SCA reported 4Q earnings lower than expected

Jan 27, 2005. /Lesprom Network/. Svenska Cellulosa Aktiebolaget (SCA) net sales amounted to SEK 89,967 million in 2004 compared with SEK 85,338 million in 2003 and earnings after taxes (net earnings) amounted to SEK 3,639 million (5,075).

2004 compared with 2003

• Net sales amounted to SEK 89,967 M (85,338).
• Earnings after taxes (net earnings) amounted to SEK 3,639 M (5,075).
• Earnings per share amounted to SEK 15.58 (21.84).
• Earnings after financial items amounted to SEK 4,839 M (6,967). Adjusted for items affecting comparability, earnings after financial items amounted to SEK 5,439 M (6,615), a decline of 18%, of which currency effects 6%.

Compared with third quarter of 2004

• Net sales amounted to SEK 23,128 M (22,812).
• Earnings after taxes (net earnings) amounted to SEK 661 M (955)
• Earnings per share amounted to SEK 2.83 (4.09).
• Earnings after financial items amounted to SEK 488 M (1,377). Adjusted for items affecting comparability, earnings after financial items amounted to SEK 1,114 M (1,307), a decline of 15%, of which currency effects 3%.

Rationalization program

• The costs for efficiency enhancement programs amounting to SEK 726 M were charged in the quarter. In addition, a decision was made regarding expansion of the earlier programs at a cost of about SEK 425 M, with a savings effect of about SEK 200 M per year.

NET SALES AND EARNINGS

The Group’s operations in Western Europe had a continued weak development also during the fourth quarter. The reason is primarily the continuing intense competitive pressure within SCA’s most important product areas, which has resulted in persistent price pressures. However, price increases were implemented in North America during the fourth quarter, which provided certain compensation for the sharp increases in energy and raw material costs during the year.

The costs for the previously decided efficiency enhancement programs amount to SEK 726 M, which in its entirety was charged against earnings in the fourth quarter. During the first quarter of 2005, the programs will be expanded in a number of specific points, resulting in restructuring expenses of about SEK 425 M, with annual savings effect of SEK 200 M. The programs are described in more detail later in the report.

HYGIENE PRODUCTS BUSINESS AREA

Net sales amounted to SEK 45,359 M (42,981), and were thereby 6% higher than in the preceding year. The effects of the completed company acquisitions and higher volumes were partly offset by lower prices but primarily by negative currency movements.

Operating profit amounted to SEK 4,321 M (4,820), a decline of 10%. Adjusted for currency effects, the decline was 8%. Earnings declined as a result of reduced earnings in the AFH tissue area, mainly in North America.

Operating profit in the fourth quarter was 12% lower than during the third quarter and amounted to SEK 943 M (1,068). Negative currency effects amounted to 2%. The earnings decline is attributable to lower prices, increased advertising and promotions expenses, and costs for production stops.

Consumer Tissue

Operating profit amounted to SEK 1,273 M (1,416). Lower prices, about 3.5%, were offset partially by lower production and distribution costs, while energy and raw material costs were largely unchanged.

Operating profit in the fourth quarter was 29% lower than in the third quarter and amounted to SEK 232 M (327) M. Despite higher volumes and somewhat lower pulp prices, earnings weakened mainly due to lower prices as well as to higher energy costs, and production stops toward year-end.

Tissue for bulk consumers – AFH

Operating profit for AFH products amounted to SEK 677 M (1,001), which was 32% lower than in the preceding year. Higher prices in North America did not offset increased raw material and energy costs and the negative currency effects. In the European operations, increased production costs and costs for enhancing the efficiency of the British production and distribution structure affected earnings adversely.

Compared with the third quarter, operating profit declined in the fourth quarter by 5% to SEK 146 M (153). As a result of price increases, the American operations posted improved earnings, despite the production cutbacks at year-end. Earnings in the European operations weakened as a result of seasonally related production stops, as well as costs for improving the efficiency of the British production and distribution structure and higher energy costs.

Personal Care

Operating profit amounted to SEK 2,371 M (2,403) and was therefore somewhat lower than prior year. The company acquisitions, combined with a positive volume development, had a positive affect on earnings. The effects of this were counteracted by generally lower prices for baby diapers in the area of retailers’ brands and a changed product mix towards thinner feminine hygiene products. In addition, the costs for advertising and promotion were higher than in the preceding year.

Compared with the third quarter, operating profit declined by 4% and amounted to SEK 565 M (588). The decline is due to lower earnings in feminine hygiene products, mainly due to a continued product shift toward thinner products. In addition, the costs for advertising and promotion were higher than in the preceding quarter.

PACKAGING BUSINESS AREA

Net sales were 5% higher than in the preceding year and amounted to SEK 31,501 M (30,029). Company acquisitions increased net sales, while lower prices had a negative impact.

Operating profit amounted to SEK 2,268 M (2,482), a decline of 9%. Adjusted for currency effects, the decline was 6% Lower prices for corrugated board were partly offset by improved productivity and improved paper integration, as well as lower energy costs. The North American packaging operations were affected by sharp price increases for oil-based raw materials, which to date could not yet be offset by implemented price increases.

Compared with the third quarter, operating profit declined by 23% and amounted to SEK 490 M (636), partly as a result of seasonal declines in conjunction with the Christmas and New Year’s holidays and partly due to planned repair and maintenance stops in the liner operations. Lower raw material prices did not offset the lower prices for corrugated board.

FOREST PRODUCTS BUSINESS AREA

Net sales for the Forest Products business area were 6% higher than in the preceding year and amounted to SEK 14,954 M (14,081). The positive effects of higher volumes and the acquisition of Scaninge’s forestry and sawmill operations were partly countered by lower paper prices. Currency movements had a negative impact on net sales of 2%.

Operating profit amounted to SEK 1,487 M (1,559) and, accordingly, was 5% lower than in the preceding year. Currency movements had a negative effect on operating profit of 14%. Lower earnings in the publication papers business were offset by improved earnings in the forestry, sawmill and pulp operations.

In the fourth quarter, earnings increased by 2% compared with the third quarter and totaled SEK 383 M (374). Currency movements affected earnings negatively by 10%. However, this was offset by improved earnings in the publication papers operations.

Publication papers

Operating profit in the publication papers operations totaled SEK 442 M (662), a decline of 33%, of which 22% due to currency effects. The decline in earnings was primarily attributable to lower prices and higher production costs. However, this was offset by higher volumes and the related higher capacity utilization.

Operating profit in the fourth quarter amounted to SEK 129 M (121), an improvement due mainly to higher volumes and related higher capacity utilization.

Pulp, timber and solid-wood products

Operating profit amounted to SEK 1,045 M (897) and was thereby 16% higher than in the preceding year. The improvement is mainly attributable to the acquisition of Scaninge’s forestry and sawmill operations, but also higher volumes and the related increased capacity utilization. Lower prices for solid-wood products and negative currency movements restricted the improvement.

Operating profit in the fourth quarter amounted to SEK 254 M (253).

PERSONNEL

The average number of employees at the close of the quarter was 51,718, compared with 43,617 at the end of 2003¹. The increase is due to acquisitions carried out during the year, while at the same time various efficiency enhancement programs within the Group reduced the number of employees.
¹ Including SCA’s portion of joint-venture companies.

RATIONALIZATION PROGRAM

In conjunction with the third quarter interim report, SCA announced an efficiency enhancement program, with estimated costs of SEK 700 M and an annual savings effect of slightly more than SEK 1,000 M.

After the announcement, additional programs were identified within the North American operations, the European hygiene products operations and in newly acquired units. The cost for these supplementary programs, which in total affect 450 persons, is estimated to SEK 425 M, of which most in the form of expenditures and the annual savings is estimated to SEK 200 M.

Against this background, SCA’s Board of Directors today approved an increase in the original program by about SEK 425 M.

Based on the communication prior to the year-end with affected employees, the fourth quarter was charged with SEK 726 M in the form of structural costs and the related asset write-downs. The costs for the expansion of the program, about SEK 425 M, are expected to be charged in the first quarter of 2005.

STORM DAMAGE

SCA’s forest holdings were not significantly affected by the storm that devastated large parts of southern Sweden’s forestlands in the beginning of 2005. Since the reported earnings for 2005 (in accordance with IFRS) comprise the sum of results from felling and the net growth of forest, the earnings in the forestry operations will not be affected by changes in short-term felling plans that may arise as a result of the storm. However, cash flow is affected.

MARKET OUTLOOK

No notable change in the market situation and demand picture for the Group’s products is expected in the nearest future. This means that the intensive competitive situation is expected to remain although certain price adjustments are planned in the North American operations and in the publication papers area in Europe. The internal measures for cost reductions and integration of acquired units will be assigned high priority during the year, while at the same time acquisition activities will be sharply limited.

ACQUISITIONS DURING THE YEAR

¹ On debt-free basis.

ANNUAL GENERAL MEETING

The Annual General Meeting will be held on Tuesday, 5 April 2005, at 15:00 p.m. at the Aula Magna, University of Stockholm, Sweden. The proposed record date for dividend entitlement is Friday, 8 April. Payment through VPC is expected on Wednesday, 13 April. The 2004 Annual Report is expected to be released in mid-March 2005. Interim reports during 2005 will be released on 26 April, 21 July and 26 October.

The Nomination Committee, which is assigned the task of preparing proposals regarding composition of the SCA Board of Directors, includes Sverker Martin-Löf, SCA Board Chairman, Curt Källströmer, Handelsbankens Personalstiftelser, Handelsbankens Pensionsstiftelser and Pensionkassan SHB Försäkringsförening, Ramsay Brufer, Alecta, Björn Lind, SEB Fonder, Thomas Halvorsen, Fjärde AP-fonden, and Carl-Olof By, Industrivärden.

CHANGED ACCOUNTING RULES (IFRS)

The table below presents an update of the preliminary information released in the interim report on 26 October. The table shows the preliminary effects of how an adjustment of the 2004 comparable figures affects the consolidated income statement and balance sheet.

STATEMENT OF EARNINGS

 BALANCE SHEET