Interim Report Q3 2017

JANUARY 1 – SEPTEMBER 30, 2017
(compared with the year-earlier period, continuing operations) 

• Net sales increased 9% to SEK 12,422m (11,434)
• Adjusted EBITDA improved 10% to SEK 2,683m (2,443)
• The adjusted EBITDA margin was 21.6% (21.4)
• Adjusted operating profit was SEK 1,838m (1,616)
• Operating profit totaled SEK 1,725m (1,739)
• Net profit for the period totaled SEK 1,278m (1,358)
• Earnings per share amounted to SEK 1.82 (1.93)
• Operating cash flow was SEK 1,431m (1,347)
   
  

A STRONG THIRD QUARTER

The third quarter of 2017 was also SCA’s first full quarter, since the split, as an independently listed company. The market trend was favorable in all of SCA’s segments and earnings improved compared with the preceding quarter as well as the same quarter last year.

Second-quarter earnings were impacted by non-recurring effects such as planned maintenance stops, while underlying earnings were stable and rising. This trend has continued into the third quarter.

Market conditions are good in all of SCA’s segments, with favorable demand and continued price increases. Production remained stable.

Demand for wood products is high, with stable demand and balanced markets in Europe, China and the US. Due to these strong market conditions, prices were increased during the year and price increases continued in the third quarter.

Demand for kraftliner has shown a strong growth trend for several years. The key drivers of this trend are e-commerce and demand for high-quality packaging, which has thereby strengthened demand for virgin fiber-based packaging material (kraftliner). In 2017, three price increases were announced for unbleached kraftliner, totaling EUR 150 per tonne, and these are being successively implemented. The price level of white kraftliner has also increased. Demand for publication paper, continued to show a negative trend.

The timber market remained stable in SCA’s operating area, in terms of both price and supply.

The pulp market has continued to be strong. Deliveries to China increased again after the summer and demand was also favorable in other markets. Several ongoing capacity extensions were delayed and production problems in other mills also restricted supply. In September, the price of softwood kraft pulp was raised in USD and further increases have been announced as of October.  

The long-term demand for softwood pulp has increased by 1.5-2% per year, which is the background to SCA’s investment in the Östrand pulp mill. The project will double SCA’s capacity and make Östrand one of the most cost-efficient production facilities in the world for softwood kraft pulp. SCA provides more detailed information about the investment amount and cost position of this project on page 6 of this report. The project is on track in terms of both time and budget.

INVESTMENT IN EXPANDED PULP CAPACITY AT ÖSTRAND
In 2015, SCA decided to invest in increased pulp production capacity at the Östrand pulp mill. The annual production capacity of bleached kraft pulp is expected to increase from the current level of 430,000 tonnes to about 900,000 tonnes. The estimated investment is SEK 7.8bn.

The total market for market pulp is about 64 million tonnes per year, comprising 26 million tonnes of bleached softwood kraft pulp, 31 million tonnes of bleached hardwood kraft pulp and 7 million tonnes of other pulp.[1]

Over the past ten years, the annual market growth rate for bleached softwood kraft pulp has been 1.5-2%, or about 0.5 million tonnes per year.[2] Growth in tissue and packaging paper has been particularly strong. SCA believes that this growth will continue in the coming years and that the ongoing expansion of production capacity, including the investment in Östrand, is needed to meet the growing demand.

Project proceeding as planned 
The project is following the investment plan, in terms of both time and budget. At the end of the third quarter of 2017, SEK 4.7bn had been invested in Östrand, corresponding to about 60% of the total investment. A further SEK 1.0bn is expected to be invested by the end of 2017, an additional SEK 1.6bn in 2018 and the remaining amount of SEK 0.5bn in 2019.

Production start-up is scheduled for June 2018, following an extended maintenance stop of about 45 days. For the full-year 2018, the production capacity for bleached kraft pulp is expected to reach approximately the same level as for the full-year 2017. The lost production volumes from the extended maintenance stop will be offset by higher capacity after the planned start-up in June.

Temporary project related costs
During the investment, project related costs incurred will have a negative impact on earnings. During this period, costs for additional wood handling, temporary staff increases to enable employee training and a higher rate of depreciation, in particular, have impacted project related costs. For full-year 2017, project related costs before tax are expected to amount to approximately SEK 150m, of which depreciation accounts for approximately SEK 50m. For full-year 2016, project related costs amounted to about SEK 75m, of which about SEK 45m was attributable to depreciation.

The extended maintenance stop in the second quarter of 2018 will increase maintenance costs compared with a normal maintenance stop. During the start-up, the direct costs will initially be higher than normal. In 2018, the amount of capital tied up in working capital will successively increase as inventories and accounts receivables grow due to the higher production volumes.

A world-class production facility
The project will double SCA’s capacity and make Östrand one of the most cost-efficient production facilities in the world for softwood kraft pulp.

According to the start-up curve, production capacity is expected to gradually increase until the end of 2019. 2020 is therefore expected to be the first year with full effect, corresponding to 900,000 tonnes. The Östrand mill also has a chemical thermomechanical pulp (CTMP) production capacity of 100,000 tonnes per year, which will remain unchanged after the investment.

At full capacity utilization, Östrand’s cash costs are expected to decrease by about SEK 350 per tonne, mainly related to indirect costs. This places Östrand in the top quartile of the cost curve for the world’s bleached kraft pulp producers.[3]

Depreciation is expected to increase by about SEK 300m per year when the mill becomes operational.

[1,2] Source: RISI, PPPC, SCA
[3] Source: Pöyry, SCA’s estimate
 

INVITATION TO PRESS CONFERENCE ON THE INTERIM REPORT FOR THE THIRD QUARTER OF 2017 

Members of the media and analysts are hereby invited to attend a press conference where this interim report will be presented by the President and CEO, Ulf Larsson, and CFO, Toby Lawton. 

Time: October 31, 2017 at 10:00 a.m.
Venue: Kreugersalen, Tändstickspalatset, Västra Trädgårdsgatan 15 in Stockholm, Sweden.

The press conference will be webcast live at www.sca.com. It is also possible to participate by telephone by calling:

Sweden: +46 (0) 8 5052 0337, UK: +44 (0) 20 7162 9960 or the US: +1 646 851 2094 

Call in good time before the conference commences. Specify “SCA” or the conference ID: 962913. 

Sundsvall, October 31, 2017
SVENSKA CELLULOSA AKTIEBOLAGET SCA (publ)
 

Ulf Larsson 
President and CEO
 

For further information, please contact:
Ulf Larsson, President and CEO, +46 (0)60 19 46 46
Toby Lawton, CFO, +46 (0)60 19 31 09
Björn Lyngfelt, Senior Vice President, Group Communications, +46 (0)60 19 34 98
Nils Lindholm, Investor Relations Director, +46 (0)70 585 41 05
Andreas Ewertz, Investor Relations Director, +46 (0)72 211 57 97 (from November 1)
   

Please note:
This is information that SCA is obliged to make public pursuant to the EU Market Abuse Regulation and the Securities Markets Act. This report has been prepared in both Swedish and English versions. In case of variations in the content between the two versions, the Swedish version shall govern. The information was submitted for publication, through the agency of the contact person set out below, on October 31, 2017 at 08:00 a.m. CET. The report has not been reviewed by the company’s auditors.