A2. Use of non-International Financial Reporting Standards ("IFRS") performance measures

Guidelines concerning non-IFRS performance measures for companies with securities listed on a regulated market in the EU have been issued by the ESMA (The European Securities and Markets Authority). These guidelines are to be applied to alternative performance measures (APM) applied as of July 3, 2016.

The Annual Report refers to a number of non-IFRS performance measures used to assist investors and company management to analyze the company’s operations. A description of the various non-IFRS performance measures used as a complement to the financial information reported according to IFRS is presented below.

The Board of Directors of SCA has established that the Group’s overall profitability target is to achieve a return on capital employed of 13% over a business cycle. The target is 30% for Personal Care, 15% for Tissue and to be in the top quartile of the industry for Forest Products. The growth target for Personal Care is annual organic sales growth of 5–7%, while the target for Tissue is 3–4%. For Forest Products, the target is to grow in line with the market.

It is important that SCA maintains an effective capital structure, while at the same time ensuring long-term access to loan financing. Cash flow in relation to net debt is to be taken into consideration in the target to maintain a solid investment grade rating.

A number of financial performance measures and how these are used to analyze the company’s objective are described below.

CALCULATION OF PERFORMANCE MEASURES NOT INCLUDED IN IFRS FRAMEWORK

RETURN MEASURES

Return is a financial term that describes how much the value of an asset changes from an earlier point in time

Non-IFRS performance measure

Description

Reason for use of the measure

Return on capital employed, ROCE

Accumulated return on capital employed is calculated as 12-month rolling operating profit as a percentage of average capital employed for the five most recent quarters. The corresponding key figure for a single quarter is calculated as operating profit for the quarter multiplied by four as a percentage of capital employed for the two most recent quarters.

This is the central ratio for measuring return on capital tied up in operations.

Return on equity

For the Group, return on equity is calculated as profit for the year as a percentage of average equity.

Shows, from a shareholder perspective, the return that is generated on the owners’ capital that is invested in the company.

CAPITAL MEASURES

Shows how capital is utilized and the company’s financial strength

Non-IFRS performance measure

Description

Reason for use of the measure

Equity

The equity reported in the consolidated balance sheet consists of taxed equity increased by the equity portion of the Group’s untaxed reserves and non-controlling interests. Deferred tax liability in untaxed reserves has been calculated at a 22.0% rate for Swedish companies and at the applicable tax rate for foreign companies in each country outside Sweden.

Equity is the difference between the Group’s assets and liabilities, which corresponds to the Group’s equity contributed by owners and the Group’s accumulated profits.

Equity per share

Equity in relation to the total number of registered shares.

A measure of the amount of equity that exists per share and is used for measuring the share against the share price.

Equity/assets ratio

Equity expressed as a percentage of total assets.

A traditional measure for showing financial risk, expressing the amount of restricted equity that is financed by the owners.

Capital employed

The Group’s and business areas’ capital employed is calculated as the balance sheet’s total assets, excluding interest-bearing assets and pension assets, less total liabilities, excluding interest-bearing liabilities and pension liabilities.

This measure shows the amount of total capital that is used in the operations and is thus one of the components for measuring the return from operations.

SEKm

2016

2015

2014

CAPITAL EMPLOYED

 

 

 

Total assets

165,748

152,372

154,736

Financial assets

–6,958

–7,220

–8,215

Non-current, non-interest-bearing liabilities

–13,312

–12,235

–11,001

Current, non-interest-bearing liabilities

–30,598

–27,748

–26,701

Capital employed

114,880

105,169

108,819

 

 

 

 

CAPITAL EMPLOYED

 

 

 

Personal Care

13,665

13,149

13,578

Tissue

61,335

55,054

55,489

Forest Products

40,109

37,216

37,831

Other

–229

–250

1,921

Capital employed

114,880

105,169

108,819

Non-IFRS performance measure

Description

Reason for use of the measure

Capital turnover

Sales for the year divided by average capital employed.

Shows in a clear manner how effectively capital is employed. Together with sales growth and the operating margin, the capital turnover ratio is a key measure for monitoring value creation

Working capital

The Group’s and business areas’ current capital is calculated as current operating receivables less current operating liabilities.

This measure shows how much working capital is tied up in the operations and can be put in relation to sales to understand how effectively tied-up working capital is used.

SEKm

2016

2015

2014

WORKING CAPITAL

 

 

 

Inventories

14,347

14,661

13,793

Trade receivables

17,811

16,829

16,827

Other current receivables

2,898

2,831

2,844

Trade payables

–15,750

–14,351

–13,964

Other current liabilities

–12,466

–11,580

–11,004

Adjustments

43

–223

–146

Working capital

6,883

8,167

8,350

Non-IFRS performance measure

Description

Reason for use of the measure

Net debt

The sum of consolidated interest-bearing liabilities, including pension liabilities and accrued interest less cash and cash equivalents and interest-bearing current and non-current receivables and capital investment shares.

Net debt is the most relevant measure for showing the company’s total debt financing.

SEKm

2016

2015

2014

NET DEBT

 

 

 

Surplus in funded pension plans

1,186

371

3

Non-current financial assets

722

1,032

3,137

Current financial assets

568

775

1,260

Cash and cash equivalents

4,482

5,042

3,815

Financial assets

6,958

7,220

8,215

Non-current financial liabilities

31,360

21,475

24,246

Provisions for pensions

5,602

2,771

5,100

Current financial liabilities

5,357

12,452

14,816

Financial liabilities

42,319

36,698

44,162

Net debt

35,361

29,478

35,947

Non-IFRS performance measure

Description

Reason for use of the measure

Debt/equity ratio

Expressed as net debt in relation to equity.

Helps show financial risk and is the most useful measure for management to monitor the level of the company’s indebtedness.

Debt payment capacity

Expressed as the cash surplus in relation to average net debt.

A financial measure that shows the company’s capacity to repay its debt.

Interest coverage ratio

Calculated according to the net method where operating profit is divided by financial items.

The ratio indicates a company’s abillity to cover its interest expenses.

PERFORMANCE MEASURES

Various types of performance measures and margin measures expressed as a percentage of sales

Non-IFRS performance measure

Description

Reason for use of the measure

Organic sales

Sales growth excluding exchange rate effects, acquisitions and divestments.

This measure is of major importance for management in its monitoring of underlying sales growth driven by changes in volume, price and product mix for comparable units between different periods.

SEKm

2016

2015

2014

ORGANIC SALES

 

 

 

Personal Care

 

 

 

Organic sales

865

2,282

853

Exchange rate effects

–1,313

1,015

465

Acquisitions/Divestments

–245

–18

12

Recognized change

–693

3,279

1,330

 

 

 

 

Tissue

 

 

 

Organic sales

1,818

2,588

749

Exchange rate effects

–1,375

4,602

2,158

Acquisitions/Divestments

2,934

0

5,990

Recognized change

3,377

7,190

8,897

 

 

 

 

Forest Products

 

 

 

Organic sales

–557

537

1,548

Exchange rate effects

–134

252

143

Acquisitions/Divestments

0

0

–726

Recognized change

–691

789

965

 

 

 

 

Group

 

 

 

Organic sales

2,131

5,412

3,139

Exchange rate effects

–2,822

5,868

2,766

Acquisitions/Divestments

2,689

–18

5,276

Recognized change

1,998

11,262

11,181

Non-IFRS performance measure

Description

Reason for use of the measure

Adjusted gross profit

Net sales minus cost of goods sold excluding items affecting comparability.

Adjusted gross profit is stripped of items affecting comparability and is thus a better measure for showing the company’s margins before the effect of costs such as selling and administrative costs.

Operating surplus/EBITDA

Calculated as operating profit before depreciation/impairment of property, plant and equipment and intangible assets and share of profits of associates.

This measure is a good complement to operating profit, as it shows the cash surplus from operations.

Adjusted operating surplus/EBITDA

Calculated as operating profit before depreciation/impairment of property, plant and equipment and intangible assets and share of profits of associates, excluding items affecting comparability.

This measure is a good complement to operating profit, as it shows the cash surplus from operations adjusted for the impact of items affecting comparability.

SEKm

2016

2015

2014

OPERATING SURPLUS/EBITDA

 

 

 

Operating profit

11,279

10,947

10,449

Share of profits of associates and joint ventures

–152

–199

–113

Depreciation/amortization

6,258

5,961

5,478

Operating surplus

17,385

16,709

15,814

Items affecting comparability

2,710

2,067

1,400

Depreciation/amortization in items affecting comparability

–80

0

0

Adjusted operating surplus/EBITDA

20,015

18,776

17,214

Non-IFRS performance measure

Description

Reason for use of the measure

Operating surplus margin/EBITDA margin

Operating surplus as a percentage of net sales for the year.

This measure is a good complement to operating margin, as it shows the cash surplus in relation to net sales.

Items affecting comparability

Under items affecting comparability, SCA includes costs in connection with acquisitions, restructuring, impairment and other specific events.

Separate reporting of items affecting comparability between periods provides a better understanding of the company’s operating activities.

Restructuring costs

Costs for impairment together with personnel costs in connection with restructuring.

This measure shows the specific costs that have arisen in connection with restructuring of a specific operation, which contributes to a better understanding of the underlying cost level in the continuing operations.

Operating margin

Operating profit as a percentage of net sales for the year.

The operating margin is a key measure together with sales growth and capital turnover ratio for monitoring value creation.

Adjusted operating profit

Calculated as operating profit before financial items and tax, excluding items affecting comparability.

Adjusted operating profit is a key ratio for control of the Group’s profit centers and provides a better understanding of earnings performance of the operations than the non-adjusted operating profit.

Financial net margin

Net financial items divided by net sales.

This measure shows the relationship between net financial items and net sales.

Adjusted profit before tax

Calculated as operating profit before tax, excluding items affecting comparability.

This is a useful measure for showing total profit for the company including financing, but not affected by taxes and items that affect comparability with previous periods.

Adjusted profit for the period

Profit for the period after deducting items affecting comparability.

Shows the period’s total earnings capacity.

Net margin

Profit for the year as a percentage of net sales for the year.

The net margin shows the remaining share of net sales after all of the company’s costs have been deducted, apart from income tax.

CASH FLOW PERFORMANCE MEASURES

Various performance measures and costs that have impacted the company’s cash flow

Non-IFRS performance measure

Description

Reason for use of the measure

Operating cash surplus

Calculated as profit before tax, with a reversal of depreciation and impairment of property, plant and equipment and intangible assets, share of profits of associates, and items affecting comparability, reduced by tax payments.

This measure shows the cash flow generated by profit and is part of the follow-up of cash flow.

Operating cash flow

Consists of the sum of operating cash surplus and change in working capital, with deductions for current capital expenditures in non-current assets and restructuring costs.

This is an important control measure used internally within the organization that shows the combined cash flow from operating activities including all parts that the units have control over themselves.

SEKm

2016

2015

2014

OPERATING CASH FLOW

 

 

 

Personal Care

 

 

 

Operating cash surplus

5,314

5,018

4,511

Change in working capital

289

–314

–96

Current capital expenditures, net

–805

–840

–884

Restructuring costs, etc.

–75

–72

–186

Operating cash flow

4,723

3,792

3,345

 

 

 

 

Tissue

 

 

 

Operating cash surplus

11,970

10,703

9,760

Change in working capital

861

–285

55

Current capital expenditures, net

–3,159

–2,260

–1,849

Restructuring costs, etc.

–338

–491

–623

Operating cash flow

9,334

7,667

7,343

 

 

 

 

Forest Products

 

 

 

Operating cash surplus

2,639

3,319

2,750

Change in working capital

119

95

–342

Current capital expenditures, net

–959

–869

–876

Restructuring costs, etc.

85

–44

–92

Operating cash flow

1,884

2,501

1,440

Non-IFRS performance measure

Description

Reason for use of the measure

Cash flow from current operations

Operating cash flow less net financial items and tax payments and taking into account other financial cash flow.

This measure can be said to illustrate the cash flow generated by operations and that can potentially be used for strategic initiatives such as strategic capital expenditures or acquisitions.

Strategic capital expenditures in non-current assets

Strategic capital expenditures increase the company’s future cash flow through acquisitions of companies, capital expenditures to expand facilities, or new technologies that boost SCA’s competitiveness.

Shows that size of the capital expenditures that are made in expansion and other growth measures.

Current capital expenditures

Investments to maintain competitiveness, such as maintenance, rationalization and replacement measures or investments of an environmental nature.

Shows the size of the capital expenditures required to maintain existing manufacturing capacity.