SCA H1 fiscal year 2011 results: operating profit down 5% to SEK 4,262 million
The recovery of the global economy is continuing, but at a slower pace. Emerging markets are showing continued strong growth, while considerable regional differences exist in Europe. The high level of growth in emerging markets has driven up raw material prices to very high levels.
The global market for incontinence care products is showing continued growth. Demand for tissue was stable in Western Europe and North America during the first half of 2011 compared with a year ago. Emerging markets are showing continued favourable growth.
Demand for corrugated board in Western Europe is up 3% through May 2011 compared with a year ago. Prices of corrugated board continued to rise during the second quarter of 2011.
Demand in Europe for magazine paper decreased by 2% during the first half of 2011 compared with the same period a year ago. Demand for newsprint rose 2% during the same period.
Raw material prices continued to rise during the second quarter of 2011.
SALES AND EARNINGS
January-June 2011 compared with corresponding period a year ago
Net sales decreased by 2% (increased by 5% excluding exchange rate effects and divestments) to SEK 52,064m (53,266). Higher prices and volumes increased sales by 4% and 1%, respectively.
Operating profit excluding restructuring costs decreased by 5% (increased by 1% excluding exchange rate effects) to SEK 4,262m (4,467). Higher prices and volumes along with cost savings compensated for sharply higher costs for raw materials, energy and distribution. The lower profit is attributable to the strengthening of the Swedish krona.
Restructuring costs totalled SEK 0m (451). Financial items increased to SEK -579m (-523). The increase is attributable to higher interest rates, which were partly compensated by a lower level of net debt. Profit before tax excluding restructuring costs decreased by 7% (1% excluding exchange rate effects) to SEK 3,683m (3,944). The tax expense excluding effects of restructuring costs was SEK 958m (1,084).
Net profit for the period excluding restructuring costs decreased by 5% (unchanged excluding exchange rate effects) to SEK 2,725m (2,860). Earnings per share rose 8% (13% excluding exchange rate effects) to SEK 3.85 (3.57).
Second quarter 2011 compared with second quarter 2010
Net sales decreased by 1% (increased by 6% excluding exchange rate effects) to SEK 26,671m (27,067). Higher prices and volumes increased sales by 4% and 2%, respectively.
Operating profit excluding restructuring costs decreased by 12% (7% excluding exchange rate effects) to SEK 2,150m (2,440). Higher volumes and prices along with cost savings compensated for higher costs for raw materials, energy and distribution. The lower profit is attributable to the strengthening of the Swedish krona, including transaction exposure in Forest Products.
Profit before tax excluding restructuring costs decreased by 15% (10% excluding exchange rate effects) to SEK 1,873m (2,196).
Net profit for the period excluding restructuring costs decreased by 13% (8% excluding exchange rate effects) to SEK 1,386m (1,601). Earnings per share decreased by 4% (increased by 1% excluding exchange rate effects) to SEK 1.96 (2.04).
CASH FLOW AND FINANCING
The operating cash surplus amounted to SEK 6,814m (7,273). The cash flow effect of the change in working capital was SEK -1,945m (-1,772). The increase is mainly attributable to higher trade accounts receivable and inventory values. Current capital expenditures were higher than in the preceding year and amounted to SEK 1,458m (952). Operating cash flow amounted to SEK 2,979m (4,135).
Financial items increased to SEK -579m (-523) as a result of higher interest rates, which were partly compensated by a lower level of net debt. Tax payments decreased to SEK 578m (798). Cash flow from current operations decreased to SEK 1,840m (2,816), mainly as a result of a lower operating cash surplus and higher current capital expenditures.
Strategic investments amounted to SEK -854m (-997). Acquisitions and divestments amounted to SEK -94m (1,223). The dividend pay-out amounted to SEK 2,809m (2,599). Net cash flow was SEK -1,917m (443).
Net debt has increased by SEK 2,224m during the year to SEK 36,630m. Net cash flow increased net debt by SEK 1,917m, while fair value measurement of pension assets, pension obligations and financial instruments increased net debt by SEK 459m. Exchange rate movements attributable to the strengthening of the Swedish krona decreased net debt by SEK 152m. The debt/equity ratio was 0.55 (0.51 at the beginning of the year). The debt payment capacity improved to 37% (33%).
As per 30 June 2011, SCA had outstanding commercial paper worth SEK 6,846m maturing within 12 months. Unutilised credit facilities amounted to SEK 20,442m, of which long-term facilities amounted to SEK 19,796m. Cash and cash equivalents amounted to SEK 2,757m.
EQUITY
Consolidated equity decreased during the period by SEK 840m to SEK 66,981m. Net profit for the period increased equity by SEK 2,725m. Equity decreased by SEK 2,809m through payment of the shareholder dividend, by SEK 272m after tax through restatement of the net pension liability to fair value, and by SEK 199m after tax through fair value measurement of financial instruments. Exchange rate movements, including the effects of hedges of net investments in foreign assets, decreased equity by SEK 285m.
TAX
A tax expense corresponding to a tax rate of 26% is reported for the period, which is also expected to be the tax rate for the full year 2011.
OTHER EVENTS
First quarter
For the fourth year in a row, SCA has been named as one of the world's most ethical companies by the Ethisphere Institute in the USA.
Second quarter
To capitalise on the favourable growth in the Russian market and further strengthen SCA's market-leading position, a decision was made to invest approximately SEK 1.2bn in a second tissue machine in Sovetsk, Russia. The new tissue machine has annual capacity of 60,000 tonnes, with production start planned for 2013. The investment is part of the strategy to grow in emerging markets and to increase the share of sales of SCA's own brands.
A decision was also made to invest approximately SEK 1.1bn in a new tissue machine in Kostheim, Germany, to meet increased demand primarily for AFH tissue products. The new tissue machine will have annual capacity of 60,000 tonnes, with production start planned for 2013.
To increase production capacity and reduce costs, a decision was made to invest approximately SEK 300m in the Bollsta sawmill, in Sweden. The investment pertains to two new biofuel boilers, increased drying capacity and an upgrade of the saw line. These investments will increase production capacity from 450,000 cubic metres to 525,000 cubic metres of sawn pine products per year.
Mats Berencreutz took office as Chief Operating Officer (COO) of SCA's global hygiene business and continues to be a member of the Corporate Senior Management Team. The appointment strengthens the Group's resources and creates conditions to further co-ordinate and develop SCA's hygiene business, with the goal of improving profitability and increasing growth. Magnus Groth, currently CEO of Studsvik AB, has been appointed as new President of SCA's tissue operations in Europe. He will take office on 15 August and will be a member of SCA's Corporate Senior Management Team.
SCA acquired 50% of the Turkish hygiene products company Komili from Yıldız Holding, Turkey's largest food group. The purchase consideration amounted to SEK 308m on a debt free basis. Komili is currently the fourth largest producer of baby diapers and feminine care products in Turkey and has operations in associated product areas, such as wet wipes, soaps and shampoos. Komili will operate as a joint venture between SCA and Yıldız Holding.
The acquisition includes local production and access to a strong distribution network in the country. Komili's annual sales are approximately SEK 530m.
During the quarter, SCA sold its Greek packaging business, with annual sales of approximately SEK 500m. The unit was sold to a Turkish packaging company in which SCA has a 49% interest. After the end of the quarter, SCA sold its packaging plant in Kuban, Russia, with annual sales of approximately SEK 220m. The sales had no profit impact.
SCA and the Norwegian company Fred.Olsen Renewables formed a jointly owned company to build a wind farm on SCA's land in northern Sweden. The area has the potential for approximately 2 TWh in annual wind power generation.
During the quarter, SCA issued a five-year EUR 600m (SEK 5,489) Eurobond.
PERSONAL CARE
With its TENA brand, SCA is the European market leader in all incontinence care segments. During the second quarter, SCA launched a line of incontinence care products designed as protective underwear for both men and women. In baby diapers, SCA has a strong, market-leading position in the Nordic countries with its Libero brand. During the second quarter, SCA launched a line of thin baby diapers under the Libero brand in the Nordic countries and Russia. In Europe, the volume development for existing and new private label contracts will result in gradually larger deliveries during the second half of 2011, entailing that in 2012, SCA will be utilizing its entire, existing production capacity.
During the second quarter of 2011, a 50% interest was acquired in a Turkish company that produces and sells hygiene products. Through this acquisition, SCA has established a hygiene products operation in Turkey.
Price increases have been carried out and will gradually take effect during the second half of 2011.
January-June 2011 compared with corresponding period a year ago
Net sales decreased by 5% (increased by 4% excluding exchange rate effects) to SEK 11,936m (12,527). Higher volumes as a result of increased market activities increased sales by 2%, while acquisitions increased sales by 2%. In emerging markets, sales rose 9% excluding exchange rate movements.
Sales of TENA-brand incontinence care products increased by 3%, excluding exchange rate effects.
Sales of baby diapers increased by 6%, excluding exchange rate effects. The increase is mainly attributable to the preceding year's acquisition in Mexico. Sales of feminine care products increased by 1%, excluding exchange rate effects, driven by favourable sales growth in Latin America.
Operating profit was 22% lower than a year ago (17% excluding exchange rate effects) and amounted to SEK 1,165m (1,490). Profit was favourably affected by higher volumes and cost savings, while profit was charged with SEK 420m in higher raw material costs and negative exchange rate effects.
The operating cash surplus decreased to SEK 1,723m (2,093). Operating cash flow decreased to SEK 1,460m (1,654) as a result of the lower operating cash surplus and higher current capital expenditures.
Second quarter 2011 compared with second quarter 2010
Net sales decreased by 5% (increased by 4% excluding exchange rate effects) to SEK 6,116m (6,418). Higher volumes increased sales by 2%, and acquisitions increased sales by 2%.
Sales of TENA-brand incontinence care products increased by 2%, excluding exchange rate effects. Growth in Latin America remained very favourable.
Sales of baby diapers increased by 8%, excluding exchange rate effects. The increase is mainly attributable to the acquisition in Mexico.
Sales of feminine care products increased by 1%, excluding exchange rate effects.
Operating profit decreased by 23% (18% excluding exchange rate effects) to SEK 582m (753). Profit was favourably affected by higher volumes and cost savings, while profit was charged with SEK 190m in higher raw material costs and negative exchange rate effects.
TISSUE
In the away-from-home (AFH) tissue segment, SCA grew its market shares in Europe and North America with its Tork brand.
Price increases have been carried out and will have a gradual impact during the second half of 2011.
January-June 2011 compared with corresponding period a year ago
Net sales decreased by 5% (increased by 4% excluding exchange rate effects) to SEK 18,887m (19,792). Higher prices and volumes increased sales by 3% and 1%, respectively. Sales in emerging markets increased by 9%, excluding exchange rate movements.
Sales of consumer tissue increased by 3%, excluding exchange rate effects. Emerging markets are showing strong sales growth.
Sales of AFH tissue increased by 6%, excluding exchange rate effects. The increase is mainly attributable to strong growth in Eastern Europe, North America and Latin America.
Operating profit decreased by 14% (6% excluding exchange rate effects) to SEK 1,295m (1,501). Higher prices, a changed product mix and higher volumes had a favourable impact on profit. However, sharply higher raw material costs, by SEK 400m, higher costs for distribution and energy, and exchange rate effects led to a lower operating profit.
The operating cash surplus decreased to SEK 2,346m (2,617), and operating cash flow decreased to SEK 895m (1,742). Cash flow decreased as a result of the lower operating cash surplus and higher level of working capital.
Second quarter 2011 compared with second quarter 2010
Net sales decreased by 5% (increased by 4% excluding exchange rate effects) to SEK 9,609m (10,064). Higher volumes increased sales by 1%, while higher prices and a changed product mix increased sales by 3%.
Sales of consumer tissue increased by 4%, excluding exchange rate effects. Emerging markets are showing strong sales growth.
Sales of AFH tissue increased by 6%, excluding exchange rate effects. Markets in Western Europe, North America and Latin America showed higher growth.
Operating profit decreased by 16% (8% excluding exchange rate effects) to SEK 668m (791). Higher prices, a changed product mix and higher volumes had a favourable impact on profit.
However, higher costs for distribution, energy and raw materials, as well as exchange rate effects, led to a lower operating profit.
PACKAGING
Corrugated board prices continued to rise during the second quarter of 2011 and are expected to rise also during the second half of the year.
January-June 2011 compared with corresponding period a year ago
Net sales were level with the corresponding period a year ago (13% higher excluding exchange rate effects and divestments) and totalled SEK 13,553m (13,500). Higher prices and volumes increased net sales by 11% and 2%, respectively. Sales were 5% lower as a result of divested operations.
Operating profit was SEK 947m (498). The strong profit improvement is attributable to higher prices and volumes as well as cost savings, which compensated for slightly more than SEK 1bn in higher raw material costs and negative exchange rate effects.
Operating cash surplus improved to SEK 1,566m (1,213), and operating cash flow was SEK 131m (7). The higher operating cash surplus was countered by a higher level of tied-up working capital.
Second quarter 2011 compared with second quarter 2010
Net sales increased by 1% (11% excluding exchange rate effects and divestments) to SEK 6,856m (6,770). Net sales increased by 11% as a result of higher prices. Sales were 4% lower as a result of divested operations.
Operating profit increased to SEK 467m (306). The strong profit improvement is attributable to higher prices and volumes as well as cost savings, which compensated for slightly more than SEK 500m in higher raw material costs and negative exchange rate effects.
FOREST PRODUCTS
During the second quarter of 2011 SCA and the Norwegian company Fred.Olsen Renewables formed a jointly owned company to build a wind farm on SCA's land in northern Sweden. The area has the potential for approximately 2 TWh in annual wind power generation. Together with SCA's previous collaboration with Norway's Statkraft, total annual
wind power generation will amount to approximately 4.5 TWh once all of the plants have been completed.
In the publication paper operations, small price increases have been carried out for all grades for the second half of 2011.
January-June 2011 compared with corresponding period a year ago
Net sales increased by 3% (increased by 5% excluding exchange rate effects) to SEK 8,676m (8,418). Higher prices primarily for publication papers and pulp contributed to the sales increase. Higher volumes and acquisitions increased sales by 1% and 3%, respectively.
Operating profit decreased by 13% to SEK 1,027m (1,178). Profit for the publication paper operations improved to SEK 37m (-39). Higher prices for publication papers compensated for lower volumes, higher raw material costs and negative exchange rate effects. The lower operating profit for the pulp and solid-wood operations is mainly attributable to negative exchange rate effects. Completed productivity improvements had a favourable effect on earnings.
The operating cash surplus was SEK 1,332m (1,540), and operating cash flow totalled SEK 473m (835).
Second quarter 2011 compared with second quarter 2010
Net sales increased by 6% (8% excluding exchange rate effects) to SEK 4,566m (4,308). Higher prices for publication papers and pulp, along with higher volumes, increased net sales. Acquisitions increased sales by 3%.
Operating profit decreased by 23% to SEK 532m (691). The lower profit is attributable to higher raw material and energy costs, and negative exchange rate effects.
SHARE DISTRIBUTION
At the end of the period, the proportion of Class A shares was 13.8%. During the second quarter, at the request of shareholders a total of 2,650,000 Class A shares were converted to Class B shares. The total number of votes in the company is 1,582,190,901. After the end of the second quarter, at the request of shareholders 500,000 Class A shares have been converted to Class B shares. The total number of votes in the company is thereafter 1,577,690,901.
RISKS AND UNCERTAINTIES
SCA's risk exposure and risk management are described on pages 44-49 of the 2010 Annual Report. No significant changes have taken place that have affected the reported risks.
Risks in conjunction with company acquisitions are analysed in the due diligence processes that SCA carries out prior to all acquisitions. In cases where acquisitions have been carried out that may affect the assessment of SCA's risk exposure, these are described under the heading "Other events" in interim reports. No significant acquisitions were made during the period.
Risk management processes
SCA's board decides on the Group's strategic direction, based on recommendations made by Group management.
Responsibility for the long-term, overall management of strategic risks corresponds to the company's delegation structure, from the Board to the CEO and from the CEO to the business group heads. This means that most operational risks are managed by SCA's business groups at the local level, but that they are co-ordinated when considered necessary. The tools used in this co-ordination consist primarily of the business groups' regular reporting and the annual strategy process, where risks and risk management are a part of the process.
SCA's financial risk management is centralised, as is the Group's internal bank for the Group companies' financial transactions and management of the Group's energy risks. Financial risks are managed in accordance with the Group's finance policy, which is adopted by SCA's board and which - together with SCA's energy risk policy - makes up a framework for risk management. Risks are compiled and followed up on a regular basis to ensure compliance with these guidelines. SCA has also centralised other risk management.
SCA has a staff function for internal audit, which monitors compliance in the organisation with the Group's policies.
RELATED PARTY TRANSACTIONS
No transactions have been carried out between SCA and related parties that had a material impact on the company's financial position and results of operations.
ACCOUNTING PRINCIPLES
This interim report has been prepared in accordance with IAS 34 and recommendation RFR 1 of the Swedish Financial Reporting Board (RFR), and with regard to the Parent Company, RFR 2. The accounting principles applied correspond to those described in the 2010 Annual Report, except for with respect to a number of amendments to existing standards and new interpretations that took effect on 1 January 2011.
CEO'S COMMENTS
The recovery of the world economy continues, but at a slower pace. Emerging markets are showing continued strong growth, while in Europe, major regional differences exist. The rapid growth in the emerging markets has driven up raw material prices sharply. Indications are strong that prices are now stabilising at a very high level.
During the year we have raised our own prices, continued to carry out cost-cutting measures and stepped up the pace of new product launches.
Net sales for the second quarter of 2011 rose 5% and operating profit rose 2% compared with the first quarter of 2011. The earnings improvement is attributable to higher volumes and prices.
Net sales for the first half of 2011 increased by 5%, excluding exchange rate effects and divestments, as a result of higher prices and volumes compared with the same period a year ago.
Compared with the first half of 2010, raw material costs have risen by more than SEK 2bn. We have succeeded in compensating for this through own price increases and cost cutting. The strengthening of the Swedish krona has entailed a decrease in operating profit by SEK 600m. All business areas have been affected. During the first half of 2011, profit was not affected by restructuring costs.
Earnings per share rose 8%, or 13% excluding exchange rate effects.
Operating profit for the first half of 2011 rose 1%, excluding exchange rate effects and restructuring costs, compared with the same period a year ago. Higher prices and volumes along with cost savings compensated for sharply higher costs for raw materials, energy and distribution. Earnings for Personal Care were favourably affected by higher volumes and cost savings, while SEK 420m in higher raw material costs led to a lower profit. Higher prices and a changed product mix along with higher volumes had a favourable effect on earnings for Tissue. However, SEK 400m in higher raw material costs and higher energy and distribution costs led to a lower profit.
The sharp earnings improvement for Packaging is attributable to higher prices and volumes along with cost savings, which compensated for slightly more than SEK 1bn in higher raw material costs. Profit for Forest Products decreased as a result of higher raw material and energy costs, as well as the fact that the strengthening of the Swedish krona was not fully compensated by higher prices and productivity improvements.
Continued favourable demand is expected in all of SCA's business areas.
Posted Date: 21st Jul 2011