SCA’s Full-Year Results Driven by Strong Emerging-Market Demand for Tissue and Hygiene Products


Swedish consumer goods company Svenska Cellulosa reported full-year earnings per share of SEK 7.06 against net sales of SEK 85.4 billion. Excluding exchange rate effects and divestments, net sales increased 11%, with acquisitions accounting for 8% of the growth.

Personal-care sales increased 11% compared with 2011 (excluding divestments), with acquisitions accounting for 5% of the growth. Sales of adult incontinence products grew 9%, sales of baby diapers increased 17%, and sales of feminine-care products rose 9%. Much of the sales growth in each category can be attributed to higher emergingmarket demand; segment operating margin also improved to 12.6% in the fourth quarter versus 12.1% in the prior year.

Personal-care operating margins were better than what we had expected in 2012 and were more in line with our medium-term assumptions. In late October, Kimberly-Clark KMB announced that it was giving up on its Western and Central European diaper operations (with the exception of Italy) to focus on emerging markets. As the third-largest baby diaper manufacturer in the region, behind Procter & Gamble PG and Kimberly-Clark, should have an opportunity to gain more shelf space with its brand-name baby diapers, in our opinion.

Sales in SCA’s tissue operations increased 16% compared with 2011 (excluding divestments). The acquisition of Georgia-Pacific’s European tissue operations, as well as additional investments in a Chilean hygiene company and a Chinese tissue company, accounted for approximately half of the annual sales growth. Compared with 2011, consumer tissue and away-from-home tissue sales grew 21% and 14%, respectively.

Full-year operating margins improved to 10.9% from 8.1% in 2011 and were slightly above our estimates; fourth-quarter margins expanded to 11.4% from 10.2% versus the prior year. We expect that tissue growth will remain robust in 2013, partially due to acquisitions, but also due to promising volume growth driven by emerging market demand.

Unsurprisingly, SCA’s forest product business continued to struggle in 2012. Declining publication paper deliveries were the main culprit, declining 6% on a year-over-year basis and 3% on a full-year basis (excluding divestments). Delivery volume for the other forest products–solid wood, kraftliner, and pulp–was all positive for the full year, though lower prices across product lines more than offset those gains. The European publication paper industry, especially newsprint, will remain in secular decline and continue to be a headwind for SCA. The company did take steps to reduce its newsprint exposure in 2012, having sold its 50% stake in a U.K. newsprint operation, with the aim of only maintaining its Sweden-based newsprint operations.

Volume growth in other areas of the forest product division was encouraging, particularly the 14% year-over-year growth in solid wood product deliveries. SCA ended 2012 with a gearing ratio of 55%, which is comfortably below its target of 70%.


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