SCA 3Q 2011 results: operating profit excluding restructuring costs down 5%
Uncertainty surrounding developments in the global economy has increased. GDP forecasts for 2011 and 2012 have been adjusted downward both regionally and globally.
The global market for incontinence care products is showing continued growth, with favourable development in emerging markets. Demand for tissue has been rising slightly in Western Europe and was stable in North America during the first nine months of 2011 compared with a year ago, while emerging markets are showing continued favourable growth.
Prices of consumer tissue in Europe have been stable, while prices of tissue in the away from home (AFH) market rose slightly during the third quarter of 2011.
Demand for corrugated board in Western Europe was up by approximately 2% through August 2011. Prices of corrugated board continued to rise during the third quarter of 2011.
Demand in Europe for magazine paper decreased by 2% during the first nine months of the year compared with the same period a year ago. Demand for newsprint decreased by 1% during the same period. Prices of both magazine paper and newsprint were unchanged or rose slightly during the third quarter.
Raw material prices for pulp, recycled paper and oil-based products decreased somewhat during the quarter, but from high levels.
SALES AND EARNINGS
January-September 2011 compared with corresponding period a year ago
Net sales decreased by 1% (increased by 6% excluding exchange rate effects and divestments) to SEK 79,001m (79,913). Higher prices and volumes increased sales by 4% and 2%, respectively.
Operating profit excluding restructuring costs decreased by 5% (1% excluding exchange rate effects) to SEK 6,697m (7,041). Higher prices and volumes along with cost savings compensated for sharply higher costs for raw materials, energy and distribution. The lower profit is therefore mainly attributable to the strengthening of the Swedish krona.
Restructuring costs totalled SEK 350m (931).
Financial items increased to SEK -930m (-823). 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% (2% excluding exchange rate effects) to SEK 5,767m (6,218). The tax expense excluding effects of restructuring costs was SEK 1,499m (1,617).
Net profit for the period excluding restructuring costs decreased by 7% (increased by 2% excluding exchange rate effects) to SEK 4,268m (4,601). Earnings per share rose 2% (7% excluding exchange rate effects) to SEK 5.66 (5.53).
Third quarter 2011 compared with third quarter 2010
Net sales increased by 1% (6% excluding exchange rate effects and divestments) to SEK 26,937m (26,647). Higher prices and volumes each increased sales by 3%.
Operating profit excluding restructuring costs decreased by 5% (2% excluding exchange rate effects) to SEK 2,435m (2,574). Higher volumes and prices along with cost savings did not fully compensate for higher raw material costs.
Profit before tax excluding restructuring costs decreased by 8% (5% excluding exchange rate effects) to SEK 2,084m (2,274).
Net profit for the period excluding restructuring costs decreased by 11% (8% excluding exchange rate effects) to SEK 1,543m (1,741). Earnings per share decreased by 7% (4% excluding exchange rate effects) to SEK 1.82 (1.95).
CASH FLOW AND FINANCING
The operating cash surplus amounted to SEK 10,514m (11,178). The cash flow effect of the change in working capital was SEK -1,544m (-1,763). The increase in working capital 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 -2,391m (-1,959). Operating cash flow amounted to SEK 6,004m (6,899).
Financial items increased to SEK -930m (-823) as a result of higher interest rates, which were partly compensated by a lower level of net debt. Tax payments decreased to SEK 720m (1,083). Cash flow from current operations decreased to SEK 4,397m (5,010), mainly as a result of a lower operating cash surplus and higher current capital expenditures.
Strategic investments amounted to SEK -1,288m (-1,713). Acquisitions and divestments amounted to SEK -711m (1,189). Dividends amounted to SEK -2,844m (-2,634). Net cash flow was SEK -446m (1,852).
Net debt has increased by SEK 4,054m during the year to date, to SEK 38,460m. Net debt amounted to SEK 33,635m, excluding pension liabilities. Net cash flow increased net debt by SEK 446m, while fair value measurement of pension assets, pension obligations and financial instruments increased net debt by SEK 3,677m. Exchange rate movements decreased net debt by SEK 69m. The debt/equity ratio was 0.58 (0.51 at the beginning of the year). The debt/equity ratio, excluding pension liabilities, was 0.51 (0.48 at the beginning of the year). The debt payment capacity improved to 37% (33%).
As per 30 September 2011, SCA had outstanding commercial paper worth SEK 7,092m maturing within 12 months. Unutilised credit facilities amounted to SEK 21,678m, of which long-term facilities amounted to SEK 21,028m. Cash and cash equivalents amounted to SEK 2,917m.
EQUITY
Consolidated equity decreased during the period by SEK 1,813m to SEK 66,008m. Net profit for the period increased equity by SEK 4,009m. Equity decreased by SEK 2,844m through payment of shareholder dividends, by SEK 2,636m after tax through restatement of the net pension liability to fair value, and by SEK 666m after tax through fair value measurement of financial instruments. Exchange rate movements, including the effects of hedges of net investments in foreign assets, increased equity by SEK 324m.
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.
RESTRUCTURING
In accordance with what has been previously communicated, SCA is continuing its work on lowering costs and increasing efficiency and profitability. Efficiency enhancement measures involving staff reductions by 2,000 employees, among other things, are being made in Personal Care, Tissue and Packaging. The annual cost savings will amount to approximately SEK 700m, with gradual effect in 2012 and 2013. Total restructuring costs will amount to approximately SEK 1,400m, of which approximately SEK 900m will have an effect on cash flow and the remaining SEK 500m pertains to impairment charges associated with disposals of plant. These costs will be booked as they arise, and during the third quarter of 2011, restructuring costs of SEK 350m were booked, including SEK 210m in costs affecting cash flow. Provisions for the rest of the costs will be made mainly during the fourth quarter of 2011 and first quarter of 2012.
INVESTMENTS AND DIVESTMENTS
During the third quarter, SCA acquired 95% of the Turkish hygiene products company San Saglik, the second largest provider of incontinence care products in Turkey. The purchase consideration amounted to SEK 95m on a debt-free basis. The acquisition includes local production and strong brands. San Saglik has annual sales of approximately SEK 100m. SCA has a call option for the remaining 5% of the company.
Also during the third quarter, SCA acquired the Brazilian hygiene products company Pro Descart, which has the number two position in Brazil's incontinence care products market.
The company also sells baby diapers and wet wipes. Consideration for the deal amounted to the equivalent of SEK 450m on a debt-free basis. The company has annual sales of SEK 360m.
To meet demand for premium products in the US market, during the third quarter SCA decided to invest SEK 460m in an upgrade of an existing tissue machine. The machine today has a capacity of 70,000 annual tonnes; this will remain unchanged, and production is expected to commence around year-end 2012/start of 2013.
During the third quarter a decision was made to rebuild one of the newsprint machines in Ortviken to allow production of higher grades. The investment is worth SEK 350m. The rebuilt machine is expected to begin operating during the third quarter of 2012 with a marginal increase in its capacity of 245,000 annual tonnes.
OTHER EVENTS
Mats Berencreutz has been appointed Executive Vice President in SCA and will also continue to be responsible for SCA's hygiene operations.
PERSONAL CARE
SCA is the European market leader in all incontinence care segments with its TENA brand, and during the year its market shares have increased. During the third quarter of 2011, production of incontinence care products began in Russia, and in China, TENA Belt was launched, a new incontinence care product that offers users improved skin comfort. The new product also contributes to lower environmental impact and a lesser burden for caregivers.
In baby diapers, SCA is the market leader in the Nordic countries with its Libero brand.
During the quarter, a line of designer diapers was launched and the range of infant care products was further expanded.
In September 2011 SCA acquired the Brazilian hygiene products company Pro Descart, which has the number two position in Brazil's incontinence care market. The company also sells baby diapers and wet wipes. During the third quarter, SCA also acquired 95% of the Turkish hygiene products company San Saglik, the second largest provider of incontinence care products in Turkey.
January-September 2011 compared with corresponding period a year ago
Net sales decreased by 2% (increased by 5% excluding exchange rate effects) to SEK 18,246m (18,652). Higher volumes increased sales by 3%, while acquisitions increased sales by 2%. In emerging markets, sales rose 12% excluding exchange rate movements.
Sales of TENA-brand incontinence care products increased by 4%, excluding exchange rate effects. Sales of baby diapers increased by 8%, excluding exchange rate effects. The increase is mainly attributable to the preceding year's acquisition in Mexico. Sales of feminine care products increased by 2%, excluding exchange rate effects, driven by favourable sales growth in Latin America.
Operating profit was 15% lower than a year ago (11% excluding exchange rate effects) and amounted to SEK 1,853m (2,187). Profit was favourably affected by higher volumes and cost savings, while profit was charged with SEK 580m in higher raw material costs and negative exchange rate effects.
The operating cash surplus decreased to SEK 2,681m (3,080). Operating cash flow increased to SEK 2,458m (2,255) as a result of a lower level of working capital, which compensated for the lower operating cash surplus, and higher current capital expenditures.
Third quarter 2011 compared with third quarter 2010
Net sales increased by 3% (8% excluding exchange rate effects) to SEK 6,310m (6,125).
Higher volumes and prices increased sales by 4% and 1%, respectively, and acquisitions increased sales by 3%.
Sales of TENA-brand incontinence care products increased by 7%, excluding exchange rate effects. Growth in Latin America remained very favourable. Sales of baby diapers increased by 10%, excluding exchange rate effects. The increase is mainly attributable to the acquisition in Mexico. Sales of feminine care products increased by 4%, excluding exchange rate effects.
Operating profit decreased by 1% (unchanged excluding exchange rate effects) to SEK 688m (697). Profit was favourably affected by higher volumes, higher prices and cost savings, while profit was charged with SEK 180m in higher raw material costs and negative exchange rate effects.
TISSUE
In the AFH tissue segment, SCA has increased its market shares with its Tork brand. SCA's environmentally certified tissue products have led to new contracts both in Europe and the USA.
To meet demand for premium products in the US market, SCA has decided to upgrade an existing tissue machine. The machine's capacity will remain unchanged at 70,000 annual tonnes, and operation is expected to commence around year-end 2012/start of 2013.
Price increases have been carried out and will have further impact during the fourth quarter of 2011.
January-September 2011 compared with corresponding period a year ago
Net sales decreased by 3% (increased by 5% excluding exchange rate effects) to SEK 28,838m (29,716). Higher prices and volumes increased sales by 3% and 2%, respectively.
Sales in emerging markets increased by 10%, 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 7% (unchanged excluding exchange rate effects) to SEK 2,104m (2,254). Higher prices, a changed product mix and higher volumes had a favourable impact on profit. However, higher raw material costs, by SEK 430m, higher costs for distribution and energy, and exchange rate effects led to a lower operating profit.
The operating cash surplus decreased to SEK 3,700m (3,920), and operating cash flow decreased to SEK 1,889m (2,825). Cash flow decreased as a result of the lower operating cash surplus and higher level of working capital.
Third quarter 2011 compared with third quarter 2010
Net sales were level with the third quarter a year ago (increased by 5% excluding exchange rate effects) to SEK 9,951m (9,924). Higher volumes increased sales by 4%, while higher prices and a changed product mix increased sales by 1%.
Sales of consumer tissue increased by 5%, excluding exchange rate effects. Emerging markets are showing strong sales growth.
Sales of AFH tissue increased by 5%, excluding exchange rate effects. Markets in Western Europe, North America and Latin America showed favourable growth.
Operating profit improved by 7% (12% excluding exchange rate effects) to SEK 809m (753). Higher prices, a changed product mix and higher volumes had a favourable impact on profit. Higher energy and raw material costs as well as exchange rate effects had a lowering effect on profit.
PACKAGING
Corrugated board prices continued to rise during the third quarter of 2011.
January-September 2011 compared with corresponding period a year ago
Net sales increased by 1% (12% excluding exchange rate effects and divestments) to SEK 20,363m (20,127). Higher prices and volumes increased net sales by 9% and 3%, respectively. Sales were 6% lower as a result of divested operations.
Operating profit was SEK 1,481m (1,010). The strong profit improvement is attributable to higher prices and volumes as well as cost savings, which compensated for nearly SEK 1.5bn in higher raw material costs and negative exchange rate effects.
Operating cash surplus improved to SEK 2,433m (2,043). Operating cash flow increased to SEK 854m (685) as a result of the higher operating cash surplus.
Third quarter 2011 compared with third quarter 2010
Net sales increased by 3% (10% excluding exchange rate effects and divestments) to SEK 6,810m (6,627). Higher prices and volumes increased net sales by 7% and 3%, respectively.
Sales decreased by 5% as a result of divested operations.
Operating profit increased to SEK 534m (512). The profit improvement is attributable to higher prices and volumes as well as cost savings, which compensated for SEK 500m in higher raw material costs and negative exchange rate effects.
FOREST PRODUCTS
During the third quarter a decision was made to rebuild one of the newsprint machines in Ortviken, Sundsvall, to allow production of higher grades. The rebuilt machine is expected to begin operating during the third quarter of 2012 with a marginal increase in its capacity of 245,000 annual tonnes.
January-September 2011 compared with corresponding period a year ago
Net sales increased by 1% (3% excluding exchange rate effects) to SEK 13,025m (12,833). Higher prices primarily for publication papers increased sales by 2%. Higher volumes increased sales by 1%.
Operating profit decreased by 16% to SEK 1,561m (1,863). Profit for the publication paper operations improved to SEK 118m (-77). Higher prices for publication papers compensated for 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 2,015m (2,408), and operating cash flow totalled SEK 1,249m (1,513).
Third quarter 2011 compared with third quarter 2010
Net sales decreased by 1% (unchanged excluding exchange rate effects) to SEK 4,349m (4,415). Higher prices for publication papers increased net sales.
Operating profit decreased by 22% to SEK 534m (685). 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 13.7%. During the third quarter, at the request of shareholders a total of 862,003 Class A shares were converted to Class B shares. The total number of votes in the company is 1,574,432,874.
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
Net sales for the first nine months of 2011 rose 6%, excluding exchange rate effects and divestments, as a result of higher prices and volumes. Growth in the hygiene operations remained favourable in emerging markets, where the Tissue and Personal Care business areas reported sales increases of 10% and 12%, respectively. SCA's global brands - TENA for incontinence care products and Tork for tissue in the away-from-home (AFH) market - have also grown their market shares during the year.
Operating profit for the first nine months of 2011 decreased by 1%, excluding restructuring costs and exchange rate effects, compared with the same period a year ago. Higher prices and volumes along with cost savings, compensated for most of the slightly more than SEK 3bn in higher raw materials costs, and higher costs for energy and distribution. The strengthening of the Swedish krona lowered operating profit by SEK 700m.
Net sales for the third quarter of 2011 increased by 1%, and operating profit, excluding restructuring costs, rose 13% compared with the second quarter. Earnings improved for all business areas. The higher consolidated profit is mainly attributable to price increases, which compensated for SEK 280m in higher raw material costs.
Earnings per share for the first nine months increased by 2% - and by 7% excluding exchange rate effects - compared with the same period a year ago.
An efficiency enhancement programme was launched during the third quarter, primarily in the hygiene and packaging operations, worth a total of SEK 1,400m, including SEK 900m in items affecting cash flow. The third quarter was charged with SEK 350m in restructuring costs. The measures will lead to annual savings of approximately SEK 700m within a two-year period.
Uncertainty surrounding developments in the global economy has increased, which makes the future economic outlook difficult to judge. So far we have not seen any negative impact on the demand for our products.
Posted Date: 26th Oct 2011