Agenda Good growth in challenging markets Introduction Megatrends
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Agenda 1 Introduction 2 Megatrends 3 Value creation and capital allocation 4 Opportunities in growth markets 5 Summary 25 Good growth in challenging markets EBITDA-margin(1) Sales SEK bn 20% 100 80 15% 60 10% 40 5% 20 0 0% 2002 1Adjusted 26 2003 for items affecting comparability 2004 2005 July 2005 June 2006 Evaluation of current operations - CVA Operating cash surplus is measured against a return requirement The return requirement is derived from All income generating assets Their expected economic life WACC Since the return requirement is adjusted for inflation, the measure does not consider at what point in time the asset was acquired 27 Actions taken to improve performance Efficiency enhancement programs A C T I O N S Innovation and product launches Price management 28 Share price development during the past 12 months(1) SEK 350 +21% +19% +15% 300 250 200 aug sep SCA B okt nov dec jan feb Paper Index Europe (MSCI) mar apr maj jun jul aug Affärsvärlden generalindex Favourable share price performance during the last 12 months 1Share price as of 29 August 2006 29 Share price development during the past 10 years(1) SEK 500 400 +166% +127% 300 +94% 200 100 0 1996 1997 SCA B 1998 1999 2000 2001 Paper Index Europe (MSCI) 2002 2003 2004 2005 Affärsvärlden generalindex SCA has shown stable long-term performance 1Share 30 price as of 29 August 2006 2006 Forest Products 31 Forest Products SCA Forest Products – at a glance Overview One of Europe's most profitable suppliers of publication papers (SC- LWC- and Newsprint grades) Europe's largest private owner of forestland, 2.6 million hectares Total sales 2005: SEK 16 bn 8% 42% 50% Pulp mill with production to tissue and publication papers Competitive supplier of solid-wood products 32 Publication papers Pulp, timber and solid-wood products Other Forest Products SCA’s forest holdings and industries in northern Sweden 2.6 million hectares of forest land, of which 2 million is used for timber production Munksund Vilhelmina Sawmill Sawmill, partly-owned Paper mill Pulp mill Kraftliner mill Holmsund Obbola Rundvik Stugun Graningebruk Bollsta Östrand Tunadal Ortviken 33 Forest Products Integrated operations 34 Forest Products Market attractiveness Good underlying demand trend for magazine papers Improved market balance Improved development for, and short supply of, SCA’s developed timber Control over wood supply increasingly important 35 Forest Products Challenges Rising energy costs Increased purchasing power among customers Expected higher wood costs 36 Forest Products SCA’s strengths Strong mill concept, focus on magazine papers Utilizing control of the value chain Leading in quality and supply chain excellence High environmental profile Product and customer focused R&D 37 Forest Products Strong track-record of increased productivity Publication Papers Forestry Index Index 160 150 150 140 140 130 130 120 110 120 100 110 90 100 80 90 70 80 60 70 50 95 96 97 98 Production 99 00 01 03 Employees Indirect costs SEK/ton 38 02 04 05 95 96 97 Logging volume on forest + standing timber 98 99 0 1 Logging cost/m3 2 3 4 5 Employees Forest Products SCA views the forestlands as strategically important Strong and stable cash flow generator Security of supply Cost control Product development throughout the value chain Large biofuel operations supporting forestry and solid-wood businesses 39 Forest Products Tight market for wood USD/odmt(2) Increased use of wood for energy production 95 About 1/5 of wood consumption for paper producers in Sweden is imported 80 Sharply increased prices on wood imported from Russia and the Baltic states Global wood prices(1) 90 85 75 70 65 60 55 50 2001 2002 2003 Softwood 1 2 40 Source: Wood Resources International Ltd. Owen dried metric ton 2004 2005 Hardwood 2006 Forest Products Actions Continued focus on productivity improvements – Strong mill concept Focus on high-quality magazine paper Further specialize the solid-wood operations Develop pulp operations, better quality and higher energy production 41 Forest Products Value creation Continued productivity improvements EBITDA margin (%) Current profitability: EBITDA margin July 2005 – June 2006: 22% Aspiration EBITDA margin improvement: 2-3 percentage points(1) Requirement for value creation: EBITDA margin: 21% Forest Products is expected to grow 2-3%(2) annually 1 2 42 Margin improvement from current level, reached within 3-5 years Organic sales growth (without acquisitions) Tissue 43 Tissue SCA Tissue – at a glance Overview Total sales 2005: SEK 31 bn Global No 3 No. 1 in Europe No. 3 in AFH tissue North America 39% 61% Leading positions in Latin America and Asia-Pacific Strong own brands and supply of retailers’ brands Products sold through retail and B2B channels 44 Consumer tissue AFH tissue Tissue Market attractiveness Stable and growing demand for tissue products – Large opportunities to capture rapid growth in emerging markets Opportunities to develop innovative new products and value-added concepts – especially in AFH Regional production and markets – not exposed for global competition High potential for further market improvement 45 Tissue Challenges Increased energy costs Structural changes within the retail trade Further growth within retailers’ brands Aggressive competitors 46 Tissue SCA’s strengths Partnerships with key customers Innovative product offerings Supply chain excellence Dual strategy (brands and private label) Tork – global AFH brand 47 Tissue Supply-chain actions in Europe SCA started the restructuring process in 2003 The number of FTEs is being reduced by some 1,500 Radically changed production network: After the program is completed in 2007, ten mills have been closed or divested, representing >150 ktons of tissue Investments in one new mill in Spain with two tissue machines Investments in new or upgrading of existing converting lines for better product quality and productivity 48 Tissue Europe's strongest production network Consumer Tissue / Standard AFH products Specialized AFH products and CT Svetogorsk Drammen Lilla Edet Prudhoe Skelmersdale Friesland Stembert Kostheim Mannheim Le Theil Ortmann Pratovecchio Lucca Valls Mediona Note: Excluding non integrated plants 49 Tissue Significantly improved efficiency… …but offset by higher costs, mainly energy Tissue Europe ~150 Index 110 105 100 95 90 85 80 2003 2004 Production volumes Employees/ton 50 2005 2006 Indirect costs EUR/ton Energy Tissue Actions Continuous optimization of the supply chain Establish Tork as the leading global brand for AFH tissue Price management in focus Improve offerings and customer partnerships Focus on innovation 51 Tissue Value creation First priority is to reach the threshold for value creation EBITDA margin (%) Aspiration: EBITDA margin improvement: 3-4 percentage points(1) Current profitability: Requirement for value creation: EBITDA margin: 14% Improvements EBITDA margin July 2005 – June 2006: 12% • • • • Asset restructuring Innovative new products Partnerships with key customers Price management Tissue is expected to grow 3-4%(2) annually 1 2 52 Margin improvement from current level, reached within 3-5 years Organic sales growth (without acquisitions) Personal Care 53 Personal Care Personal Care - at a glance Overview Total sales 2005: SEK 19 bn Global No. 1 in incontinence care No. 1 in baby diapers, Nordic Strong regional positions in feminine care Strong own brands and supply of retailers’ brands 16% 28% 56% Innovation-driven business focused on consumer and customer needs Incontinence products Baby diapers Feminine hygiene products 54 Personal Care Market attractiveness Differentiable products with strong brand equity – high barriers of entry Strong growth and low penetration on emerging markets High level of consolidation 55 Personal Care Challenges Customer concentration – changes in the retail landscape Demanding to remain at the forefront of innovation Competitive communication around products increases A&P costs Increased costs for raw materials 56 Personal Care SCA’s strengths Consumer insights Excellence in supply chain High pace of product innovation Strong market positions Strong brand equity 57 Personal Care Actions Innovation – development of new product platforms Improved platforms for baby diapers Complementary incontinence products Capture growth in emerging markets Further improve supply chain Expansion of capacity in Eastern Europe 58 Personal Care Value creation Highest priority is to drive growth Current profitability: Aspiration: EBITDA margin improvement: 0-2 percentage points(1) Personal Care is expected to grow 5-7%(2) annually Expansion in growth markets EBITDA margin July 2005 – June 2006: 18% 1 2 Margin improvement from current level, reached within 3-5 years Organic sales growth (without acquisitions) 59 Packaging 60 Requirement for value creation: EBITDA margin: 12% Products with higher value content Incontinence products as a growth engine Packaging Packaging - at a glance Overview Revenue Total sales split 2005: SEK 32 bn Packaging solutions, protective packaging and services 7% Europe’s second largest supplier of corrugated board 15% 17% High degree of integration with own production of containerboard Leading supplier of packaging solutions in North America and China 3% 58% Conventional corrugated board Consumer packaging Protective packaging Service Industrial packaging 61 Packaging Market attractiveness Differentiation through value-added offerings and design capabilities Option for strong and lasting partnerships with key clients Improved market balance for containerboard in Europe Rapid growth in China and Eastern Europe 62 Packaging Challenges Price management – carry through price increases Customers under pressure due to high competition within retail trade Manage increased cost for raw materials – mainly related to containerboard operations European market less consolidated than US 63 Packaging SCA’s strengths Superior retail insights World class design capabilities Strong customer relationships 64 High quality asset base Local presence with global capabilities Packaging Actions Further develop complete solutions and partnerships with targeted customers Corrugated board Price management – disciplined and consistent approach to price increases Closure and relocation of converting plants Capacity closures, net 350 kton Containerboard Upgrades in remaining mills Further reductions of operational costs 65 Packaging Value creation First priority is to reach the threshold for value creation EBITDA margin (%) Current profitability: Aspiration: EBITDA margin improvement: 2-4 percentage points(1) Requirement for value creation: EBITDA margin: 13% Main improvements EBITDA margin July 2005 – June 2006: 11% • Price management • Complete packaging concepts • Asset restructuring - productivity improvements Packaging is expected to grow 2-3%(2) annually 1 2 66 Margin improvement from current level, reached within 3-5 years Organic sales growth (without acquisitions) Capital allocation 67 Strong fundamentals for further value creation 68 Forest Products Continued and improved production of highquality products and services as well as cost leadership Tissue Primary focus is to reach value-creating profitability threshold Personal Care Capitalize on full potential of product concepts, brands and global expansion Packaging Primary focus is to reach value-creating profitability threshold Capital expenditures Based on long-term strategic needs Equally important to decide where to as well as not to invest Strategic capex: some 2% of sales Current capex: some 5% of sales Total capex: ~7% of sales 69 Capex per business area Forest Products Tissue Investments in efficiency and quality Main expansion in growth markets Focus on high-quality magazine paper Personal Care Packaging Capacity growth within all three segments Strategic capex to value-added segments with high growth potential Technology upgrades Continued relocation of production to low cost countries 70 Further supply chain improvements in North America Investments in order to improve efficiency and product quality Strengthen profitable product areas and geographies Selective acquisitions Acquisitions Gain market access or increase market share predominately in high-growth markets Complementary capabilities in mature markets Divestments Opportunities evaluated on an ongoing basis Divestments Assets where SCA is not fully committed to invest required capital 71 Efficient utilization of generated cash flow Capital structure – debt/equity ratio Long-term target of 0.7x Dividend policy At least 1/3 of cash flow from current operations SCA is committed to continue to deliver increased dividends 72 Historical dividend development SEK h: 9% growt d n e Divid 10 R) (CAG 8 6 4 2 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 73 Value creation - SCA Group EBITDA margin (%) Current profitability: Aspiration: EBITDA margin improvement: 2-3 percentage points(1) Requirement for value creation: EBITDA margin: 15% Main improvement: Tissue Europe Packaging Europe EBITDA margin July 2005 – June 2006: 14%(3) SCA is expected to deliver annual growth of 3-4%(2) 1 2 3 74 Margin improvement from current level, reached within 3-5 years Organic sales growth (without acquisitions) Adjusted for items affecting comparability Summary - value creation Current margin Margin improvement Margin requirement Growth Actual EBITDA margin July 2005 – June 2006(4) Aspiration: Margin improvement from current level(1), reached within 3-5 years, percentage points EBITDA-margin requirement for value creation(2) Annual growth during the next 3-5 years(3) 14% 2-3% 15% 3-4% Personal Care 18% 0-2% 12% 5-7% Tissue 12% 3-4% 14% 3-4% Packaging 11% 2-4% 13% 2-3% Forest Products 22% 2-3% 21% 2-3% Group 1 July 2005 – June 2006 2 CVA analysis, based on WACC and gross assets as of 30 June 2006 3 Organic sales growth (without acquisitions) 4 Adjusted for items affecting comparability 75 76
