase in goodwill and trademarks of SEK 1,979m. Translation differences for intangible assets and property, plant and equipment increased the value of assets by SEK 808m. In December 2007, SCA announced a number of actions designed to enhance competitiveness, which among other things involved impairment of non-current assets amounting to SEK 3,542m, primarily within Tissue and Packaging but also within Forest Products. Current assets increased by SEK 2,763m despite SCA s sale of the North American packaging operations in March which in total reduced non-current assets held for sale by SEK 2,504m. The change consists of increased cash and cash equivalents as well as higher working capital tied up in inventories, due to company acquisitions and higher raw material prices, as well as in trade receivables, due to increased sales and higher prices. Working capital amounted to SEK 11,623m (9,870). Capital employed was 7% higher than in the previous year and totalled SEK 101,647m (95,362). A breakdown of capital employed by currency is shown in the table below. SEKm 2007 % 2006 % 2005 % EUR 34, , , SEK 31, , , GBP 9, , , USD 6, , , MXN 3, , ,940 4 AUD 2, , ,868 3 DKK 2, , ,004 2 NZD 1, , ,767 2 PLN 1, COP 1, , ,089 1 CNY 1, MYR SKK RUB CAD Other 2, , ,480 3 Total 101, , , Return on capital employed and equity The increase in Swedish assets is mainly attributable to the revaluation of biological assets. The increase in Polish assets is attributable to strategic investments within Packaging and Personal Care. The decrease in American assets is mainly attributable to the sale of the North American packaging operations. The value in Swedish kronor of the Group s foreign net assets at year-end was SEK 39,967m (36,482). Equity Consolidated equity at year-end amounted to SEK 64,279m (58,963) and increased during the year by SEK 5,316m. Net profit for the year, and the effects of remeasurements according to IAS 19 for pensions and IAS 39 for financial instruments, increased equity by SEK 7,161m and SEK 673m respectively. Dividends reduced equity by SEK 2,939m while exchange rate fluctuations increased equity by SEK 421m. Translation differences in equity relate to foreign subsidiaries equity which was not fully hedged during the year. Financing SCA s interest-bearing gross debt at year-end amounted to SEK 42,190m (38,389). The weighted average maturity was 4.2 years. The increase in the gross debt was due to completed company acquisitions, strategic investments, higher cash and cash equivalents and the effects of exchange rate fluctuations. Net debt amounted to SEK 37,368m (36,399) at year-end. The increase over the previous year was related to a negative net cash flow of SEK 1,411m, negative exchange rate fluctuations of SEK 571m and a positive effect of remeasurements according to IAS 19 for pensions and IAS 39 for financial instruments, of SEK 1,013m. multiple 0.8 % % Key ratios The debt/equity ratio was 0.58 (0.62) and the visible equity/assets ratio was 44% (44). Return on equity and capital employed amounted to 12% (9) and 11% (9) respectively. The capital turnover rate was 1.10 (1.05). At yearend, working capital amounted to 11% of net sales Debt/equity ratio, multiple Debt payment capacity, % Return on capital employed Return on equity sca annual report 2007

68 Personal Care Capital employed increased slightly during the year due to investments in increased capacity and amounted to SEK 9,418m (8,818) at year-end. Working capital increased from SEK 1,324m to SEK 1,563m, primarily due to higher net sales which led to increased trade receivables. Share of the Group Packaging Share of the Group Capital employed 35% ROCE 1) 5 % Working capital 2) 8 % ROCE 1) 11% Working capital 2) 16 % Tissue The sale of the packaging operations in North America decreased capital employed which at year-end amounted to SEK 26,129m (27,615). Working capital increased slightly during the year, primarily due to higher net sales, and amounted to SEK 3,875m (3,473). Capital employed 27% Share of the Group Share of the Group Capital employed 9% ROCE 1) 32 % Working capital 2) 7% The acquisition of P&G s European tissue operations increased capital employed but competitive enhancement measures in the form of impairment losses offset this increase. Capital employed totalled SEK 34,812m (32,244). Working capital decreased somewhat despite acquisitions and higher net sales and amounted to SEK 2,655m (2,671) at year-end. Forest Products Capital employed ROCE 1) 10 % Working capital 2) 11% The revaluation of standing forest, as a result of a new felling plan and updated revenue and cost assumptions, increased capital employed by SEK 5,173m. At year-end capital employed amounted to SEK 29,945m (25,358). Working capital increased during the year and amounted to SEK 3,061m (2,543) at year-end. 28% SCA Data Corporate governance Financial statements Board of Directors Report Introduction Consolidated balance sheet SEKm Intangible assets 21,616 20,051 Property, plant and equipment 80,352 74,670 Other non-current assets 5,845 4,349 Total non-current assets 107,813 99,070 Current assets 37,237 34,474 Total assets 145, ,544 Equity 64,279 58,963 Non-current liabilities 34,579 31,249 Current liabilities 46,192 43,332 Total equity and liabilities 145, ,544 Working capital 11,623 9,870 Capital employed 101,647 95,362 Net debt 37,368 36,399 ROCE 1) 11 % Working capital 2) 11 % 1) Return on capital employed. 2) Working capital as a percentage of net sales. sca annual report

69 SCA Annual Report 2006

70 The year at a glance Contents Net sales amounted to SEK 101,439m (96 385). Net profit for the year amounted to SEK 5,467m (454). Earnings per share amounted to SEK (1.84). SCA s efficiency enhancement programmes provided savings of SEK 1,265m. SCA has strengthened its product offerings within all segments with new, innovative products. The proposed dividend is SEK (11.00) per share. Earnings, dividend and cash flow per share SEK Earnings Operating cash flow Dividend 2006 Key ratios SEK EUR 1) SEK EUR 1) SEK EUR 1) Net sales, SEKm/EURm 101,439 10,972 96,385 10,398 89,967 9,867 Profit before tax, SEKm/EURm 6, , Net profit for the year, SEKm/EURm 5, , Net profit for the year SEKm 2) 5,467 4,435 5,233 Earnings per share, SEK Earnings per share, SEK 2) Cash flow from current operations per share, SEK Dividend, SEK ) Strategic investments incl. acquisitions, SEKm/EURm 1, , ,738 1,287 Shareholders equity, SEKm/EURm 58,299 6,444 56,343 5,980 54,350 6,048 Return on equity, % Debt/equity ratio, multiple Average number of employees 51,022 51,902 49,919 1) See pages 52 and 54 for exchange rates 2) Excluding items affecting comparability 3) Proposed dividend SCA Group SCA at a glance 1 CEO s message 2 Value creation 6 SCA shares 12 Personal Care 14 Tissue 22 Packaging 28 Forest Products 34 Raw materials 40 Financial reporting Contents Financial reports 43 Board of Directors report 44 Operating cash flow statement 50 Income statement 52 Balance sheet 54 Cash flow statement 56 Parent Company s financial reports 58 Notes 60 Proposed distribution of earnings 92 Audit report 93 Corporate governance CSR including Internal Control Report 94 Board of Directors and auditors 100 Senior management 102 Organization 103 SCA Data Group overview 105 Ten-year summary 106 Quarterly data 108 Group per country 109 Production capacity 110 Definitions and key ratios 111 Glossary 112 Investor Relations contacts 112 Annual General Meeting 113 Financial information schedule 113

71 This report is more than just a summary of the past year. It also describes a company with a passionate commitment to understanding its customers and consumers and providing them with a better standard of living a better life. Our products may appear uncomplicated but behind every baby diaper, every feminine care product and every packaging solution lies a generous measure of customer and consumer awareness, innovative development and understanding of the long supply chain from raw material to store shelf.

72 We are here to develop and improve everyday lives. This is our mission which also contains fantastic opportunities for growth. Millions of people in developing countries are about to experience an enormous improvement in their standard of living. We grow hand-in-hand with this progress and we operate our business with sustainable principles. Enjoy reading more about the opportunities we offer!

73 SCA at a glance SCA in the world Net sales by business area (excl. intra- Group deliveries) Forest Products 16% Packaging 32% SCA s strategic strengths Regional presence with global capability Personal Care 21% Consumer and customer insights Efficient production Tissue 31% Operating profit by business area (adjusted for central items) Forest Products 28% Packaging 23% The Group s largest markets Personal Care 32% Tissue 17% SEKm UK Germany USA France Sweden Italy Netherlands Spain Denmark Australia Mexico Belgium 0 3,000 6,000 9,000 12,000 SCA is a global consumer goods and paper company. We create value through knowledge of consumers and customers needs, regional presence and efficient production. We develop, produce and market personal care products, tissue, packaging solutions, publication papers and solid-wood products in more than 90 countries. More than half of our sales volume comprises consumer products where the end-users are individuals and households. Every day our products reach hundreds of millions of people around the world. These products are mainly sold under our own brands, such as TENA, Tork, Edet, Zewa, Libero and Libresse. Sales are increasing rapidly in emerging markets. Our packaging solutions are primarily used in the transportation of food, industrial products and consumer durables, but are also in the form of point-of-sale packaging for product promotion to the end-consumer in the store. In our Forest Products business area, high-quality publication papers for newspapers and magazines are among our most important products. SCA s own timber supply is a vital component in the Group s raw material flow and helps form a strong link between the different product segments. Read more about SCA s strategic strengths on page 7. Although Europe is SCA s main market, sales are increasing rapidly in the emerging markets. SCA

74 2 SCA 2006

75 Jan Åström Events and trends 2006 was a year of recovery for SCA as demand for our products increased. In addition the balance between supply and demand improved, which meant prices could increase in most of our product areas. Our extensive efficiency enhancement programmes developed well and implementation is actually happening a little faster than planned. The Group s profits and profitability improved and, towards the end of the year, shareholder value creation levels were achieved. There is good potential for continued profitable growth thanks to increased demand, especially for new products and in emerging markets. This is supported by our strategic strengths: consumer and customer insight, regional presence with global capability and efficient production. Our progress has been achieved against the backdrop of two global themes that captured the world s interest in These themes are of vital importance to SCA s future and underscore its longterm potential, as well as the responsibility we all share for the future. I am referring to China and the climate issue. China is the symbol of current growth acceleration in many developing countries and it is providing billions of people with the opportunity to create a better life as efficient producers and consumers with substantial spending power. This reinforces market economy values and results in increased international exchange at all levels, more open societies and greater freedom for individuals. This, in turn, increases global demand and presents SCA with new challenges. Everything will move far faster and our market potential will be significantly increased. When Sweden and other European countries became market economies at the end of the 19th century, it took years for their economies to double in size. In many developing countries, GNP is doubled within just a decade. SCA will act as a driving force in this era of major global transition. People s desire for a better quality of life fuels our energy to develop and grow. SCA s contribution to this process is its expertise and its products. The ability to simply keep ourselves and our homes clean, to protect our children from infection and to provide comfortable hygiene solutions for them as babies, to free women from the discomfort and taboos associated with menstruation, to provide the elderly with comfort and independence when their bodily functions let them down all of this is a natural part of a better life. Our packaging solutions make it possible to transport goods across long distances and to open up and integrate markets that generate prosperity. Words and images inspire millions of people and publication papers carries knowledge and experiences to other countries and to new generations. Our products are about improving the quality of life in many different dimensions, modernization across borders and the chance of a more dignified and comfortable life. The other major theme this year the climate issue has focused attention on how essential sustainable development and a sound environment actually are. SCA has a long, distinguished tradition in the environmental area. Experience and expertise have been transformed into practical measures to improve the environment, making us leaders in this field. SCA owns vast areas of forestland that must be properly managed. There are production facilities all over the world and our products are used on a daily basis by hundreds of millions of people. Ours is an important responsibility we must run our business along sustainable lines. The Group complies with a number of global, regional and local guidelines and has established a far-reaching sustainability policy, transparent in all areas. Many of our employees, myself included, work with sustainability issues on a daily basis in various international contexts, in laboratories and out in workplaces, in cooperation with customers and consumers. Our products are about improving the quality of life in many different dimensions SCA

76 Jan Åström Opportunities and challenges It starts with consumer and customer insight SCA is currently experiencing a period of major transition with increased investment in consumer-focused innovation and product development in order to maintain and strengthen the Group s profitability. The increasing mobility of goods, services and capital across borders has promoted the growth of large global corporations and SCA can benefit from this trend thanks to strong brands and a position as a major, well-established supplier of retailers brands. It is crucial that we understand our customers commercial situation, and create added value for them. Retail chains and large-scale consumers expect support from their suppliers. SCA maintains longstanding partnerships with several international customers; partnerships that include activities such as joint studies, development of new products and expansion of services. Competition for the attention of consumers increases daily and deep, marketing insight is essential. SCA is currently in the process of renewing its brand strategy. The aim is to gather brands into different product categories on global platforms. This will consolidate SCA brands and provide substantial synergy effects. These platforms will also provide a foundation for innovation, product development, production and marketing using cohesive strategies. One example of the renewal process in 2006 is the global implementation of the Tork brand. Another example is SecureFit, our new thin feminine care product. An important element of our efforts in this area is to increase awareness of the value we create. This will put us in a better position to establish appropriate price levels. A natural consequence of our brand initiatives has been to reform price structure and contracts, as well as training SCA marketing and sales organizations to communicate the value of these offerings. These efforts have helped to create a positive price trend for most of the Group s products. Growing in new markets Our strength in understanding consumer and customer needs is closely linked to our global knowledge and regional presence. SCA is present on most significant markets, all over the world. This global competence rests on regional production and distribution structures. Expanding on new growth markets is a prioritized strategy, concentrating on segments where there is the best potential for profitable expansion. Organic growth will be complemented by acquisitions. Central and Eastern Europe, home to 330 million people, is one of the most important expansion areas. Growth is strong more than 6% per year and quality-of-life needs have been neglected for far too long. Our products are at the top of people s wish lists with respect to improving the quality of their lives. In Russia our tissue brand Zewa is a clear market leader. A new tissue plant is planned outside Moscow to meet the increased demand. In Poland our new factory has become a centre for the manufacture of baby diapers and incontinence products. In Romania we are building a new plant for packaging solutions. Latin America is another prioritized growth region within the Personal Care and Tissue business areas. The restructuring of the Mexican operation has been successful leading to improved profitability and growth during the year. In South America our leading positions in Colombia, Ecuador, Peru and Chile have been consolidated. In China the focus has primarily been on packaging for global customers and expansion has been rapid. We are currently a full-service packaging supplier in China and are considering expanding into the personal care segment. These growth markets will have a powerful impact on SCA s figures in the coming years. One example of geographical rebalancing is the sale of the North American packaging operations in January 2007, which releases resources for expansion in Eastern Europe and Asia. Sharper competitive edge Implementation of cost-cutting and efficiency programmes has been the single, most important task during the past two years. SCA must be competitive in all our segments. The good years around the start of this century were followed by a period of weaker demand, excess capacity and price pressure, mainly within the packaging and tissue segments. Meanwhile, restructuring was underway within the retail sector and price competition became tougher. Consequently SCA implemented a cost-cutting programme in two stages, first in 2004 and then a more comprehensive programme in the summer of When all the planned measures have been fully implemented in 2008, costs will have been cut by more than SEK 2.7bn. SCA was the first in the industry to carry out extensive capacity cut-backs and several of our competitors have since followed suit. For a number of years consumers have been able to benefit from rationalization within the industry in the form of gradual price reductions. Both raw material and energy costs have, however, increased dramatically over the past two years and it is thus probable that the end consumers will face higher prices. In addition to efficiency programmes, annual improvement in productivity is essential in order to meet external cost increases. This is a high-priority goal 4 SCA 2006

77 Jan Åström The past year We increase investments in consumer-focused innovation and product development that will be achieved through gradual, constant improvements. Implementing large-scale cut-backs demands efficient management. I am proud of the efforts that SCA managers and employees around the world have made in these turbulent times. At the same time, intensive work is underway within the Group to ensure that there will be a good supply of future managers available to work within prioritized competence areas. Investments for the future The efficiency programmes have been combined with significant, forwardlooking investments in line with the long-term industrial vision shared by the senior management and the Board of Directors. We are modernising our production base, our product development and our marketing. In Personal Care, capacity will be increased in all three product segments, technology upgraded and production operations increasingly shifted to low-cost countries. Within the Tissue business focus will be on expansion in growth markets. Within Packaging, strategic investments in high value content segments will be the focus. Within Forest Products, improvements to efficiency and product quality are underway. SCA possesses intrinsic strength in its Group structure through its raw material integration. This strength manifests itself in many ways. Increasing demand for timber in 2006 resulted in an, at times, problematic supply situation. Thanks to its own raw material base, SCA was able to cope with this situation better than many of its competitors. A large portion of Group production costs relate to energy. Apart from constant efforts to reduce energy consumption, a number of large-scale projects are underway aimed at utilizing energy generated by waste products. A new recovery boiler at the Östrand pulp mill, commissioned in 2006, greatly increased the inhouse supply of energy. Increased investments in biofuels are also among the measures under implementation. Cautious optimism In summary, I can say that SCA has begun to lift itself out of a decline lasting several years, this thanks to our systematic measures to cut cost levels and improve production structures, our innovative strength and our product range. The Group now provides more new and improved products and services than ever before. Market trends in 2007 are relatively positive with continued high levels of demand in most product areas and a better balance between supply and demand. This paves the way for improved price development for our products. However energy and other raw materials are still an uncertain factors. In 2007 many structural efficiency measures will reach completion, although ongoing improvement measures and expansion investments will continue to bear fruit in the years to come. All in all, I look forward to a sustained improvement of our longterm competitiveness and profits. Stockholm, February 2007 Jan Åström President and CEO SCA

78 Value creation Strategic focus SCA s business concept involves developing, producing and marketing increasingly value-added products and services in the Personal Care, Tissue, Packaging and Forest Products business areas. SCA s products simplify the everyday lives of hundreds of millions of people around the globe and generate strong cash flows that enable good dividend growth and raised value of the SCA shares. SCA s products radically simplify the everyday lives of consumers and customers as an important part of a modern society. Demand is rising steadily in mature markets and rapidly in the emerging economies. SCA works in close cooperation with customers to constantly develop the products attributes and functionality to create new products and services. In addition to innovative development based on consumer and customer insights, SCA s strengths include presence in regional markets with global capability and an efficient production structure. Higher value-added The concentration on growth in Personal Care, Tissue and Packaging has gradually shifted the balance towards consumer products. Although the Forest Products business area s portion of the Group s net sales has diminished, it continues to be of great strategic significance for raw material integration, strong cash flow generation and development of publication papers and solidwood products. Also within Forest Products, the focus has shifted towards products with increasing value-added. The Group s growing size and financial position enable the individual business areas to make strategic investments to increase growth and competitiveness. Growth Although geographically most of SCA s sales are concentrated in Europe and North America, a combination of acquisitions and good organic growth will increase the portion of sales in fast growing markets in Central and Eastern Europe, Latin America and China. Sales in these prioritized growth markets currently account for more than 15% of net sales, compared to 6% ten years ago. SCA s total organic growth is expected to reach 3 4% per year. Investments, acquisitions and divestments SCA works constantly on optimizing each individual business area by investing in the segments that have the best future development potential. To sustain the Group s profitability and growth targets, SCA estimates the annual investment requirement at 7% of the Group s net sales. Current investments are expected to reach around 5% and strategic investments around 2%. SCA regards selective company acquisitions as an important tool to quickly gain access to new markets or to develop complementary capabilities in existing ones. As a result of the Group s priorities, SCA may also divest units within the framework of the four business areas. Sales split SCA Group % Other Forest Products Packaging Hygiene Products Sales in emerging markets 2006 Growth is concentrated to Personal Care, Tissue and Packaging % Emerging markets Mature markets 15% Sales in the emerging markets of Central and Eastern Europe, Latin America and Asia account for 15% of SCA s net sales. 6 SCA 2006

79 Value creation Strategic strengths Consumer and customer insights Regional presence with global capability Efficient production Consumer and customer insights SCA intends to increase the pace of innovation for new products and services within each of the business areas. Leading market positions and the Group s significant resources make SCA an attractive partner when customers seek complete solutions to develop both products and services. Regional presence with global capability SCA s focus involves the assumption that production and distribution are most efficient in regional markets close to customers. Several of SCA s products cannot sustain the high cost of long transport routes. While production is local, most of SCA s product offerings are global and, due to its size and geographical spread, SCA enjoys significant economies of scale within research and development, brand positioning and concept development. Efficient production SCA has a long tradition of constant improvement in the production structure and utilizing the Group s synergies throughout the value chain. Over the past few years this strategy has been intensified through the implementation of two major cost-cutting programmes that will reach completion in 2007 and will reduce total costs by SEK 2.7bn. SCA s own raw material base gives the company control over cost trends through an efficient raw material integration system. SCA

80 Value creation Strategic control SCA aims to provide its shareholders with the highest possible return. This means the company must allocate resources in the best possible way. To achieve this, SCA uses a cash-flow based model to measure profitability in current operations and for new investments. Cash flow requirement SCA measures profitability using a Group-wide cash-flow model where the cash flow from current operations is compared with a cash-flow requirement. This requirement is derived from all income-generating assets, their expected economic life and the weighted cost of capital. The requirement indicates the level at which value is created for the shareholders (see explanation on page 11). The value creation requirement measured as cash flow from current operations, was SEK 5.2 1) bn for 2006, which is equivalent to an operating surplus margin (EBITDA) of 15.0%. The cash flow from current operations for 2006 was SEK 4.1bn, which is equivalent to an EBITDA margin of 14.5%, slightly below the required level. During the year the negative earnings trend was reversed and in the final quarter, SCA achieved a level at which the Group was value-creating. This improvement can mainly be attributed to cost savings totalling SEK 1,265m and a more favourable market development. The requirement for 2007 is a cash flow of SEK 5.1 billion, representing an EBITDA margin of 15.0%. Like the margin, the required return on capital employed is derived from the cash-flow requirement. The required return on capital employed in 2007 is 9.0%. SCA sees the potential for substantial improvement on current profit levels. Measuring from 2006, SCA expects the EBIDTA margin to improve by 2 3 percentage points within a three-year period. The effects of additional market and price improvements are not included in these assumptions. Likewise, costs for input raw materials are expected to remain constant at 2006 levels. Based on SCA s strategic strengths, the priorities for each business area are described below. Personal Care Profitability and growth are very strong within the Personal Care business area. In 2006 an EBITDA margin of 18% was achieved, which is significantly higher than the required level for value creation in 2006 of 12%. The requirement for 2007 is 11% at the EBITDA level. Given the strong profitability level, the highest priority is to make the most of the growth potential that exists. The objective is to grow organically by 5 7% annually. This will be driven by high growth in incontinence care, an increased portion of sales in growth markets in diapers and feminine care, and a successful positioning and development of retailers brands. The margins are expected to be maintained at current levels with a potential for some expansion. This requires a high pace of product development, more production in low-cost countries and higher sales in premium segments. The business risk in Personal Key ratios 1) Operating surplus margin (EBITDA) Result 2) (%) 14,1% 14,5% Value creation requirement (%) 15,0% 15,0% Operating cash flow Result 2) (SEKbn) 5,3 4,1 Value creation requirement (SEKbn) 5,1 5,2 5,1 Result/requirement (%) 105% 79% Return metrics Result capital employed 2) (%) 7,7% 8,8% Capital employed target (%) 9,0% 9,0% 9,0% Result equity 2) (%) 7,9% 9,5% Equity target (%) 8,0 % 9,0% 8,5% Financial metrics Debt/equity ratio (multiple) 0,7 0,6 0,7 Market adjusted debt/equity ratio (multiple) 0,6 0,4 Debt payment capacity (%) 27% 29% 1) The EBITDA margin requirement is based on all income-generating assets, their expected economic life and the weighted cost of capital. The operating cash flow is also affected by the Group s capital structure. The requirement may vary from year to year depending on how the underlying parametres change. 2) Excluding items affecting comparability. 8 SCA 2006

81 Care is mainly related to the positioning of SCA s main competitors, developments in the retail sector and raw material costs. Tissue Overall the profitability in the Tissue business area is unsatisfactory. This business area achieved an EBITDA margin of 12% in 2006, which is below the required level of 14%. The main reason for the weak result is tough competition in consumer tissue in Europe. The required EBITDA margin for 2007 is 14%. Tissue for bulk consumers (AFH) has demonstrated good profitability and this is expected to increase in the years ahead due to increased sales of premium products and complete hygiene concepts for public premises under the global Tork brand. In Consumer tissue, SCA is working with the following strategic priorities: increasing the portion of sales of SCA s own brands, rationalizing production structures, forming strategic partnerships to develop retailers brands, and increasing sales in emerging markets such as Latin America and Russia. The tissue market is growing steadily by around 3 4% per year. The business risk in this area is mainly related to competition in the retail trade, capacity growth from smaller competitors and increases in the price of pulp, recycled paper and energy. Packaging Towards the end of the year SCA began regaining the value-creating level within the Packaging business area. For the full year 2006 Packaging achieved an EBITDA margin of 11%, which is lower than the value-creation requirement level of 13%. The 2007 level for value creation is an EBITDA margin of 14%. In the years ahead the profits are expected to grow as a result of the ongoing efficiency programme, an improved balance in the markets and an anticipated increase in the sale of complete packaging solutions in high-value segments. Overall SCA expects the Packaging business area to grow by around 2 3 % per year. The growth rate is significantly SCA

82 Value creation higher in the prioritized growth regions of Central and Eastern Europe and Asia. The business risk in Packaging is mainly related to the general demand in Europe, increased capacity from smaller competitors and increases in the price of recycled paper and energy. Forest Products SCA s Forest Products business area is meeting the Group s return requirement. For the full year 2006 Forest Products demonstrated an EBITDA margin of 22%, which is over the required level of 21%. The requirement for 2007 is an EBITDA margin of 21%. SCA expects to be able to strengthen margins in the years ahead by continuing to implement successful productivity measures within the publication papers operation, increase the percentage of value-added products within the solid-wood products segment, improve the energy balance from pulp production and further rationalize forest management. Growth is expected to reach 2 3 % per year. The business risk in this area is mainly related to trends in the advertising market in Europe, changes in the supply and demand balance and wood and energy price fluctuation. Dividend policy SCA aims to provide stable and rising dividends. Over a business cycle, about one third of the cash flow from current operations (after interest expenses and tax) is normally used for dividends and two thirds for value-creating strategic investments. If the cash flow from current operations exceeds what the company can invest in profitable investments, the surplus is returned to the shareholders by increasing the dividend or used to repurchase the company s own shares. Over the past decade the dividend has grown by an average of 9% per year and the proposed dividend for the 2006 financial year is SEK 12, representing an increase of 9% compared with Capital structure SCA s debt/equity ratio measured as net debt in relation to the book value of equity was 0.62 on 31 December 2006, which is below SCA s long-term target of 0.7. The debt/equity ratio target of 0.7 has been chosen taking into account SCA s business risk and the composition of the product portfolio. Periodically the debt/equity ratio may deviate from this target and over the past decade, it has varied between 0.39 and In addition to internal financing from cash flow from current operations, funds for further strategic investments are made available by additional borrowing capacity while maintaining the same debt/ equity ratio. SCA has a credit rating for long-term borrowing of Baa1/BBB+ and short-term borrowing of P2/A2 from Moody s and Standard & Poor s respectively, and a short-term credit rating of K1 in Sweden from Standard & Poor s. For more detailed information about risk management, see Note 2 on page 66. Incentive programme SCA s incentive programme is designed to support the company s objective of creating shareholder value. The programme for senior executives has two components: achievement of earning and cash-flow targets and the price performance of SCA s shares compared to an index consisting of SCA s major global competitors. For more information about the structure of the programme, see Note 32, Remuneration to senior executives on page 85. Dividend per share SEK Average cumulative growth: 9% Strategic investments, acquisitions and divestments SEKm 12,000 10,000 8,000 6,000 4,000 2, , Personal Care Tissue Packaging Forest Products Divestments Most of SCA s strategic investments and acquisitions are in Personal Care, Tissue and Packaging. 10 SCA 2006

83 SCA s cash-flow model SCA s cash-flow model SCA s main tool for measuring the profitability of current operations is a cash-flow model where the cash flow from operations is compared with a cash-flow requirement. This requirement is derived from all income-generating assets, their expected economic life and a weighted cost of capital. The requirement is adjusted for inflation, which provides a measurement independent of the date of acquisition of the asset and also independent of adjustments in the accounts, such as depreciation. This method is called Cash Value Added (CVA). SCA monitors business groups and operating units by comparing the net operating profit with the requirement. If the net operating profit exceeds the requirement, i.e. the CVA index is over 1.0, the unit is profitable and thus value-creating. These evaluations provide a basis for decisions on future investment allocations. For the Group as a whole the requirement is set as cash flow from operations, which is operating cash flow minus financial items and paid tax. The cash-flow requirement shows at what level SCA is value-creating during an individual year. However, this snapshot must be viewed in relation to value creation over a longer period. The net operating profit margin and rate of return are subsequently derived from the cash flow from operations. Strategic investments SCA evaluates all strategic investments (company acquisitions or expansion investments) in accordance with the cash-flow model. All investments must provide a return that exceeds the cost of capital. The future cash flow of each strategic investment is calculated and the cost of capital is discounted. This provides a present value for the estimated future cash flow. If the present value is higher than the expenditure for investment, the investment is value-creating. SCA requires that the present value must exceed the investment expenditure by a certain margin. SCA s required rate of return SCA s required rate of return on assets is determined by the capital market s return requirement on investments in SCA shares and current long-term interest rates. The return requirement, the weighted cost of capital (WACC), was calculated at the end of 2006 as shown in the figure below. Applying this method of calculation, the weighted cost of capital is determined as 6.4%. This means that all investments must over time generate an operating cash flow after tax but before interest expense of at least 6.4% of the investment in order to be valuecreating and thus meet market demands. The return requirement level above applies to investments in Sweden. Different borrowing costs and tax rates in other countries change the return requirement for operations in those countries. SCA s required rate of return Risk-free interest Market risk premium 4.5% 3.8% SCA s risk premium Cost of equity 7.9% 0.65x (Market valued) SCA s Beta coefficient 4.1% 0.9x WACC Risk-free interest 6.4% 3.8% Interest expense Loan margin 1.0% 4.8% Marginal tax Effective interest expense 3.5% 0.35x 28% SCA

84 SCA shares Strong development during 2006 Price trend in 2006 The closing price in 2006 on the Stockholm Stock Exchange for SCA s B shares was SEK (297), which represents a market capitalization of SEK 84bn (69). This amounts to around 2% of the total market capitalization on the Stockholm Stock Exchange. In 2006 the share price rose by 20%. Including the dividend paid out in 2006, the total return amounted to 24%. The share price performance was strong for the first few months of the year, before falling again in line with the general decline on the Stockholm Stock Exchange in May and June. During the second half of the year, the share price was performing well again. The highest closing price for SCA s B share in 2006 was noted on 27 December at SEK 364. The lowest price of SEK 279 was noted on 13 June. In 2006 the SCA share price developed in line with the Stockholm Stock Exchange as a whole and outperformed the comparable industry index. Over a five-year period, the SCA shares enjoyed a stronger trend than the comparable industry index but weaker than the Stockholm Stock Exchange. Trading in SCA shares SCA shares are listed and traded primarily on the Stockholm Stock Exchange, but may also be traded on the London Stock Exchange (OTC) and as American Depository Receipts (ADR level 1) in the US through the Bank of New York. In addition to indexes linked directly to the Stockholm and London exchanges, SCA is included in other indexes such as the Dow Jones STOXX Index, FTSE Eurotop 300 and MSCI Eurotop 300. SCA is also represented in several environmental indexes around the world, where companies are evaluated based on their ability to combine financial growth with successful environmental work. Examples include the FTSE4Good Index and the Dow Jones STOXX Sustainability Index. Liquidity The turnover of SCA shares increased in The total volume of shares traded was 311 million shares (304), representing a value of approximately SEK 101bn (81). The average daily trading for SCA on the Stockholm Stock Exchange amounted to 1.2 million shares, equivalent to a value of SEK 401m (321). Foreign ownership Approximately 57% (61) of the share capital is owned by investors registered in Sweden and approximately 43% (39) by foreign investors. Foreign ownership has increased steadily in recent years. The US and the UK account for the highest percentage of shareholders registered outside Sweden with 15% and 12% respectively. Dividend The Board of Directors has proposed a dividend to shareholders of SEK 12 per share for 2006, which is 9% higher than in The 2006 dividend represents a dividend yield of 3.4% per share based on SCA s share price at the end of the year. Since going public on the Stockholm Stock Exchange in 1950, SCA has never reduced the dividend, and over the past ten years, the dividend has increased by an average of 9% per year. SCA s dividend policy is described on page 10. Ticker names: Stockholm Stock Exchange (the Nordic Exchange) London Stock Exchange (OTC) New York (ADR Level 1) SCA A SCA B SNKB SVCBY Price trend and share trading, 2006 Price trend and share trading, SEK 400 Thousand shares 10,000 SEK 500 Million shares , , , , , , , , , Jan. Feb. March April May SCA B Affärsvärlden general index MSCI European Paper Index June July Aug. Sept. Oct. Nov. Dec. Daily trading SCA B Affärsvärlden general index MSCI European Paper Index Trading per quarter 0 12 SCA 2006

85 Data per share All earnings figures include non-recurring items. SEK per share unless otherwise indicated Earnings per share after full tax: After dilution Before dilution Market price for B shares: Average price during Closing price, 31 December Cash flow from current operations 1) Dividend ) Dividend growth, % 3) Dividend yield, % P/E ratio 4) Price/EBIT 5) Beta coefficient 6) Pay-out ratio (before dilution), % Shareholders equity, after dilution Shareholders equity, before dilution Average number of shares after dilution (millions) Number of registered shares 31 December (millions) Number of shares after full conversion (millions) ) See definitions of key ratios on page ) Board proposal. 3) Rolling 5-year data. 4) Share price at year-end divided by earnings per share after full tax and dilution. 5) Market capitalization plus net debt plus minority interests divided by operating profit. (EBIT=earnings before interest and taxes). 6) Share price volatility compared with the entire stock exchange (measured for rolling 48 months). Percentage of foreign ownership Year % Shareholders by country Other 16% UK 12% USA 15% Shareholders by category Private individuals 11% Sweden 57% Institutions 89% SCA s ten largest shareholders According to VPC AB s official share register for directly registered and trustee registered shareholders as of 31 December 2006, the following companies, foundations and mutual funds were the ten largest registered shareholders based on voting rights (before dilution). Shareholder No. of votes % No. of shares % AB Industrivärden 167,591, ,591, Handelsbanken* 74,354, ,272, SEB* 41,805, ,725, Livförsäkringsaktiebolaget Skandia 17,498, ,354, Alecta 10,684, ,430, AB Skrindan 10,026, ,002, AMF Pension 9,390, ,003, Andra AP-fonden 9,151, ,586, Swedbank* 8,214, ,761, Nordea* 6,721, ,507, * Including mutual funds and foundations. Source: VPC AB Shareholder structure No. of Holding No. of votes % shareholders % No. of shares % ,084, , ,696, ,000 12,099, , ,595, ,001 2,000 12,417, , ,352, ,001 5,000 13,665, , ,257, ,001 10,000 7,829, ,581, ,001 20,000 7,854, ,857, ,001 50,000 13,242, ,527, , ,000 11,894, ,144, , ,663, ,024, Total 573,751,819 74, ,036,698 Source: VPC AB Share distribution 31 December 2006 Series A Series B Total shares Number of registered shares 37,635, ,401, ,036,698 of which treasury shares 1,253,138 1,253,138 Total 37,635, ,401, ,036,698 Issues Since the beginning of 1993 the share capital and number of shares have increased due to new issues and conversions as follows: Increase in share Cash payment No. of shares capital. SEKm SEKm Series A Series B Total 1993 Conversion of debentures and new subscription through Series 1 warrants 4,030, New issue 1:10, issue price SEK 80 17,633, , ,145, ,821, ,967, Conversion of debentures 16, ,145, ,837, ,983, Conversion of debentures 3,416, ,145, ,254, ,399, New issue 1:6, issue price SEK ,899, , ,133, ,166, ,299, Conversion of debentures 101, ,626, ,775, ,401, New issue, private placement 1,800, ,787, ,414, ,201, New issue through IIB warrants ,701, ,500, ,202, Conversion of debentures and subscription through IIB warrants 2,825, ,437, ,590, ,027, Conversion of debentures 9, ,427, ,608, ,036,698 SCA

86 SCA A year of continued profitable growth President s letter page 3 Concentrating on shareholder value Strategic orientation page 8 Annual Report 2001 Continued acquisitions in US Hygiene Products and Packaging pages 14 and 22 HYGIENE PRODUCTS, PACKAGING AND FOREST PRODUCTS FOR EVERYDAY USE WORLDWIDE

87 SCA Year in brief Cash flow from operations remained strong and amounted to SEK 11,249 M. Accordingly, the cash flow target for the year was exceeded. Earnings after financial items was the best ever, amounting to SEK 8,090 M. SCA share rose 43% during the year and noted a new all-timehigh. SCA acquired Georgia-Pacific s American tissue operations in the Away From Home area. SCA acquired the US protective packaging company Tuscarora. Jan Åström named to succeed Sverker Martin-Löf as President and CEO in conjunction with the Annual General Meeting in The Board has also announced that it intends to select Sverker Matin-Löf as new Board Chairman of SCA succeeding Bo Rydin, who was named Honorary Board Chairman. SCA IN BRIEF SCA produces and sells absorbent hygiene products, packaging solutions and publication papers. Based on customer needs, value-added products are produced for consumers, institutions, industry and the retail trade. SCA strives to increase the proportion of high-value-added products in order to generate stable and healthy profitability. Net sales amount to more than SEK 82 billion annually. Western Europe is SCA s main market. A strong penetration has also been made in North America. The Group has acquired several companies in these regions in recent years, thus strengthening the market positions for Hygiene Products and Packaging. Concurrently, selective expansion is under way in Latin America, Central and Eastern Europe as well as in Asia.

88 Contents page Key ratios SEK EUR 2 SEK EUR 2 Net sales, SEK M/EUR M 82,380 8,919 67,157 7,960 Earnings after fi nancial items, SEK M/EUR M 8, , Earnings per share after tax, SEK Cash fl ow from current operations, per share, SEK Dividend, SEK Strategic investments, net, SEK M/EUR M 15,503 1,679 3, Shareholders equity, SEK M/EUR M 45,983 4,884 39,898 4,511 Return on shareholders equity, % Debt/equity ratio, multiple Average number of employees 42,049 37,700 1 Excluding nonrecurring items. 2 See pages 48 and 50 for currency rates. 3 Adjusted historically taking into account new issue for stock options of 1.8 million shares in Board proposal. See page 71 for defi nitions. NET SALES BY BUSINESS AREA 2001 (excl. intra-group deliveries) OPERATING PROFIT BY BUSINESS AREA 2001 (adjusted for central items) EARNINGS, DIVIDEND AND CASH FLOW PER SHARE SEK 50 Other 2% 40 Forest Products 14% Hygiene Products 49% Forest Products 28% Hygiene Products 42% Packaging 35% Packaging 30% Earnings Dividend Cash flow from current operations Renewable and recyclable materials account for approximately 95% of SCA s products. Equal quantities of recycled and fresh wood fibers are used in production. SCA owns approximately 1.6 million hectares of productive forestland and conducts sawmill operations. At the beginning of 2002, the number of employees was approximately 40,000, in some 40 countries. The SCA share is traded on the stock exchanges in Stockholm and London, and can also be traded in the US in the form of ADRs (American Depositary Receipts). 1

89 Contents Hygiene Products Packaging Forest Products American acquisitions and strong earnings Significant earnings improvement in all product categories. In North America, extensive integration efforts followed the acquisition of Georgia-Pacific Tissue. New, exciting packaging The acquisition of Tuscarora has turned SCA into a global leader in customized protective packaging. Strong per - formance despite declining market Strong cash flow and earnings, particularly from the publication papers business. 2 President s letter 3 Operations in brief 6 Business concept and strategy 8 Business control and fi nancial goals 10 SCA share 12 OPERATIONS: Hygiene Products 14 Brand strategy 21 Packaging 22 Forest Products 28 IT 34 Research and Development 35 Environmental and social responsibility 36 Human resources 38 Financial risk management 39 FINANCIAL REVIEW: Board of Directors report 41 Cash fl ow statement 46 Statement of earnings 48 Balance sheet 50 Parent Company 52 Accounting principles 53 Notes to the fi nancial statements 55 Proposed disposition of earnings 66 Audit report 67 Quarterly data 68 Group by country 69 Ten-year comparison 70 Defi nitions and key ratios 71 Board of Directors and Auditors 72 Senior Management and organization 74 Annual General Meeting 76 Glossary 77 SCA in the world 78 Production capacities 79 SCA s raw material consumption 80 Financial information report dates 81

90 P RESIDENT S LETTER / SCA ANNUAL REPORT 2001 A year of continued pro f- itable growth In terms of earnings, SCA s performance in 2001 was its best ever. Growth in hygiene products and packaging continued through acquisitions in North America. In terms of earnings, the year 2001 developed into the best in SCA s history. Earnings after financial items rose 11% to SEK 8,090 M, bringing the average earnings increase over the past five years to 18%. Cash flow from current operations in 2001 continued to be strong, amounting to SEK 11,249 M, well in excess of the target for the year. The year began with a strong market that subsequently weakened. Increasing price pressure was offset primarily by declining prices for raw materials and a more value-creating product mix. The Group s sustainable cash flow target at the beginning of 2002 has been adjusted upward for the expansion-related investments and acquisitions carried out in 2001 and amounted to SEK 6.2 billion. Accordingly, the cash flow target was increased by a full 29% compared with the beginning of American breakthrough The acquisitions of Georgia-Pacific Tissue and Tuscarora were a breakthrough for SCA in the North American market. These acquisitions give us the necessary critical mass and a platform for further expansion. With the acquisition of Georgia- Pacific Tissue, we advanced to the position of No. 3 in North America in tissue for the Away-From-Home (AFH) segment a segment in which the three largest producers control 88% of the market. Tuscarora, a growth company, is world leading in customized protective packaging and possesses unique knowledge that we can transfer to other parts of our global packaging operations. The initial acquisitions in North America during the year were supplemented with a number of smaller company acquisitions. Marko Foam Products, RPA and ISC are all active in protective packaging, whereas the Encore Paper focuses on tissue for the AFH segment. Encore Paper complements both our product mix and geographic spread. Other strategic investments In Europe, we acquired two packaging companies in France Anjou Emballages and Cartonnages Industriels Méhunois (CIM) and one in Finland the Pakkausjaloste packaging company. Packaging also signed a cooperation agreement with the Swedish packaging company Nefab, which enables us to offer customers more complete industrial packaging solutions. In the hygiene area several expansion-related investments in tissue and incontinence products were carried out. In tissue, it was decided to under- 3

91 P RESIDENT S LETTER / SCA ANNUAL REPORT 2001 In the beginning of 2001, the American companies Georgia-Pacific Tissue and Tuscarora were acquired. These were followed by additional North American acquisitions within protective packaging and tissue for the AFH market, parallel with intensive integration efforts. take an expansion of the conversion operations at the Kostheim mill in Germany, and to increase production capacity for high-value recycled-fiber pulp at Lilla Edet in Sweden. In incontinence products, it was decided to build several machines for manufacturing various types of incontinence products for the European and the North American markets. In Forest Products, decisions were taken to undertake investments at the Ortviken paper mill, involving the upgrade and rebuild of the coating plant. At the Östrand pulp plant, dryer capacity will be increased to improve the Group s internal pulp supply. Work is under way in Laakirchen with a new paper machine that will be placed in operation in June SCA and Graninge AB agreed on a modification of their cooperation in the jointly owned Scaninge Timber AB, whereby SCA s capital share increased from 40.6 to 59.4%. The parties voting rights remain unchanged at 50% each. Dividend and share performance Cash flow from current operations may be allocated for strategic investments and dividends. For 2001, the Board proposed a dividend increase of 13% to SEK 8.75 per share. Consequently, over the past five years the dividend has increased by an average of 12%. In 2001, the SCA share price rose 43% to SEK 287, outperforming both the SAX index and the Morgan Stanley European forest index. On 27 December, the shares reached a new all-time-high of SEK 290. The share price continued to rise and on 22 February 2002 a closing price of SEK was noted. Long-term growth in Group For some time, SCA has undergone a transition from traditional forest company to growth company focusing on hygiene products and packaging. This development intensified over the past five years. In 1991, the Hygiene Products and Packaging business areas accounted for 65% of sales, while in 2001, the corresponding figure was 85%. At the same time, SCA s forest industry operations have been adapted to supply internal raw-material requirements, and production of publication papers has been concentrated on more value-added products. During , sales of the hygiene and packaging operations increased by 13% a year, while the operating surplus increased 16% a year. In the same period, earnings per share increased 18% a year, from SEK 4.69 per share to SEK This is the result of a long-term strategy, in which most of the strategic investments have been in hygiene products and packaging, concurrent with a streamlining of the Group s other operations. The key milestones include the acquisitions of the Reedpack packaging company in 1990, the German-based PWA packaging and hygiene company in 1995, some 30 smaller acquisitions during and the North American acquisitions made in 2001, as well as the divestments of Båkab in 1992 and the fine papers business in The current structure, with hygiene products, packaging and forest products, creates significant synergies, particularly through the common fiber base. As much as 60% of the Group s fiber requirements are supplied through SCA s own forest holdings and recovered paper collection. This provides control over the supply of raw material, permits integration and promotes efficient internal utilization of fiber raw material, which has a positive impact on the Group s logistics costs. Financial targets In 1997, we clarified our financial targets with the help of the cash-flowbased CVA model, which focuses on creating shareholder value. Among the targets then established was that the total return on the SCA share that is, share price increase and dividend should result in doubling of shareholder value every fifth year. Profitability being one of the cor- 4

92 nerstones of our strategy, the requirement was set that cash flow from current operations should grow by at least 8 10% annually. All acquisitions must fulfill our cash-flow requirements and increase net earnings within the first year. Since 1997, the share price has risen from SEK 130 to SEK 287, which, combined with the dividend, gives an annual total average return of 21%. Cash flow from current operations in the same period increased by an average of 22% per year that is, considerably more than the Group s sustainable target. The Group looks to the future SCA s overall goal is to generate shareholder value, and its ongoing objective is to double the value to shareholders every fifth year. SCA will reach this objective partly through ongoing growth and partly by improving the efficiency of current operations. The Group s growth target, which will be attained primarily via acquisitions, is 8 10% annually. We plan to expand primarily in Europe, and aims to achieve market shares of 20 25% in corrugated board packaging and 25 30% in tissue. In North America, growth will take place both in packaging, particularly the value-added segments, and in tissue for the AFH segment, as well as in incontinence products. The forest industry sector s role in internal supply of raw materials will be further developed, since the Group s growth requires an increased supply of raw materials. The relative importance of fresh fiber is expected to increase as a result of an active product development aimed at function as well as quality. The position of publication papers was improved as a result of ongoing investments in the SC and LWC area. The product portfolio gains an increasingly higher high-quality profile and competitiveness is improved continuously at the Group s three large publication paper mills. Outlook for 2002 Demand for the Group s products in Europe was relatively favorable during 2001 despite the fairly distinctive decline in the general economy. Demand is expected to remain favorable in 2002 for the Group s consumer-oriented products. In other respects, the demand trend for the industry-related products is more difficult to assess. In North America, the general recession during 2001 had a significant impact on demand for the Group s packaging and tissue products. Prices were also under pressure. However, the incontinence area remained largely unaffected. During the autumn the situation stabilized and a certain, although moderate, recovery occurred during the fourth quarter. Any further weakening is not expected. A potential recovery in the US economy during the year should Bo Rydin, Honorary Chairman rapidly improve the demand situation for these product areas. Raw material costs and energy costs are expected to remain stable in early New President In conjunction with the Annual General Meeting on 11 April 2002, I will be succeeded in the position of President and CEO by Jan Åström. Jan Åström was appointed Executive Vice President and Deputy CEO in autumn 2000 and prior to this he held a number of executive positions in partly or wholly owned SCA companies since In conclusion, with regard to Bo Rydin s departure as Board Chairman, I extend the thanks of the company s Board and management. Stockholm, February 2002 Sverker Martin-Löf President and CEO Bo Rydin has dedicated a life s work to SCA. During his 16 years as President and CEO and 14 years as Board Chairman, the company has continually developed and changed, which has resulted in a strong value growth for the company s shareholders. During this period, SCA has also been a secure workplace for the employees, despite structural changes at time being very extensive. It was possible to carry out the process of change in accord with the labor unions and with respect for the individual. Bo Rydin s commitment has been intense and he has always acted in the best interests of SCA. The Board and management extend heartfelt thanks to Bo Rydin for his efforts and express their appreciation for such rewarding cooperation. An expression of this regard is that Bo Rydin is being named Honorary Chairman. 5