SCA Interim Report 1 January - 30 June 1999

Interim Report 1 January - 30 June 1999 SCA in brief 99:2 99:1 9906 9806 Net sales, SEK M 16,389 16,242 32,631 30,121 Earnings after financial items, SEK M 1,287 1,128 2,415 2,858 Excluding nonrecurring items 1,287 1,128 2,415 2,458 Earnings per share after tax, SEK 4.25 3.76 8.01 9.62 Cash flow from current 8.57 4.25 12.82 5.91 operations per share, SEK *As a result of volume growth, company acquisitions and rationalization measures, Group earnings after financial items in the second quarter, excluding nonrecurring items, were the best since the final quarter of 1995 despite severe price competition and weak demand in Western Europe. *Operating cash surplus improved by 6%, and the cash flow from current operations amounted to SEK 2,550 M, which is in line with the Group's cash flow target for the actual period 1999. *Continuing stable level of earnings for Hygiene Products. *Higher earnings and improved margins for Packaging, compared with the first quarter. *Earnings in Graphic Paper began to recover during the second quarter. SALES AND EARNINGS The Group's net sales amounted to SEK 32,631 M (30,121), an increase of 8% compared with the first six months of 1998. The increase was largest in the packaging operations, due primarily to company acquisitions. Currency movements impacted positively on Group net sales by 2%. Net sales rose 1% compared with the first quarter. Group operating profit amounted to SEK 2,999 M (3,436). Adjusted for nonrecurring items, amounting to SEK 400 M in 1998, operating profit for the period declined by 1%. Packaging reported higher earnings while the other business areas reported slightly lower earnings. Operating profit in the second quarter was 6% higher than in the first quarter, which was on a level with earnings in the fourth quarter of 1998. The improvement in earnings was attributable primarily to Packaging. Financial items amounted to an expense of SEK 584 M (578). Lower interest rates compensated fully for higher net debt resulting from company acquisitions. Group earnings after financial items amounted to SEK 2,415 M (2,858). Adjusted for nonrecurring items, this was equal to a decrease of 2% compared with the corresponding period previous year. Earnings after financial items were 14% higher than in the first quarter, which in turn were on a level with those in the fourth quarter of 1998. Net earnings after tax amounted to SEK 1,587 M (1,899). Earnings per share, after full tax and full dilution, amounted to SEK 8.01 (9.62). Calculated on a rolling 12-month basis, the return on shareholders' equity was 11% (13). The return on capital employed, calculated on the same basis and excluding nonrecurring items amounted to SEK 400 M, was 12% (13). CASH FLOW 1 SEK M 9906 9806 Net sales 32,631 30,121 Operating cash surplus 5,213 4,920 % of net sales 16 16 Current capital expenditures, net -911 -851 % of net sales 3 3 Changes in working capital -744 -1,437 Other operating cash flow changes -105 -110 Operating cash flow 3,453 2,522 Income taxes paid, etc² -509 -785 Free cash flow 2,944 1,737 per share, SEK 14.80 8.79 Interest paid after taxes -394 -569 Cash flow from current operations 2,550 1,168 per share, SEK 12.82 5.91 Strategic capital investments, net -5,240 -666 Cash flow before dividend -2,690 502 ¹ Figures for 1998 adjusted to conform with SCA's new cash flow statement (see page 11). 2 Tax attributable to operating profit. Operating cash surplus amounted to SEK 5,213 M (4,920), equal to 16% (16) of net sales. Operating cash flow amounted to SEK 3,453 M (2,522). Working capital increased by SEK 744 M (1,437) during the period. Current capital expenditures amounted to SEK 911 M (851). Cash flow from current operations, that is before strategic capital expenditures and dividends, amounted to SEK 2,550 M (1,168), equal to SEK 12.82 (5.91) per share. Strategic investments, which include expansion investments, company acquisitions and strategic structural expenditures, amounted to SEK 5,270 M (2.067). Company acquisitions amounting to SEK 3,577 M (1,432) include primarily the purchase of packaging companies in Great Britain and Denmark as well as the redemption of minority interests in SCA Graphic Laakirchen AG. Strategic capital expenditures for machinery and plant amounted to SEK 1,540 M (635), mainly within Hygiene Products but also in Packaging. Preparations to ensure a problem-free changeover to the new millennium are proceeding according to plan. Further information can be found on www.sca.se under the heading "Y2K". FINANCING Net debt at the end of the period amounted to SEK 24,461 M, which is SEK 3,091 M higher than at 1 January 1999. The increase is the net effect of cash flow from operations amounting to SEK 2,550 M, net outlays of SEK 5,240 M for strategic investments and divestments, a dividend of SEK 1,283 M to the shareholders, and the positive impact, SEK 882 M, of currency movements. As a result of the appreciation of the Swedish krona, shareholders' equity declined by approximately SEK 1,200 M, due to SCA's policy of hedging the Group's assets outside Sweden. This policy is based on the principle that the debt/equity ratio should not be affected by currency movements. The debt/equity ratio was 0.85 (0.74), while at 31 December 1998 it was 0.72. The interest coverage multiple was 5.1 (5.9). HYGIENE PRODUCTS BUSINESS AREA SEK M 99:2 99:1 9906 9806 Net sales 6,679 6,609 13,288 12,723 Consumer products 3,774 3,775 7,549 7,412 AFH and incontinence 2,905 2,834 5,739 5,311 products 907 905 1,812 1,839 Operating surplus 406 424 830 931 Consumer products 501 481 982 908 AFH and incontinence 583 596 1,179 1,221 products 205 237 442 529 Operating profit 378 359 737 692 Consumer products AFH and incontinence -2.4* 1.6* 4.7** 13.0** products 2.9* 2.0* 8.2** 8.0** Volume growth, % Consumer products AFH and incontinence products *) Compared with the immediately preceding quarter **) Compared with corresponding period previous year Net sales amounted to SEK 13,288 M (12,723), an increase of 4% compared with the corresponding period previous year. Operating profit amounted to SEK 1,179 M (1,221), a decrease of 3%. The trend of the market in the Nordic region and middle Europe is relatively stable, while the rate of increase in Southern Europe is favorable. Earnings declined marginally, relative to the first quarter, due to higher raw material costs, not fully offset by an improved product mix and higher volumes. The decline of 16% in operating profit for Consumer products, SEK 442 M (529), was due to continuing pressure on prices. A deliberately strict pricing policy, based in part on the increase of raw material costs, initially resulted in a certain decrease in volume. This was true in Germany, Austria and Central and Eastern Europe, in particular. As a result of the restructuring programs under way in the tissue and diaper operations, where the favorable effects will have an impact in 2000 and 2001, there will be certain net increases in costs in the current year since changeover costs exceed the savings that have already been achieved. Higher raw material costs also had a negative effect on second-quarter earnings and their full impact will be felt in the third quarter. Meanwhile, the order situation has improved and it is expected that higher selling prices can be implemented gradually during the autumn. Earnings decreased by 13% compared with the first quarter. Operating profit for AFH and Incontinence products amounted to SEK 737 M (692), an increase of 7%. The primary reason for the increase, which occurred despite higher raw material costs and ongoing restructuring programs, was a very favorable growth in volume. Earnings increased by 5% compared with the first quarter. The new tissue machine in Mannheim started up on schedule during the summer. This investment will give a marked improvement of the competitiveness of high quality brand name and private label products. PACKAGING BUSINESS AREA SEK M 99:2 99:1 9906 9806 Net sales 4,664 4,745 9,409 7,478 Operating surplus 793 699 1,492 1,167 Operating profit 474 387 861 768 Deliveries m sq. m. Corrugated board 827 823 1,650 1,452 Production and deliveries, liner products, see table "Volumes" on page 15. Net sales for the period amounted to SEK 9,409 M (7,478), an increase of 26%. The growth in volume of corrugated board amounted to 14%. Operating profit amounted to SEK 861 M (768), an improvement of 12%. Company acquisitions had a favorable impact on earnings, while lower prices for paper reduced them. As a consequence of lower prices for paper, earnings from liner operations declined and could be offset only to a minor degree by lower costs for energy and wood. However, lower prices for paper resulted in an increase in earnings from corrugated board operations. Operating profit from packaging operations increased by 22% compared with the first quarter. Demand for corrugated board in Europe was lower than in 1998, notably during the first quarter. Combined with lower liner prices at the end of 1998 and in the beginning of 1999, the weak order situation has resulted in a certain reduction of prices. An improvement in demand could be noted in May and June, however. Demand for corrugated board declined in most large markets in Europe, such as France, Germany and the Benelux countries. However, the decline was greatest in Great Britain, where demand was approximately 5% lower than in the preceding year. Growth in Southern Europe was favorable, notably in Spain but also in Italy, while the Nordic countries, Sweden and Denmark, showed a marginal decrease in volume. The market is currently characterized by suppliers' efforts to raise prices, due to rising prices for recycled paper, despite the fact that demand for corrugated board is relatively weak. Increases in the prices of corrugated board are expected to be implemented during the autumn, however. Demand for liner products was weak during the winter and then gradually improved. A high exchange rate for the dollar and increased demand in Asia has resulted in a decrease in American exports of kraftliner to Europe. A number of older machines in the U.S. were also taken out of operation, which improved the supply and demand balance for kraftliner. Price increases for kraftliner were posted in the second quarter and additional increases have been announced. A price increase of EUR 40 per ton for the second half of the year has been announced in Southern Europe. Sharply higher prices for recycled fiber has caused margins to decline in the testliner operations. Testliner prices are now expected to increase in the third quarter to compensate for raw material costs. A price increase of DEM 120 per ton has been announced, but its full impact on earnings will not be felt until the fourth quarter. GRAPHIC PAPER BUSINESS AREA SEK M 99:2 99:1 9906 9806 Net sales 4,642 4,569 9,211 9,164 Operating surplus 799 743 1,542 1,552 Wood-containing publication papers 524 508 1,032 936 Fine papers, paper merchanting, market pulp 275 235 510 616 Operating profit 457 405 862 890 Wood-containing publication papers 352 320 672 596 Fine papers, paper merchanting, market pulp 105 85 190 294 Production and deliveries, see table "Volumes" on page 15. Net sales amounted to SEK 9,211 M (9,164), an increase of 1%. The increase is a net of lower prices, which were offset by higher volumes and favorable effects of currency movements. Net sales increased by 2%, compared with sales for the first quarter, also due to lower prices which were compensated by higher volumes and favorable effects of currency movements. Operating profit for the period amounted to SEK 862 M (890), where wood- containing publication paper accounted for SEK 672 M (596). The improvement in earnings for wood-containing paper is due mainly to lower prices for wood, resulting in higher margins. The market is currently relatively stable. Operating profit in the fine paper and market pulp operations amounted to SEK 190 M (294). The decline is due to lower prices for fine papers and market pulp. The negative trend of prices for both fine papers and pulp has been reversed, resulting in a recovery in earnings during the second quarter. Operating profit in the second quarter was SEK 457 M, an improvement of 13% compared with the first quarter. Prices in the wood-containing publication paper rose and deliveries increased. Earnings in the fine paper and pulp operations amounted to SEK 105 M in the second quarter, an improvement of 24%, mainly attributable to the pulp segment. Operating profit of the portion of the fine paper business that will be transferred to the new company, MoDo Paper AB, amounted to SEK 229 M (314). Operating profit in the first and second quarters were SEK 108 M and SEK 121 M, respectively. FOREST AND TIMBER SEK M 99:2 99:1 9906 9806 Net sales 922 941 1,863 2,086 Operating surplus 179 188 367 441 Operating profit 152 161 313 376 Operating profit for the period was 17% lower than in the comparable period of the preceding year. Earnings included capital gains of SEK 17 M (21) from the sale of forest land. Both sawmill and forestry operations reported lower earnings than in the corresponding period previous year, due to lower selling prices for sawn timber and pulpwood. PERSONNEL The number of employees at the end of the second quarter was 34,388 (32,433). The number at 31 December 1998 was 32,211. The increase is due to acquisitions of companies. MARKET OUTLOOK Demand for raw materials such as pulp and recycled fiber is strong, due primarily to the continuing good trend of business in North America and to an increasingly rapid recovery in Asia. This has resulted in higher raw material costs, a trend that is expected to continue and possibly strengthen during the autumn. Cost increases for raw materials have resulted in price increases for some products, despite continuing weak demand. A continuing weak demand may cause some delay in the opportunities to compensate for higher raw material costs through price increases. There are, however, signs indicating a strengthening of the European economy, which should result in a favorable trend of volume and prices during the second half of the year. SHARE DISTRIBUTION 30 June 1999 Series A Series B Total Registered number of 62,145,880 135,254,055 197,399,935 shares Unconverted debenture - 1,289,973 1,289,973 loans Outstanding warrants - 1,643,544 1,643,544 Total after full 62,145,880 138,187,572 200,333,452 conversion Calculated in accordance with the recommendations of the Financial Analysts Association, the effects of the outstanding convertible debenture and warrant programs amount to a maximum dilution of 0.8%, which is taken into account when calculating earnings per share for the period. Stockholm 29 July 1999 SVENSKA CELLULOSA AKTIEBOLAGET SCA (publ) Sverker Martin-Löf President and CEO This report is unaudited. Copies of the Interim Report are available at SCA U.K. Holdings Limited, SCA Packaging House, 543, New Hythe Lane, Aylesford, Kent ME20 7PE, attention, Tony Staples, telephone +44 1622 883 025. Interim Report 1 January - 30 September will be published on 28 October 1999. Statement of Earnings 1 January - 30 June 1999 1998 SEK M EUR M SEK M ECU M Net sales 32,631 3,653 30,121 3,477 Operating expenses -27,471 -3,076 -24,783 -2,861 Operating surplus 5,160 577 5,338 616 Depreciation according to plan -2,177 -244 -1,964 -227 Share in earnings of 16 2 62 7 associated companies Operating profit 2,999 335 3,436 396 Financial items -584 -65 -578 -67 Earnings after financial items 2,415 270 2,858 329 Income taxes -797 -89 -898 -104 Minority interest -31 -3 -61 -7 Net earnings after tax 1,587 178 1,899 218 Operating margin 9% 11% Return on shareholders' equity 11% 13% Return on capital employed 12% 14% Business Areas Net sales 1 January - 30 June SEK M 1999 1998 Hygiene Products 13,288 12,723 Consumer products 7,549 7,412 AFH and incontinence products 5,739 5,311 Packaging 9,409 7,478 Graphic Paper 9,211 9,164 Wood-containing publication papers 3,701 3,599 Fine papers, paper merchanting, market pulp 5,510 5,565 Forest and Timber 1,863 2,086 Other operations 862 815 Divested units - 140 Intra-Group deliveries -2,002 -2,285 Total net sales 32,631 30,121 Earnings 1 January - 30 June SEK M 1999 1998 Hygiene Products 1,179 1,221 Consumer products 442 529 AFH and incontinence products 737 692 Packaging 861 768 Graphic Paper 862 890 Wood-containing publication papers 672 596 Fine papers, paper merchanting, market pulp 190 294 Forest and Timber 313 376 Other operations -56 331 Divested units - 5 Goodwill amortization -160 -155 Total operating profit 2,999 3,436 Financial items -584 -578 Earnings after financial items 2,415 2,858 of which nonrecurring items - 400 Earnings after financial items excluding nonrecurring items 2,415 2,458 Balance Sheet 1999-06-30 1998-12-31 SEK M EUR M SEK M ECU M Assets Long-term assets 56,546 6,475 55,147 5,823 Receivables and inventories 19,463 2,228 18,790 1,984 Financial receivables and investments 3,002 344 2,617 276 Cash and bank balances 1,594 183 1,819 192 Total assets 80,605 9,230 78,373 8,275 Equity, provisions and liabilities Shareholders' equity 27,568 3,157 28,404 2,999 Minority interests 1,292 148 1,386 146 Provisions 10,773 1,234 10,906 1,152 Interest-bearing debt 29,057 3,327 25,806 2,725 Operating liabilities and other noninterest-bearing debt 11,915 1,364 11,871 1,253 Total equity, provisions and liabilities 80,605 9,230 78,373 8,275 Debt/equity 0.85 times 0.72 times Equity/assets 36% 38% Cash Flow Statement 1 January - 30 June 3 SEK M 1999 1998 Operating cash surplus ¹ 5,213 4,920 Changes in working capital -744 -1,437 Current capital expenditures -911 -851 Other operating cash flow changes -105 -110 Operating cash flow 3,453 2,522 Financial items -584 -578 Income taxes paid -316 -606 Other -3 -170 Cash flow from current operations 2,550 1,168 Strategic capital expenditures -1,540 -635 2 Strategic structural expenditures -153 - Acquisitions -3,577 -1,432 Divestments 30 1,401 Cash flow before dividend -2,690 502 Dividend -1,283 -1,145 Net cash flow * -3,973 -643 Net debt, 1 January -21,370 -19,018 Net cash flow -3,973 -643 Currency effects 882 -112 Net debt, 30 June -24,461 -19,773 Debt payment capacity 37% 39% * Additional information in accordance with Swedish Financial Accounting Standards Council's recommendation regarding reporting of cash flow: Net cash flow -3,973 -643 Change in interest-bearing debt 3,772 515 Change in cash and bank balances -201 -128 Cash and bank balances at beginning of period 1,819 1,582 Change in cash and bank balances -201 -128 Currency effects on cash and bank balances -24 -15 Cash and bank balances at end of period 1,594 1,439 ¹ Operating surplus adjusted for significant noncash items in accordance with the principles being applied by SCA effective at midyear 1999. 2 Restructuring measures taken to improve SCA's competitive position. 3 Figures for 1998 adjusted in accordance with SCA's new cash flow statement. Quarterly Data Group 1999 1998 SEK M II I IV III II I Net sales 16,389 16,242 15,918 15,234 14,857 15,264 Operating surplus 2,627 2,533 2,476 2,506 2,427 2,911 Depreciation according to plan -1,093 -1,084 -1,043 -1,006 -966 -998 Share in earnings of associated companies 11 5 27 32 41 21 Operating profit 1,545 1,454 1,460 1,532 1,502 1,934 Financial items -258 -326 -343 -338 -298 -280 Earnings after financial items 1,287 1,128 1,117 1,194 1,204 1,654 of which nonrecurring items - - - - - 400 Income taxes -425 -372 -356 -426 -376 -522 Minority interest -21 -10 -30 -19 -29 -32 Net earnings after tax 841 746 731 749 799 1,100 Earnings per share, SEK 4.25 3.76 3.68 3.77 4.05 5.57 Quarterly Data Business Areas - Net sales 1999 1998 SEK M II I IV III II I Hygiene Products 6,679 6,609 6,951 6,490 6,395 6,328 Consumer products 3,774 3,775 4,081 3,820 3,714 3,698 AFH and incontinence products 2,905 2,834 2,870 2,670 2,681 2,630 Packaging 4,664 4,745 3,832 3,725 3,650 3,828 Graphic Paper 4,642 4,569 4,959 4,779 4,491 4,673 Wood-containing publication papers 1,894 1,807 1,979 1,900 1,761 1,838 Fine papers, paper merchanting, market pulp 2,748 2,762 2,980 2,879 2,730 2,835 Forest and Timber 922 941 998 901 1,033 1,053 Other operations 487 375 365 467 404 411 Divested units - - 3 1 -1 141 Intra-Group deliveries -1,005 -997 -1,190 -1,129 -1,115-1,170 Total net sales 16,389 16,242 15,918 15,234 14,85715,264 Business Areas - Operating Surplus 1999 1998 SEK M II I IV III II I Hygiene Products 907 905 925 919 887 952 Consumer products 406 424 431 457 460 471 AFH and incontinence products 501 481 494 462 427 481 Packaging 793 699 523 580 592 575 Graphic Paper 799 743 785 835 823 729 Wood-containing publication papers 524 508 533 540 490 446 Fine papers, paper merchanting, market pulp 275 235 252 295 333 283 Forest and Timber 179 188 236 171 221 220 Other -51 -2 7 1 -96 435 Total operating surplus 2,627 2,533 2,476 2,506 2,427 2,911 Quarterly Data Business Areas - Operating profit 1999 1998 SEK M II I IV III II I Hygiene Products 583 596 583 600 605 616 Consumer products 205 237 244 234 276 253 AFH and incontinence products 378 359 339 366 329 363 Packaging 474 387 316 396 395 373 Graphic Paper 457 405 469 492 425 465 Wood-containing publication papers 352 320 380 358 317 279 Fine papers, paper merchanting, 105 85 89 134 108 186 market pulp Forest and Timber 152 161 206 140 188 188 Other operations -40 -16 -30 -16 -34 365 Divested units - - -1 -1 - 5 Goodwill amortization -81 -79 -83 -79 -77 -78 Total operating profit 1,545 1,454 1,460 1,532 1,502 1,934 of which nonrecurring items - - - - - 400 Operating profit excluding nonrecurring items 1,545 1,454 1,460 1,532 1,502 1,534 Business Areas - Operating surplus margins 1999 1998 % II I IV III II I Hygiene Products 14 14 13 14 14 15 Consumer products 11 11 11 12 12 13 AFH and incontinence products 17 17 17 17 16 18 Packaging 17 15 14 16 16 15 Graphic Paper 17 16 16 17 18 16 Wood-containing publication papers 28 28 27 28 28 24 Fine papers, paper merchanting, 10 8 8 10 12 10 market pulp Forest and Timber 19 20 24 19 21 21 Group operating surplus margin 16 16 16 16 16 19 Quarterly Data Business Areas - Operating margins 1999 1998 % II I IV III II I Hygiene Products 9 9 8 9 9 10 Consumer products 5 6 6 6 7 7 AFH and incontinence products 13 13 12 14 12 14 Packaging 10 8 8 11 11 10 Graphic Paper 10 9 9 10 9 10 Wood-containing publication papers 19 18 19 19 18 15 Fine papers, paper merchanting, 4 3 3 5 4 7 market pulp Forest and Timber 16 17 21 16 18 18 Group operating margin 9 9 9 10 10 13 Group - margins Operating surplus margin 16.0 15.6 15.6 16.5 16.3 19.1 Operating margin 9.4 9.0 9.2 10.1 10.1 12.7 Financial net margin -1.6 -2.0 -2.2 -2.2 -2.0 -1.8 Profit margin 7.8 7.0 7.0 7.9 8.1 10.9 Volumes Thousand metric 99:2 99:1 98:4 98:3 98:2 98:1 tons Liner products Production 562 550 497 562 555 554 Deliveries 582 557 516 518 543 586 Wood-containing publication papers Production 295 302 295 301 303 301 Deliveries 295 290 311 300 300 288 Fine papers Production 197 186 179 190 183 184 Deliveries 203 183 182 193 164 181 Five-year summary Full year 1998 1997 1996 1995 1994 Earnings after financial items, SEK M 5,169 4,457 3,573 5,731 1,060 Earnings per share after tax, SEK 17.07 13.98 10.71 17.55 2.94 Debt/equity ratio, times 0.72 0.73 0.67 0.69 0.52 Return on capital employed, % 14 12 11 16 6 Return on shareholders' equity, % 13 12 10 17 3 ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/07/29/19990729BIT00020/bit0001.pdf http://www.bit.se/bitonline/1999/07/29/19990729BIT00020/bit0002.doc