Two strong businesses with attractive offerings
– exciting future for the hygiene and the forest products businesses
2016 was an eventful year for SCA. We initiated work in order to be able to propose to the 2017 Annual General Meeting to decide on a split of the SCA Group into two listed companies: a hygiene company and a forest products company. During the year, we enhanced our strategy and created a new vision. The acquisition of Wausau Paper Corp., a leading North American AfH tissue company, was completed and was integrated successfully. We strengthened our cooperation with Vinda to build a leading Asian hygiene business. Toward the end of the year, we entered into an agreement to acquire the medical solutions company BSN medical. The acquisition of BSN medical is an excellent strategic fit for SCA and supports our vision “Dedicated to improving well-being through leading hygiene and health solutions”. Through successful innovation work, we improved our customer and consumer offerings and strengthened our market positions in many product segments. We also continued to increase the efficiency of the value chain and address underperforming market positions.
Net sales and the adjusted operating profit1) increased by 2% and 7% respectively during the year. Organic sales, which exclude exchange rate effects, acquisitions and divestments, increased by 2% in 2016 and were affected by a somewhat challenging market situation for hygiene products and by capacity reductions. The adjusted operating profit1), excluding currency translation effects, acquisitions and divestments, increased by 8% and the adjusted operating margin1) increased by 0.6 percentage points to 11.9%. The adjusted return on capital employed1) was 12.5% and the operating cash flow increased by 16%. The Board of Directors proposes an increase in the dividend by 4.3% to SEK 6.00 per share.
Initiated work to split SCA
SCA has increased the share of Group sales attributable to its hygiene business over the past few decades. In 2016, the hygiene products business accounted for 86% of Group sales and the forest products business for 14%. Our hygiene and forest products operations are two strong businesses with attractive offerings in their respective areas. Synergies between the operations have decreased over time and are currently limited. A split of the Group and a distribution and listing of shares in the subsidiary which today operates the hygiene business is expected to increase focus, customer value, development opportunities and enables each company to successfully realize its strategies under the leadership of separate and dedicated management teams, two different boards of directors and independent access to capital. It feels, therefore, like a natural step to propose to the 2017 Annual General Meeting to split the SCA Group into two listed companies; a hygiene company and a forest products company.
Provisions for tax cases and antitrust cases
During the year, we reserved SEK 1,300m for ongoing tax cases in Sweden and Austria. The provision followed recently announced judgements in similar cases, which indicate a change in practice. We also reserved SEK 1,090m for ongoing antitrust cases in Chile, Colombia, Poland, Spain and Hungary. These cases essentially relate to the period between 2000 and 2013. We do not tolerate any form of collusion with competitors and we work intensively to minimize the risks for unethical behavior, for example through training employees in competition law.
Improve well-being in the world
SCA’s vision is “Dedicated to improving well-being through leading hygiene and health solutions”. Health, well-being and sanitation are some of the pillars in the United Nation’s Sustainable Development Goals, goals that we actively support. The goals aim to contribute to making a better world but also create business opportunities in existing and new markets. We have the knowledge, experience, products, solutions and commitment to contribute to improving hygiene standards worldwide and to break taboos surrounding menstruation and incontinence. In September, we launched our fifth Hygiene Matters report, which aims to promote a global dialog concerning hygiene, health and well-being. The report is based on a global survey and was launched in conjunction with a session of the General Assembly of the United Nations in New York. We also collaborate with the United Nations Foundation, which aims to bring together businesses, authorities and NGO’s to cooperate on the UN’s goals for sustainable development.
Innovations strengthen our offering
We are a company close to customers and consumers, which enables us to convert customer and consumer insights into products and solutions that meet existing and new needs. Our focus on digitalization has continued in many areas, not least in e-commerce. Customers and consumers appreciate the opportunity to buy items online, such as our incontinence products, which is practical, convenient and discrete. In 2016, we launched 23 innovations that have improved our offering and strengthened our market positions and brands. Innovations were launched in consumer tissue, under the brands Lotus, Plenty, Regio, Tempo and Zewa, in feminine care products, such as the brands Bodyform, Libresse and Nosotras, in baby diapers under the brands Drypers and Libero and in AfH tissue and incontinence products under the two globally leading brands Tork and TENA. We want to contribute to a circular society where resource consumption and waste is minimized and closed or new ecocycles are created. To inspire new innovations and business solutions, we have joined the Circular Economy 100 (CE 100), an Ellen MacArthur Foundation program established to work toward a circular economy.
Through successful innovation work, we improved our customer and consumer offerings and strengthened our market positions in many product segments. We also continued to increase the efficiency of the value chain and address underperforming market positions.”
Value-creating acquisitions and investments
Toward the end of the year, we signed an agreement to acquire the medical solutions company BSN medical. The purchase price for the shares amounts to EUR 1,400m and takeover of net debt to approximately EUR 1,340m2). BSN medical has leading market positions in several attractive medical product categories and provides a new growth platform with future industry consolidation opportunities. The medical solutions company shares similar positive market characteristics, customers and sales channels as our incontinence business, with the globally leading brand TENA, which will provide opportunities for faster growth through cross-selling. The completion of the transaction is subject to regulatory approvals and closing is expected to take place during the second quarter of 2017.
The acquisition of Wausau Paper Corp., a North American AfH tissue company, was completed during the year and work to integrate operations is progressing according to plan. Following the acquisition, SCA is the second largest player in the AfH tissue segment in the North American market.
Our investment in doubling pulp production at the Östrand pulp mill in Sweden is progressing as planned. By the end of December 2016, we had invested SEK 2.6bn of the approximately SEK 7.8bn planned. Production is scheduled to commence in the second quarter of 2018. The investment will provide the mill with a world-class cost position and environmental performance.
Measures to improve profitability in emerging markets
At the end of the year, we decided to discontinue our hygiene business in India. Four years after entering the Indian market, our conclusion is unfortunately that profitability cannot be achieved within a reasonable time frame. We prioritize growth in selected emerging markets, such as China, Southeast Asia, Latin America, Eastern Europe and Russia, where we already hold strong market positions.
Our efforts to address weak market positions continued during the year. Our Mexican baby diaper business has had a weak market position and inadequate profitability for some time, which led to the decision to discontinue operations. Mexico remains a high-priority market for the rest of our hygiene business.
The divestment of the hygiene products business in Southeast Asia, Taiwan and South Korea to Vinda was completed during the year. SCA is the majority shareholder in Vinda, one of China’s largest hygiene companies. The transaction strengthens the cooperation between SCA and Vinda and enables us to further leverage our shared strengths to build a leading Asian hygiene business.
In Brazil, our new production facility for incontinence products was inaugurated, which strengthens our competitiveness.
Continuing efficiency initiatives
Work with efficiency enhancements and cost savings continued during the year. We launched the Tissue Roadmap, which is a ten-year plan to streamline production and enhance capital efficiency to increase value creation in the Tissue business area. In line with the plan, we closed a plant in Spain and implemented restructuring measures at two plants in France during the year.
In 2017, our main priorities are to continue growing with good profitability and at the same time successfully implement initiatives started in recent years. I see an exciting future for both the hygiene and forest products businesses. A greater insight that the earth’s resources are limited will benefit renewable products, such as pulp, solid-wood products and paper products. Increased awareness about how hygiene, health and well-being are linked, combined with a growing and aging population, will result in rising demand for hygiene products – products we all need every day.
President and CEO
1) Excluding items affecting comparability.
2) Estimated as of December 31, 2016.