Work for long-term value creation
Generate increased shareholder value through profitable growth
SCA’s overall objective is to generate long-term value for its shareholders and that the SCA share will deliver a higher total shareholder return than competitors. SCA’s strategic framework supports its overall long-term objective. The company also has quantitative targets that govern operations and increase shareholder value; financial targets for organic sales growth, return on capital employed and capital structure as well as targets for people and nature.
Financial targets and dividend
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. In 2016, the Group’s adjusted return on capital employed, excluding items affecting comparability, was 12.5%.
SCA’s target for annual organic sales growth for Personal Care is 5–7%, while the target for Tissue is 3–4%. For Forest Products, the target is to grow in line with the market. In 2016, the Group’s organic sales increased by 2%. Organic sales increased by 3% for Personal Care and 3% for Tissue. Organic sales in Forest Products decreased by 3%.
SCA aims to provide long-term stable and rising dividends to its shareholders. The Board of Directors proposes an increase in the dividend by 4.3% to SEK 6.00 (5.75) per share for the 2016 fiscal year. Accordingly, dividend growth over the most recent five-year period amounted to 7.4%. The 2016 dividend represents a dividend yield of 2.3%, based on SCA’s share price at the end of the year.
Investments in future growth
SCA is well positioned to leverage the growth potential existing in both mature markets and emerging markets. SCA’s long-term goal is to be the leading company and strengthen its brand positions in the markets that it serves, for example, through active innovation work that improves SCA’s customer and consumer offering and strengthens the SCA brands. SCA’s ambition is to increase the emerging markets’ share of net sales and profit. The company is prioritizing growth in selected emerging markets, such as China, Southeast Asia, Latin America, Eastern Europe and Russia, where the company holds strong market positions. Emerging markets accounted for 32% of SCA’s net sales in 2016.
In addition to organic sales growth, SCA sees an opportunity to also grow through acquisitions. The acquisition of Wausau Paper Corp., a leading North American AfH tissue company, was completed in 2016 and was integrated successfully. Following the acquisition, SCA is the second largest player in the AfH tissue segment in the North American market. In December 2016, SCA entered into an agreement to acquire BSN medical, a leading medical solutions company. BSN medical has leading market positions in several attractive medical product categories and provides a new growth platform with future industry consolidation opportunities. The completion of the transaction is subject to customary regulatory approvals and closing is expected to take place during the second quarter of 2017.
In each of the geographic markets and product categories where SCA is represented, the ambition is to generate a return that exceeds the cost of capital and improves cash flow. Where this is not the case, SCA focuses on improving profitability. SCA has taken the decision to discontinue operations in product categories and in markets where it concludes that necessary investments are not expected to create value and where profitability cannot be improved within a reasonable time frame. Investment in growth should only take place where the return on capital employed is higher than the cost of capital. In incontinence products in North America, SCA has successfully prioritized the achievement of satisfactory profitability ahead of sales growth. Actions have been taken to reduce costs, discontinue unprofitable product offerings and focus on fewer but more profitable products. In 2016, a new production facility for incontinence products was inaugurated in Brazil, which enables improved profitability in the business. During the year, SCA closed its baby diaper business in Mexico because of weak market position with inadequate profitability. Investments needed to improve its product offering and market position were not deemed to be value creating. SCA has also decided to discontinue its hygiene business in India as a result of its assessment that profitability cannot be achieved within a reasonable time frame.
For Forest Products, SCA is investing in doubling pulp production at the Östrand pulp mill. Production is expected to commence in the second quarter of 2018. At the end of 2016, SEK 2.6bn had been invested of the approximately SEK 7.8bn planned. Over time, the investment in Östrand is expected to increase sales and competitiveness and create a world-class cost position and higher margin.
Cost and capital efficiency has the highest priority to strengthen competitiveness and increase profitability and cash flow in the Group. SCA continuously strives for a more effective supply chain and for better leveraging economies of scale to achieve a more efficient value chain. To improve efficiency and further increase value creation within the Tissue business area, a “Tissue Roadmap” was launched during 2016. This consists of a ten-year plan to optimize the supply chain, increase cost and capital efficiency and secure capacity for future growth as well as enabling faster production adaptation in conjunction with innovations and product upgrades.
Growth where profitability is high
SCA prioritizes investments and growth in market positions where profitability is high. Investments could, for example, take the form of innovation initiatives, marketing activities and upgrading or replacing machines.
By focusing on innovation and improving and expanding its customer and consumer offering, SCA is working to strengthen its market positions and brands, improve pricing and product mix and increase sales. In 2016, SCA launched 23 innovations, including AfH tissue and incontinence products under the two globally leading brands Tork and TENA.
For example, during the year SCA invested in growth in feminine care products in Europe and in Latin America in order to expand at a faster rate than the market, capture market shares and drive profitable growth. Investments were made in innovation work to improve and expand customer offerings and in marketing activities. These initiatives have resulted in stronger market positions and increased organic sales both in Europe and Latin America.
Incentive programs supporting long-term value creation
The variable remuneration of the CEO, Executive Vice Presidents and Business Unit Presidents and equivalents supports Group efforts for value creation and targets for organic sales growth and return on capital employed.
The program for variable remuneration is divided into a short and long-term portion. The long-term portion is based on the performance of the company’s B share, measured as the Total Shareholder Return index, compared with a weighted index of competitors’ and consumer companies’ shares performance over a three-year period. The short-term portion is mainly focused on operating cash flow, cost control, operating profit and organic sales growth for each business unit. The targets are weighted differently depending on the type of business each executive is responsible for. For an executive in charge of a business with unsatisfactory profitability, a target such as operating profit is assigned a high weight while organic sales growth has a low weight. In a similar way, organic sales growth is assigned a high weight for an executive responsible for a business with good profitability.
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