2,503 16,983 8 % 15 %

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1 Net sales and operating margin SEKm % 2, 15 16, 12 12, 9 8, 6 4, Net sales Margin Operating cash flow SEKm 3, 2,4 1,8 1, Operating profit and ROCE SEKm % 2,5 1 2, 8 1,5 6 1, Operating profit ROCE Share of Group Net sales, 15% Operating profit, 25% Capital employed, 3% Av. no. of employees, 8% Forest Products offers its customers magazine paper, newsprint, pulp, timber, solid-wood products, finished wood components for building construction and furniture manufacturing, customised wood products for the building trade, timber and biofuel. 16,983 2,53 15 % 8 % Sales, SEKm EBIT, SEKm EBIT margin ROCE 1) 1) Return on capital employed.

2 Board of Directors Report Forest Products Forest Products Market position SCA is the sixth largest publication papers manufacturer and one of the ten largest solidwood product manufacturers in Europe. SCA is Europe s largest private forest owner, with a holding of 2.6 million hectares of forest, of which 2. million is cultivated. Brands Product brands include Luna, a pulp grade with high absorption capacity, and Grapho- Verde, a high-quality magazine paper with more than 5% recycled fibre; and GraphoMax an uncoated publication paper grade based entirely on fresh fibre. The printing characteristics of GraphoMax are very impressive, making the paper grade ideal for advertising materials in particular. Innovation and product development Innovation is an integral part of SCA s strategy to shift its operations towards increasingly developed products in high-value segments and towards more attractive customer offerings. The properties of the company s publication papers are developed continuously, enabling the product to match a newspaper s or magazine s profile and message. In solid-wood products, SCA develops Visible wood, products for interiors and carpentry. Developed wood refers to products that are customised for the next stage in the processing chain and are supported by services and warehousing integrated into the customer s distribution and sales. Development programmes are not solely focused on products, but also involve the development of business models, service, distribution solutions and so forth. Much development work is conducted with customers in an effort to identify jointly beneficial solutions. Target A minimum of 11% return on capital employed over an economic cycle. Average no. of employees 4,172 (4,224) 1%. Production 12 facilities in 3 countries. Strategic priorities Implement rationalisation and efficiency enhancement to achieve higher profitability. Continue to shift towards increasingly developed products in high-quality segments in publication papers and solid-wood products. Continue to improve integration between forest and industrial operations. Utilise the commercial strength of SCA s leading position in the environmental area, its use of a renewable raw material and its recyclable products. Capitalise on the major potential for energy production and effective energy solutions available in the company s extensive holdings of forests and forestland and in the industry s processes and by-products. Strategy SCA has long commanded a position as one of Europe s most profitable producers of forest products based on its in-depth consumer and customer insight, high innovative ability, efficient production, high value-added products, integration with SCA s own wood raw material and a sustainability perspective at all levels. SCA specialises in the prime quality segments in magazine paper SC and LWC paper. These paper grades are used for magazines, catalogues and advanced printed advertising, which are all areas that offer favourable long-term global growth. This focus on quality segments is supported by the company s in-depth knowledge of pulp production, as well as its capacity for innovation and ability to select the right raw materials for specific pulp and paper grades. In the solid-wood products area, the strategy is to move towards more processed and customised products in markets that offer long-term growth. SCA s own raw materials, production and logistics expertise, and closer cooperation with customers, generate competitive advantages. SCA is a qualified supplier of purpose-designed wood products to industry for further processing into such items as panels, floors, windows, doors and furniture. Finished-wood components for window manufacturing, for example, represent another growth market. Products for the do-ityourself markets are delivered planed and prepackaged. Service and advanced logistics solutions are of key significance for the building materials trade. SCA works in close cooperation with its customers in its principal markets in Scandinavia, France and the UK. In the eastern US and Japan, SCA is a specialised supplier within several niche markets. Integration of SCA s own wood raw material is a key aspect of the company s strategy that contributes to stable cash flow and reliable supplies, and facilitates quality and cost control. SCA s forest holdings are becoming increasingly important as competition for timber raw material in northern Europe intensifies and demand for biomass from the energy sector grows. Having its own logistics is part of the company s integration strategy, with loading and unloading terminals in Sweden and on the continent and transports on environmentally sound vessels. SCA s forest assets are located in northern Sweden, where the Group has built up an efficient supply system for its own mills and sawmills. The company s forest holdings are managed on a very long-term basis. Intensive programmes aimed at enhancing profitability continue. Forest Products relatively strong position offers the potential to win market shares in a weak market. Long-term competitiveness is also favoured by access to the Group s own wood raw material and SCA s environmental profile. Innovation and product development will continue, with the focus on further processing, customisation in segments with favourable price trends and growth to gain higher profitability. Forest holdings, in-house energy supplies and the focus on biofuel make up the basis for continuing sustainability programmes. Efforts are continuing with a view to realising SCA s wind power venture via the agreement with the Norwegian energy company, Statkraft, in 27, which involves 45 wind turbines on SCA s land, offering a power capacity of 2,4 GWh annually. SCA Annual Report 29 35

3 Board of Directors Report Forest Products Market The European market for publication papers amounts to SEK 14bn. Magazine paper accounts for approximately 5%, while newsprint primarily makes up the remainder. In 29, demand for publication papers was very sluggish due to the financial crisis and the resulting decline in advertising expenditure. The European market for solid-wood products amounts to some SEK 11bn. All major European countries saw a reversal in house building in 29, which adversely impacted the market for solid-wood products. However, the renovation and extension market in which SCA s products are much in demand was not equally affected. Publication papers SCA s sales of publication papers are made primarily to the Western European market and to major publishers of newspapers and magazines. The market for publication papers was depressed in 29. Consumption declined by 14% for newsprint, 22% for LWC and 9% for SC paper. The expected, trend-based market growth was adjusted down as a result of more intense competition for public and advertising expenditures from electronic media. Magazine paper is still expected to show volume growth, however, primarily in Asia and South America, while the global newspaper market is anticipated to remain more stable, with a slight dip in Europe and North America. Publication papers definitions LWC paper Light Weight Coated A coated paper with a high mechanical pulp content. Used for high-quality magazines and advertising materials with demanding colour-printing requirements. SC paper SuperCalandered publication A paper with a high-gloss surface and a high content of mechanical and/or recycled pulp. Mainly used for catalogues, magazines and advertising materials. Newsprint A paper used for newspapers that is based on mechanical pulp from fresh wood fibre or recycled fibre. Publication papers, producers in Europe (capacity) UPM-Kymmene, 22% Stora Enso, 19% Norske Skog, 1% Myllykoski, 8% Holmen, 6% SCA, 6% Other, 29% Source: Pöyry The European publication papers market is highly consolidated. The five largest players have a market share of 8% or higher for most paper grades. SCA is the sixth largest publication papers manufacturer in Europe. SCA is the eighth largest among manufacturers of LWC paper and sixth among producers of SC paper and newsprint. Pulp, timber and solid-wood products Forest Products has a pulp capacity of 52, tonnes. Approximately 4% of this capacity is utilised within SCA for the production of tissue and publication papers. The remainder is sold to external customers. The pulp market is exposed to significant movements in volume and price due to intense international competition. SCA has positioned itself in the high-quality segment based on its excellent access to and expertise in unique long-fibred Nordic wood raw material. The European market for solid-wood products amounts to approximately SEK 11bn, with demand primarily deriving from the construction and house building industries, which are relatively cyclical. SCA has further developed its operations towards processed and customised, semi-finished products and components with high-value content and more balanced demand. SCA s sawmill operations are the seventh largest in Europe. The industry is dominated by many small and mid-sized sawmills. Combined, the five leading suppliers account for only about 2% of the European market. SCA is Europe s largest private forest owner with a total of 2.6 million hectares of forestland. 2 million hectares are used for wood production, of which about 5% has been set aside to preserve key natural values. The remainder consist of forests with a low industrial value. The company s forests are managed sustainably, which means that growth exceeds felling, and are managed to the highest standard for responsible silviculture according to the Forest Stewardship Council. In Sweden, SCA s industries capitalise on the high quality of the raw material from its own forests. In the southern UK, far from the forests but close to Europe s largest concentration of paper consumers, the jointly owned company Aylesford Newsprint uses 1% recovered paper in the production of newsprint. In Austria, close to the large forests of the alpine region and major population centres, SCA Laakirchen utilises fresh fibre from the forest and recovered fibre in the production of high-quality publication papers. SCA is also one of Europe s largest suppliers of forest biofuels, including branches, tops, roots, bark, sawdust, peat and such processed products as pellets and briquettes. SCA BioNorr supplies households and heating operations in Europe with pellets. This market is growing by more than 2% annually and continues to have excellent growth prospects. The company s market share in Sweden is approximately 6%. 36 SCA Annual Report 29

4 Board of Directors Report Forest Products Operations in 29 Key events Intensified streamlining and cost-cutting measures to achieve higher profitability. Start-up of a new trimming unit at the Tuna dal sawmill. Development of the supply chain to the building industry and building materials trade to gain market positions closer to customers and consumers. Start-up of new line for the production of mechanical pulp at the Ortviken paper mill. Decision made regarding a new lime kiln at the Östrand pulp mill. Official permission granted for the first of Statkraft-SCA Vind AB s wind farms in Sweden. progress in volumes of its environmentally friendly GraphoVerde SC paper. Despite a sluggish market for solid-wood products, SCA increased its shipments. SCA successfully exported substantial volumes of publication papers and solidwood products to markets outside Europe. The declining SEK exchange rate provided a competitive advantage for Swedish units. Operating profit rose by 13% to SEK 2,53m (2,27). The improvement was primarily attributable to higher sales prices for publication papers, in addition to lower costs for raw materials and energy, and continuing production improvements. Pulp operations and solid-wood products reported a fall in operating profit due to lower sales prices. Changes in exchange rates added 2% to operating profit. Capital expenditures totalled SEK 1,153m (1,426). A number of initiatives and projects were completed during the year in an effort to establish more robust market positions closer to customers, such as the development of the supply chain to the building industry and the building materials trade. Net sales rose by 2% to SEK 16,983m (16,71). Higher prices in publication papers operations added 4% to sales, while sales fell by 1% as a result of lower prices in pulp and solid-wood products. Lower volumes, especially for newsprint, reduced sales by 3%. Despite a challenging market, SCA increased its shipments of LWC paper from the preceding year, largely thanks to a favourable trend in export sales. While demand for standard grades declined, SCA enjoyed healthy Operating margin was 14.7% (13.2). Return on capital employed was 8% (7). Operating cash surplus amounted to SEK 3,233m (2,88), while operating cash flow rose to SEK 3,35m (1,697). The higher operating cash surplus combined with lower working capital and slightly lower current capital expenditures contributed to the improvement. SCA s sales by product segment SC paper, 21% LWC paper, 19% Newsprint, 17% Solid-wood products, 23% Pulp, 12% Timber, 8% SCA s sales by region Europe, 88% Asia, 8% North America, 2% Africa, 2% Key figures SEKm 29 Group share, % 1) 28 Net sales 16, ,71 of which internal 1,286 1,575 Operating cash surplus 3, ,88 Change in working capital Current capital expenditures Other changes in operating cash flow Operating cash flow 3, ,697 Operating profit 2, ,27 Operating margin, % Capital employed 31, ,964 ROCE, % 8 7 Strategic investments plant and equipment restructuring costs company acquisitions/ divestments 5 25 Average number of employees 4, ,224 1) Group share excludes items affecting comparability and other operations. SCA Annual Report 29 37

5 Essentials for keeping up-to-date Forest Products Net sales, 15% 1) Operating profit, 25% 1) Capital employed, 3% 1) Av. no. of employees, 8% 1) 16,71 Sales, SEKm 2,27 EBIT, SEKm 13 % EBIT margin 7 % ROCE 2) 67 % Capital expenditure 3) 2 % Working capital 4) Forest Products offers its customers magazine paper, newsprint, pulp, timber, solid-wood products, finished wood components for building construction and furniture manufacturing, customised wood products for the building trade, timber and biofuel. 1) Share of the Group. 2) Return on 3) Capital expenditures in 4) Working capital in capital employed. relation to depreciation. relation to net sales.

6 Board of Directors Report Forest Products Forest Products Sales: SEK 16,71m (18,744) 5%* Operating profit: SEK 2,27m (2,87) 23% Average no. of employees: 4,224 (4,92) +3% Production: 12 facilities in three countries Strategic priorities: Implement rationalisation and efficiency enhancements to achieve higher profitability Continue to shift towards increasingly developed products in high-quality segments within publication papers and solid-wood products Continue to improve integration between forest and industrial operations Utilise the commercial strength of SCA s leading position in the environmental area, its use of a renewable raw material and its recycleable products Target: A minimum of 11% return on capital employed over an economic cycle. Market position: SCA is the sixth largest publication papers manufacturer and one of the ten largest wood product manufacturers in Europe. SCA is Europe s largest private forest owner, with a holding of 2.6 million hectares of forest, of which 2. million in cultivated. Brands: New product brands include Luna, a newly developed pulp grade with high absorption capacity, and Grapho Verde, a high-quality magazine paper with more than 5% recycled fibre. Innovation and product development: Innovation is a key component of SCA s strategy to shift its operations towards increasingly developed products in high-value segments. The properties of the company s publication papers are developed continuously, enabling the product to match a newspaper s or magazine s profile and message. Within wood products, SCA develops Visible wood, products for interiors and carpentry. Developed wood refers to products that are customised for the next stage in the processing chain and are supported by services and warehousing integrated into the customer s distribution and sales. Production and business processes: SCA s top priority is the implementation of rationalisation programmes that also encompass distribution, reducing capital tied up in inventories, machines and flows, and reviewing administration, personnel requirements and purchasing. The operations are integrated in a self-controlled production chain from the company s forest operations to the sale of value-added products. The operations are governed and controlled through such actions as measuring delivery quality, customer and employee satisfaction, ISO certification and thirdparty certification of SCA s forest management and sustainability work. * Net sales for 27 include SCA s transport operations in the amount of SEK 1,22m. From 28, sales related to this business will be recognised as other income, which is why the percentage deviation given above does not include this sales amount. Strategy SCA has achieved a long-term position as one of Europe s most profitable producers of forest products based on its in-depth consumer and customer insight, innovative ability, efficient production, high value-added products, integration with SCA s own wood raw material and a sustainability perspective at all levels. SCA specialises in the prime quality segments within magazine paper: SC and LWC paper. These grades of paper are used for magazines, catalogues and advanced printed advertising, which are all areas that offer favourable long-term growth in the Western European market. This focus on quality segments is supported by the company s in-depth knowledge of pulp production, as well as its capacity for innovation and ability to select the right raw materials for specific pulp and paper grades. In the solid-wood products area, the strategy is to grow toward more processed and customised components in markets that offer long-term growth. SCA s own raw materials, production and logistics expertise, and closer cooperation with customers, generate competitive advantages. SCA is a qualified supplier to the house building, home furnishings and furniture industries for panels, floors, windows, doors and furniture. Another growing market is semi-industrial and industrial wood input materials, which are delivered as finished products in various lengths, dimensions and quality of selected raw materials. Products for the do-it-yourself market and the building materials trade are delivered planed and prepackaged. SCA works in close cooperation with its customers in its principal markets in Scandinavia, France and the UK. In the eastern US and Japan, SCA is a specialised supplier within a small number of segments in several niche markets. Integration of SCA s own wood raw material is a key aspect of the company s strategy that contributes to a stable cash flow and reliable supplies and facilitates quality and cost control. SCA s forest holding is becoming increasingly important as competition for timber raw material in northern Europe intensifies and demand for biomass from the energy sector grows. Having its own logistics is part of the company s integration strategy for its loading and unloading terminals in Sweden and on the continent and for transports on environmentally sound vessels. SCA s forest assets are located in northern Sweden, where the Group has built up an efficient supply system for its own mills and sawmills. The company s forest holdings are managed on a very long-term basis. Forest Products operations are primarily based on renewable energy, including residual products from felling. Self-generated process power is increasing continuously. SCA has decided to make a major investment in wind power in cooperation with the Norwegian company Statkraft. A total of 2,8 GWh of electricity annually is planned from wind farms on SCA s land in Sweden. SCA s sales by product segment SC paper, 18% LWC paper, 18% Newsprint, 17% Solid-wood products, 22% Timber, 14% Pulp, 11% SCA s sales by region Europe, 9% North America, 3% Asia, 5% Africa, 2% SCA Annual Report 28 29

7 Board of Directors Report Forest Products Market The European market for publication papers amounts to SEK 13bn. Magazine paper accounts for approximately 6%, while newsprint makes up the remainder. The newsprint market has a stable volume trend over the business cycle, while magazine paper is growing by approximately 2%. The European market for solid-wood products is valued at about SEK 13bn. In 28, a decline in housing construction was noted in all major European countries, which adversely impacted the market for solid-wood products. The number of building permits indicates a continued low level of activity and several sawmills have issued notice of termination of employment, while several plant closures are also in progress. Publication papers SCA sells publication papers in 4 countries. Its principal market is Western Europe and major publishers of newspapers and magazines. The demand trend is weaker for newspapers than for magazines, catalogues and advanced printed advertising matter, which are SCA s main business focus. The magazine market has a higher longterm growth rate and requires high paper grades to achieve an attractive appearance and long service life. Demand for publication papers is sensitive to fluctuations in the advertising market. The European advertising market gradually weakened during 28. The European publication papers market is highly consolidated. The five largest players have a market share of 8% or more for most paper grades. SCA is the sixth largest publication papers manufacturer in Europe. SCA is the seventh largest among manufacturers of LWC paper and fifth among producers of SC paper and newsprint. Publication papers definitions LWC paper Light Weight Coated A coated paper with a high mechanical pulp content. Used for high-quality magazines and advertising materials with demanding colour-printing requirements. SC paper Supercalendered publication A paper with a high-gloss surface and a high content of mechanical and/or recycled pulp. Mainly used for catalogues, magazines and advertising materials. Newsprint A paper used for newspapers that is based on mechanical pulp from fresh wood fibre or recycled fibre. Publication papers, producers in Europe (capacity) UPM-Kymmene, 23% Stora Enso, 2% Norske Skog, 12% Myllykoski, 1% Holmen, 7% SCA, 6% Other, 22% Source: Pöyry. Pulp, timber and solid-wood products Forest Products has a pulp capacity of 515, tonnes. Approximately 4% of this capacity is utilised within SCA for the production of tissue and publication papers. The remainder is sold to external customers. The pulp market is exposed to significant fluctuations in volume and price due to intense international competition. SCA has positioned itself in the high-quality segment based on its excellent access to and expertise in unique long-fibred Nordic wood raw material. The European market for solid-wood products amounts to approximately SEK 13bn, with demand primarily coming from the construction and house building industries, which are relatively cyclical. SCA has further developed its operations towards processed and customised semi-finished products and components with high-value content and more balanced demand. SCA s sawmill operations are the ninth largest in Europe. The industry is dominated by many small and mid-sized sawmills. The five leading suppliers combined account for only about 22% of the European market. SCA is Europe s largest private forest owner with a total of 2.6 million hectares. More than 75% of this holding is used for the company s own industrial operations, with approximately 5% set aside to preserve important natural value. The remainder comprises forests of low industrial value. The company s forests are managed sustain ably, which means that growth exceeds felling, and are managed to the highest standard according to the Forest Stewardship Council. In Sweden, SCA s industries capitalise on the high quality of the raw material from its own forests. In the southern UK, far from the forests but close to Europe s largest concentration of paper consumers, the jointly owned company Aylesford Newsprint uses 1% recovered paper in the production of newsprint. In Austria, close to the large forests of the alpine region and major population centers, SCA utilises fresh fibre from the forest and recovered fibre in the production of high-quality newsprint. SCA is also one of Europe s largest suppliers of forest biofuels, including branches, tops, roots, bark, sawdust, peat and such processed products as pellets and briquettes. SCA BioNorr supplies households and heating operations in Europe with pellets. This market is growing by more than 2% annually and continues to have excellent growth prospects. The company s market share in Sweden is approximately 1%. Source: Pöyry and Svebio 3 SCA Annual Report 28

8 Board of Directors Report Forest Products Operations in 28 Key events Intensified efficiency enhancement measures and cost-cutting measures to achieve higher profitability New facility in Munksund for window components Decision regarding investment in the sawmill in Tunadal Improvements made in the supply chain to the construction industry and the building materials trade to capture market positions in closer proximity to customers and consumers Net sales declined by 5% to SEK 16,71m (18,744), adjusted to reflect the fact that SCA s transport operations were reported as other income in 28. Sales for the publication papers business rose by 3% as a result of higher prices and volumes. The decline in demand for solidwood products accelerated as the recession took hold during the year and construction in Western Europe declined. Sales of solid-wood products fell by 19% on account of lower prices and volumes. The pulp market was also exposed to pressure as volumes declined and the price trend weakened. Operating profit declined by 23% to SEK 2,27m (2,87). Despite higher selling prices compared with the preceding year, profit generated by the publication papers business declined due to higher raw material and energy costs. Solid-wood products had a negative impact on profit due to lower selling prices and increased timber expenses. The operating profit generated by pulp operations was lower than the preceding year, at the same time as earnings from forest operations improved. This resulted in a lower operating margin of 13.2% (15.3). Efficiency enhancements and cost-cutting measures were prioritised on account of this decline in profit. Toward the latter part of the year, raw material and energy prices dropped from the exceptionally high levels that prevailed during the first six months of the year. Operating cash surplus amounted to SEK 2,88m (3,798) and operating cash flow to SEK 1,697m (2,249). The decline in operating cash flow was primarily related to a lower operating cash surplus. Capital expenditures amounted to SEK 1,426m (1,231). A new component facility was started up in Munksund, an investment that totalled SEK 93m. Production primarily comprises window components for a major customer and involves significant rationalisation and key steps to achieve a higher rate of refinement. Several initiatives and projects were implemented during the year to establish even stronger market positions in closer proximity to customers, including improvements made in the supply chain to the construction industry and the building materials trade. SCA also decided to make an investment totalling SEK 21m in the sawmill in Tunadal, where an automated sorting facility was installed. This investment will cut production costs and boost the production volume, while improving quality and increasing the output of finished products in relation to the amount of timber. The main markets are Scandinavia, the UK and France. The future The intensive efforts aimed at strengthening profitability continues. SCA Forest Products relatively strong position provides the company with opportunities to capture market shares in a weak market. Moreover, access to the company s own wood raw material and SCA s environmental profile promote long-term competitiveness. Innovation and product development will continue, with a focus on added value, customisation in segments with favourable price trends and growth to achieve a higher level of profitability. SCA s forest holding, own supply of energy and focus on biofuel form the basis of its continued sustainability work. Work aimed at implementing SCA s wind power investments also continues based on the agreement the Group signed with the Norwegian company Statkraft in 27. The goal is to construct wind power plants on SCA s land, with a capacity of 2,4 GWh of electricity annually for industrial operations in Sweden. Key figures SEKm 28 Group share, % 27 Net sales 16, ,744 of which internal 1,575 2,134 Operating cash surplus 2, ,798 Change in working capital Current capital expenditures ,73 Other changes in operating cash flow Operating cash flow 1, ,249 Operating profit 2, ,87 Operating margin, % Capital employed 3, ,649 ROCE, % 7 11 Strategic investments plant and equipment restructuring costs company acquisitions/ divestments Average number of employees 4, ,92 Net sales and operating margin SEKm 18 % Operating cash flow SEKm Operating profit and ROCE SEKm 12 % ,5 2, , 2, ,5 1, , 1, Net sales Operating margin Operating profit ROCE SCA Annual Report 28 31

9 Forest Products Keeping people up-to-date is one of the key tasks for paper. SCA produces publication papers and wood products that are continually developed to offer higher value-added. Our substantial forest holdings are a strategic asset and provide a base for sustainable development of our integrated industrial operations, everything from publication papers, pulp, sawmills and manufacture of finished wooden components to interiors and decoration in homes and the furniture industry. Always being up-to-date is our goal. Forest Products Production comprises publication papers, pulp and solidwood products. The business area also supplies the Group with raw material from SCA s own forests. Share of the Group Geographic presence Net sales 17% Operating profit 28% Capital employed 28% Average no. of employees 8% Sales primarily in Europe, but also in North America and Japan. Sales by segment Sales by region Deliveries Other 6% Pulp 8% Timber 15% SC paper 16% LWC paper 16% Asia 4% North America 5% Europe 91% Newsprint (tonnes) 567, 552, SC paper (tonnes) 52, 52, LWC paper (tonnes) 465, 48, Solid-wood products (m 3 ) 1,731, 1,653, Solid-wood products 24% Newsprint 15% 46 sca annual report 27

10 SCA Data Corporate governance Financial statements Board of Directors Report Introduction Keeping up-to-date sca annual report 27 47

11 Forest Products Strategy SCA is one of Europe s most profitable producers of forest products. Strengths include deep customer insight, efficient production facilities, integration with SCA s own forests, high value-added products and a sustainability perspective at every level. Forest Products consists of magazine paper, newsprint, pulp, timber, solid-wood products and biofuels. There are strong links between these segments in a value chain that makes optimal use of SCA s own wood raw material. SCA has the following strategic priorities for Forest Products: Continue to shift towards increasingly developed products in high-quality segments within publication papers, solid-wood products and pulp. Continue efficiency enhancements at the production facilities. Further develop the integration between the forest and the industrial operations. Exploit the commercial strength of the sustainability perspective and SCA s leading environmental positions. Focus on high-quality magazine paper SCA focuses on the prime quality segments within magazine paper, SC and LWC paper. These are used for magazines, catalogues and printed advertising, which are all areas with good growth. The properties of the paper are developed continually reflecting consumer demand and customer preferences so that it can express and become an integral part of a magazine s profile and message. One example of adjustment to increased environmental awareness is the recently developed SC paper Grapho Verde which contains more than 5% recycled fibre. The paper has excellent printability and strengthens SCA s leading position as regards economic use of resources and environmental initiatives. Quality development of pulp benefits from SCA being able to choose the right raw material for a specific pulp grade. The development of Luna, a pulp grade with high absorption, was successfully completed during the year. This product extends the application to include various packaging segments in the food sector with its stringent hygiene requirements. Value-added solid-wood products SCA is one of the ten largest manufacturers of solid-wood products in Europe and the shift continues towards increasingly processed and customized products focused on markets with good growth and leading customers. Raw material, production and logistics expertise as well as close cooperation with customers provide competitive advantages. Two terms clarify the strategy: visible wood and developed wood. Visible wood is products for interiors and joinery such as panels, floors, windows, doors and furniture. The customer base includes the house building sector, the home furnishings sector and the furniture industry. Developed wood is products that are prepared for the next stage in the processing chain in accordance with customer wishes and which meet the demands of customers customers. Main markets today are Scandinavia, France and the UK. SCA has a broad range of products and services in this segment with warehousing and sophisticated distribution to a large number of customers and building material distributors. In other countries, SCA is a specialized supplier within a limited number of market segments. In the eastern US deliveries mainly comprise products for the building materials trade, in Japan products for modular home manufacturers, and in Italy components for the window and furniture industries. Strategic raw material integration Integration of raw material is an important strategic cornerstone for Forest Products. The forest assets are located in northern Sweden where the Group has built up an effective supply system for its own mills and sawmills. Use of SCA s own wood raw material is optimized for sawmills, pulp mills, paper production and for biofuels. This enables the wood raw material to be processed in an optimum manner and means that production is highly cost effective. Transport is also a key part of this integrated model. SCA has its own organization for developing and improving distribution and transport in an environmentally sound manner. Among other things, large volumes of publication papers are transported on environmentally approved ships. Control of its own wood raw material is a key part of the Group s long-term strategy. It provides a stable cash flow, reliable supplies and facilitates quality and cost control. This is becoming increasingly important with intensified competition for timber raw material in northern Europe and rising demand for biomass from the energy sector, which confirms the value of the Group s long-term sustainability strategies. SCA s forest holdings total 2.6 million hectares, of which 2. million hectares is productive. The forest is managed on a long-term basis and provides the base of SCA s raw material integration. Residual products from felling, such as branches and tops, are being used increasingly for production of renewable energy. A pilot project is also under way using stumps as an energy raw material. Renewable energy Operations are mainly based on renewable energy. Self-generated process power is increasing all the time. During the year a decision was made for a major investment in wind power totalling 2,8 GWh for electricity for the industrial operations in Sweden in cooperation with the Norwegian company Statkraft. This and similar investments in renewable energy are essential for the long-term development of the industrial operations. Continual improvements Forest Products has continuously improved its productivity over a number of years. The industrial facilities are large, competitive units that are well-invested with modern technology. Further investments were made during the year both for production of solid-wood products and publication papers. SCA s own raw material supply provides flexibility and the ability to overcome and lessen the impact of external disruptions such as a decline in supplies or major price fluctuations. This provides a basis for consistent quality and high productivity. 48 sca annual report 27

12 Performance and challenges 27 Global growth continued and pushed up demand within most product and market areas. Sales and earnings rose mainly due to higher volumes for solid-wood products and pulp. An already high margin strengthened. During the year the forest assets were revalued and decisions were made for significant investments to meet future challenges. Market, sales and earnings Demand for publication papers remained strong in Europe due to a high level of economic activity and a favourable advertising market. SCA s production was close to the capacity limit. Weaker demand in the US and a falling dollar reduced profitability for exported paper and volumes were moved from the US to the European market. This led to price pressure in some segments. Towards the end of the year prices improved, however, as a result of structural adjustments and continued high demand. Development within solid-wood products was very strong in the first part of the year. Prices rose sharply and demand was very high. Russian export duties on wood raw material supported the high prices while effects from storm-felled timber in recent years abated. The higher market prices meant that supplies of solid-wood products increased substantially and towards year-end some weakening of the favourable price trend was noted. The pulp market was also well balanced during the year due to strong global demand which allowed prices to be raised. As a consequence of higher timber prices, the value of SCA s forest assets was increased by SEK 5,173m (for more information, see Note 14 on page 88). Future focus SCA has a long-term competitive advantage due to control over its own raw material, good access to renewable energy and a growing market preference for products manufactured with a sustainability perspective. These conditions provide a strong platform for future development. During the year a decision was made together with the Norwegian company Statkraft to form a joint venture for major investments in wind power in Sweden on SCA s land. At the same time, SCA signed an agreement with Statkraft for electricity supplies for the Group s Swedish forest product operations. This agreement also enabled a decision to invest in increased capacity of mechanical pulp at Ortviken paper mill in Sweden. The investment will increase capacity for pulp for LWC paper and newsprint. In solid-wood products a number of investments and measures were carried out to improve production and profitability. Severn Timber in Wales was acquired during the year, a company that processes and distributes sol- id-wood products to the British building materials trade. This acquisition is in line with SCA s strategy to expand in profitable and growing segments. Good logistics and an effective transport network are a significant part of work with continual improvements. During the year investments were decided to expand and improve the efficiency of the two largest freight hubs in Sundsvall, Sweden and Rotterdam, the Netherlands. High productivity with lodgepole pine Large-scale felling of the first generation of lodgepole pines (pinus contorta), which started in 26, continued successfully in 27. This pine is about 4% more productive than Swedish pine. SCA started planting lodgepole pines on a large scale at the beginning of the 197s. Experiences from both its biological and industrial performance are good. This investment is a key part of SCA s long-term raw material strategy and continued integration of competence within the forestry and industrial operations. SCA Data Corporate governance Financial statements Board of Directors Report Introduction Net sales and operating profit Operating cash flow Key figures SEKm 27 Group share % 26 Net sales 18, ,651 of which internal 2,134 2,4 SEKm 2, 15, 1, 5, Net sales Operating profit SEKm 27 4, 3, 2, 1, 3, SEKm 2,5 2, 1,5 1, Operating cash surplus 3, ,588 Change in working capital Current capital expenditures 1, Other changes in operating cash flow Operating cash flow 2, ,549 Operating profit 2, ,475 Operating margin, % Capital employed 26, ,682 Return, % 11 1 Strategic investments plant and equipment restructuring costs company acquisitions Average number of employees 4,92 8 4,148 sca annual report 27 49

13 5 sca annual report 27

14 Market Publication papers The European market for publication papers amounts to SEK 13bn. Newsprint accounts for almost 4% with other coated and uncoated publication papers making up the remainder. The magazine paper market is growing by about 3% per year, while annual growth in the newsprint market is slower at approximately 1%. Publication papers, producers in Europe (capacity) UPM-Kymmene Stora Enso Norske skog Myllykoski Holmen SCA Burgo-Marchi Group M-real Palm Leipa ktonnes 2, 4, 6, 8, The European publication papers market is characterized by high consolidation and the five largest players have a market share of 8% or more for most paper grades. SCA is the sixth largest publication papers manufacturer in Europe. Among manufacturers of LWC paper, SCA is seventh in size and fifth among producers of SC paper and newsprint. Consolidation of the publication papers market in Europe % Newsprint LWC paper SC paper Publication paper definitions LWC paper Light Weight Coated A coated paper with a high mechanical pulp content. Used for high quality magazines and advertising materials with demanding colour-printing requirements. SC paper Supercalendered publication A paper with a high-gloss surface and with a high content of mechanical and/or recycled pulp. Mainly used for catalogues, magazines and advertising materials. Newsprint A paper used for newspapers that is based on mechanical pulp from fresh wood fibre or recycled fibre. SCA Data Corporate governance Financial statements Board of Directors Report Introduction SCA is not one of the major players in the market, but focuses on product quality and cost-effective production. The graph shows market shares for the five biggest players in Western Europe. Market Pulp, Timber and Solid-wood products The world market for bleached softwood sulphate pulp amounts to SEK 82bn. The largest customers are non-integrated manufacturers of fine paper, publication papers and tissue. The European market for solid-wood products amounts to approximately SEK 18bn. The industry is dominated by a large number of small and medium-sized sawmills and the five leading suppliers combined only account for about 2% of the European market. SCA s sawmill operations hold strong positions in growing market segments and SCA is the eight-largest manufacturer in Europe. SCA is Europe s largest private forest owner with a total of 2.6 million hectares, of which 2. million hectares are used for timber production. sca annual report 27 51

15 Forest Products Share of the Group Geographical presence The products produced are publication papers, pulp and solid-wood products. This business area supplies the Group with raw material from SCA s own forests and is responsible for some of the Group s transport and logistics solutions. Net sales 17% Operating profit 28% Capital employed 27% Average no. of employees 8% Most of the sales are in Europe, but the products are also sold in North America and Japan. 34 SCA 26

16 Forest Products Forests mean growth. SCA is growing thanks to more value-added products, greater efficiency and operational integration. Our leading position is based on sustainable development. Sales by product segment Sales by region Deliveries Other 7% Pulp 7% Timber 13% Solid-wood products 22% SC paper 18% LWC paper 17% Newsprint 16% Asia 4% North America 5% Europe 91% Newsprint (tonnes) 552, 567, SC paper (tonnes) 482, 52, LWC paper (tonnes) 429, 465, Solid-wood products (m 3 ) 1,539, 1,731, Half of the sales within Forest Products are publication papers. Other segments are pulp, timber, solidwood products and logistics. Most of the sales are in Europe. Solid-wood products and magazine paper are also exported to other parts of the world. SCA 26 35

17 Forest Products Strategy SCA is one of Europe s most profitable producers of forest products. Strengths include efficient mills, integration with SCA s own forests and high value-added products. Forest Products consists of newsprint, SC paper and LWC paper, pulp, timber, solid-wood products and logistics. There are strong links between the different segments in a value chain based on optimal utilization of SCA s own forest land. In the coming year SCA will work with the following strategic priorities: A gradual shift towards increasingly developed products in high-quality segments within both publication papers and solid-wood products Market SCA s leading position in the environmental area Continue to make existing industrial facilities more efficient Further develop integration between the forest and the industrial operations Focus on magazine paper SCA s strategy is to gradually shift the balance towards high-quality magazine paper segments, such as SC and LWC paper. Magazine paper is used for magazines, catalogues and printed advertising, which are all areas with good growth. Product development is focused, among other things, on improving the paper s properties so that it can express and become an integral part of a magazine s profile and message. SCA has, for example, developed a successful SC paper grade with very good printability. The same strategic focus applies to pulp production. Pulp grades based on the unique properties of Nordic fibres are being further developed to make them more competitive. Value-added solid-wood products In the solid-wood product segment a strategic shift is also under way towards increasingly processed and customized products. Two terms explain the strategy; visible wood and developed wood. Visible wood is products for interiors and decoration, such as panels, floors, window frames, doors and furniture. Customers are found in areas such as small-scale building sector and the interior fittings and furniture industries. Developed wood refers to products that are adapted according to customer wishes and requirements for the next stage in the processing chain. This includes products for the DIY market that are packaged and ready to place on the shelf at the retail outlet. One example is SCA s large-scale deliveries to the Home Depot, the biggest seller of wood products in the USA. Strategic forest assets Having control of the Group s own wood raw materials is an important aspect of the Group s long-term strategy. It provides a stable cash flow, a reliable supply source and facilitates quality and cost control. The forest assets are located in the north of Sweden where the Group has built up an effective supply system for its paper mills and sawmills. Environmentally certified forestry and control of the timber s origins make it possible to offer customers products with a high environmental profile. The forest assets amount to 2.6 million hectares, of which 2. million are used for wood production. The residual products from felling, such as branches and tops, are being used increasingly as biofuel. Constant improvements Productivity within the Forest Products business area has been improving for a number of years. The industrial facilities are large and competitive and there has been considerable investment in modern technology. Having its own raw material supply allows for flexibility and the ability to overcome and lessen the impact of external factors such as a decline in supply or major price fluctuations. It also provides a basis for consistent quality and high productivity. SCA s own energy production from biofuel and co-generation reduces dependence on external energy. Excellent industrial facilities and constant improvements helps the business area maintain good profitability despite the relatively small market shares for the end-products. 36 SCA 26

18 Forest Products The past year Key ratios Group SEKm 26 share % 25 Net sales 17, ,935 of which internal 2,4 1,846 Operating cash surplus 3, ,961 Change in working capital Current capital expenditures ,377 Other change in operating cash flow Operating cash flow 2, ,595 Operating profit 2, ,886 Operating margin, % Capital employed 25, ,384 Return, % 1 7 Strategic investments plant and equipment restructuring costs company acquisitions Average number of employees 4, ,53 Net sales and operating profit SEKm 2, 15, 1, 5, Net sales Operating profit Operating cash flow SEKm 3, 2,5 2, 1,5 1, SEKm 4, , 2, 1, Demand for products from this business area improved gradually during the year, which provided the basis for price increases and higher margins. SCA reached record high production volumes in all product segments. Net sales for the Publication papers segment increased by 12% to SEK 8,93m and for Pulp, Timber and Solid-wood products, net sales increased by 1% to SEK 8,721m. The operating profit within the Publication Papers segment increased by 24% to SEK 818million. The operating profit within the Pulp, Timber and Solid-wood products segment increased by 35% to SEK 1,657m. Demand for publication papers increased on most markets thanks to good advertising activity. The trend was particularly strong in newsprint and SC paper. The market balance in SC paper improved despite the addition of new capacity. The LWC market also improved, albeit at a slower pace. The solid-wood products market improved radically during the year thanks to the construction boom in Europe. The pulp market was well balanced in 26 due to strong global demand, which enabled prices to be increased. The improved market situation and price increases resulted in better earnings and profitability for this business area, despite rising energy costs and negative currency effects towards the end of the year. New recovery boiler In 26 a new recovery boiler was put into operation at the Östrand pulp mill in Sweden, involving a total investment of SEK 1.6bn. The launch of the new boiler was successful and resulted in an increase in energy production, making Östrand self-sufficient and also periodically a net seller of electricity. Lodgepole pine SCA began cultivating the fast-growing lodgepole pine (pinus contorta) in the 197s to increase the felling potential of the forest assets. This type of pine grows 4% faster than Swedish pine. In 26 SCA carried out a relatively large-scale felling of the first generation of lodgepole pine. The lodgepole pine has equalled or surpassed expectations, both in terms of growth and the quality of the timber. This successful investment demonstrates the benefits of SCA s longterm perspective in forestry. New sawmill cooperation In 26 SCA acquired a minority share of Jämtlamell s sawmill in Stugun, Sweden. Production at the sawmill amounts to around 15, cubic metres and was coordinated with SCA s seven other sawmills in 26. The new turbine in the Östrand pulp mill generates.5 TWh electricity per year and will improve SCA s engery balance. SCA 26 37

19 38 SCA 26

20 Forest Products Market Publication papers The European publication papers market amounts to SEK 125bn. Newsprint accounts for around 35% and other coated and uncoated publication papers makes up the remainder. The magazine paper market is growing by 3 4% per year, while the newsprint market is growing at a slower pace, 1 2% per year. The European publication papers market is characterized by a high level of consolidation, and the five largest players have a market share of 8% or higher for most publication paper grades. SCA is the sixth largest publication papers manufacturer in Europe. Among manufacturers of LWC paper, SCA is seventh in size and fifth among manufacturers of SC paper and newsprint. Publication papers, producers in Europe (capacity) ktonnes UPM Stora Enso Norske skog Myllykoski Holmen SCA Burgo-Marchi Group M-real Palm Leipa 2, 4, 6, 8, SCA is not one of the biggest players in the market, but is focusing on product quality and cost-efficient production. Consolidation of the publication papers market in Europe % 1 Publication paper definitions LWC paper Light Weight Coated paper A coated paper with a high mechanical pulp content. Used for high quality magazines and advertising materials with demanding color-printing requirements. SC paper Supercalendered publication paper A paper with a high-gloss surface and with a high content of mechanical and/or recycled pulp. Mainly used for catalogues, magazines and advertising materials. Newsprint A paper used for newspapers that is based on mechanical pulp from fresh wood fibre or recycled fibre Newsprint LWC paper SC paper The graph shows the five biggest players market share in Western Europe. Forest Products Market Pulp, Timber and Solid-wood products The world market for bleached softwood sulphate pulp amounts to around SEK 75bn. The largest customers are non-integrated manufacturers of fine paper, publication papers and tissue. The European market for solid-wood products amounts to around SEK 14bn. The industry is dominated by numerous small and medium-sized sawmills and the five leading suppliers combined have only around 2% of the European market. SCA s sawmill operations hold strong positions in growing market segments and SCA is the sixth largest manufacturer in Europe. SCA is Europe s biggest private forest owner with a total of 2.6 million hectares of forest, of which 2. million hectares are used for wood production. SCA 26 39

21 Forest Products Strong perform despite de Strong cash flow and earnings, particularly from the publication papers business. Group Key ratios (SEK M) 21 share % 2 Net sales 13, ,876 of which, intra-group 1,958 1,899 Operating cash surplus 4, ,759 Change in working capital Current capital expenditures, net Other operating cash fl ow changes Operating cash fl ow 3, ,153 Operating profi t 2, ,72 Operating margin (%) Capital employed 13, ,331 Return (%) 2 2 Strategic investments plants restructuring expenses 13 2 company acquisitions Average no. of employees 3,68 9 3,658 Net sales, Av. no. of Net sales and SEK M employees number of employees * Publication papers 7,85 7,243 1,843 of which, intra-group 86 Pulp, timber and solid wood products 7,29 7,227 1,519 of which, intra-group 1,53 1,58 Total 13,556 12,876 3,362 * Excluding staff functions. Change, Produced volumes, tons 21 2 % Newsprint* 539, 543, 1 SC paper 327, 322, 2 LWC paper 382, 421, 9 * Including SCA s share in Aylesford Newsprint Ltd (5%). Change, Deliveries, tons 21 2 % Newsprint* 524, 546, 4 SC paper 322, 322, LWC paper 374, 425, 12 * Including SCA s share in Aylesford Newsprint Ltd (5%). Change, Solid wood products 21 2 % Produced volume, m 3 651, 654, Deliveries, m 3 656, 647, 1 Wood consumption and fellings, million m 3 fub 21 2 Consumption SCA s Swedish units Fellings on own forestland as a % of wood consumption Production capacities shown on page 79.

22 ance clining market Demand for newsprint was strong in early 21, but the weakening economy also reduced advertising and consequently demand for newsprint, however, from a high level. NET SALES AND OPERATING PROFIT OPERATING CASH FLOW KEY MARKET SHARES SEK M 15, SEK M 3, SEK M 3,5 % 12,5 1, 7,5 2,5 2, 1,5 3, 2,5 2, 1,5 Newsprint, Western Europe 7 SC paper, Western Europe 8 LWC paper, Western Europe 5 Total publication papers, Western Europe 6 5, 1, 1, 2, Net sales, SEK M Operating profit, SEK M Operating profi t rose 9% to SEK 2,976 M. Operating cash fl ow remained strong and amounted to SEK 3,11 M. 29

23 F OREST PRODUCTS / SCA ANNUAL REPORT 21 Forest Products produces and sells publication papers, pulp and solid wood products, supplies SCA s Swedish units with wood raw materials and is responsible for the Group s transport and logistics. The operations cover the entire chain, from raw material to the end-product at the customer. SCA s forest holdings secure the supply of raw materials to its industries in northern Sweden, which in turn supply SCA s packaging and hygiene products operations with liner and pulp, respectively. SCA s production of publication paper in Sweden is supplemented by the operations in Laakirchen in Austria and the partlyowned Aylesford mill in the UK. Combined, these units have a volume and breadth of product range that make SCA a competitive producer of publication papers. As a result of consolidation among customers, a paper producer must be able to meet demands for volume and product range. SCA s forest products focus on the highest quality segments of their respective areas, and these operations form the backbone of the SCA Group s fiber-related expertise. They are also a major generator of cash flow, from both the publication papers business and the forest business, the latter having generated an average of SEK 7 M a year over the past ten years. The year began with strong demand for all publication paper grades and favorable prices. During the year, the market was affected by a decline in the economy and reduced advertising. However, overall, Forest Products operating profit rose 9% to SEK 2,976 M. Strategic investments In Laakirchen, work continues on a new paper machine. The investment is in line with schedule and budget, and the new machine will be placed in operation in June 22. The new machine will increase capacity by 15, tons of SC paper a year, particularly SC paper for offset printing in the higher quality segment. This will make SCA s total range of publication papers more complete, and the level of service to the large publishing companies that form the most important customer category can be increased. The coating plant at the Ortviken paper mill was modernized, which improved the quality of the LWC paper produced, and the drying capacity was increased at the Östrand pulp plant, which improved internal pulp supply. In 2, SCA and Graninge AB joined forces to form the Scaninge Timber forest and sawmill company. Combined, SCA and the part-owned company Scaninge form Sweden s largest sawmill group, with the potential to become a leading player in the European market for solid wood products. PUBLICATION PAPERS Market The market for publication papers in Europe is valued at slightly more than SEK 1 billion. Newsprint accounts for approximately 4%, while other uncoated and coated publication papers account for the remainder. The customers are publishing houses with their own printing plants, which are often combined with external printing, and printing plants that work solely with external assignments. The general trend is that the publishing houses are increasingly outsourcing printing to external suppliers. Magazines and daily newspapers depend on advertising revenues. The volume of advertising is linked strongly to the state of the economy. The publication paper market in Europe is well consolidated. The five largest companies account for 82% of deliveries. A significant step toward further consolidation was taken when UPM-Kymmene and Norske Skog 3

24 For magazine paper grades LWC and SC paper SCA focuses mainly on publishing houses and magazine printers. Publishers often want a high and specific quality of paper for a certain magazine, which strengthens the bond between supplier and customer. SCA s PRODUCT PORTFOLIO PUBLICATION PAPERS COMPETITORS EUROPE GLOBAL CONSOLIDATION OF PUBLICATION PAPER MARKET Other 7% Newsprint 21% Thousand tons UPM- Kymmene Stora Enso % Pulp12% Timber 15% LWC paper 2% Norske Skog M-real/ Myllykoski Holmen SCA Burgo Solid wood products 9% SC paper 16% Palm Bridgewater SAPPI Newsprint LWC paper SC paper Publication paper accounts for 57% of Forest Products sales. SCA is not among the largest players in publication papers, but focuses on product quality, cost-efficient production and effi cient logistics. Figures show the companies capacity in Europe. The diagram shows the market shares of the fi ve largest players. Consolidation is more extensive in Europe than in North America and Asia. 31

25 F OREST PRODUCTS / SCA ANNUAL REPORT 21 purchased the German publication papers company, Haindl. A distinct trend in recent years is that capacity additions reflect market growth to a greater extent than previously. At the beginning of the year, the market for publication papers was strong. However, the market for coated publication paper, LWC, showed early signs of weakening as a result of the decline in advertising. Demand for newsprint was very high at the beginning of the year, but subsided during the second half due to the slump in the economy and reduced advertising. While demand for SC papers remained stable during the year, the market was affected to some extent by the depressed market for related products such as LWC. SCA s strategy and market position SCA concentrates mainly on magazine and newspaper publishers, preferably in Europe, with high demands on product quality and delivery reliability. In many instances, the publisher requests a paper grade that is adapted for the specific publication, which strengthens the bond between supplier and customer. SCA focuses on production efficiency and high quality, rather than on market share. This strategy has made SCA one of the most profitable suppliers of publication papers in Europe. SCA s product development is oriented toward meeting the specific demands of different categories of customers. Development work is conducted in cooperation with customers, as well as with manufacturers of printing presses, printing ink and other key components of the printing process. SCA regularly launches of new, improved publication paper products. Over a succession of years, the Ortviken paper mill has succeeded in improving its productivity and increasing its production, without any significant investment. In the UK, Aylesford Newsprint produces newsprint from 1% recovered paper. SCA continued to develop the system for Internet-based business communications used by the leading paper manufacturers and publishing houses, that provides direct and secure computer-to-computer communications with the customer. BRIEF FACTS, PUBLICATION PAPERS 21 2 Net sales, SEK M 7,85 7,157 Operating surplus, SEK M 2,585 2,62 Operating profi t, SEK M 1,818 1,348 Gross margin, % Operating margin, % Deliveries, tons 1,22 1,293 Average no. of employees 1,843 1,823 PULP, TIMBER AND SOLID WOOD PRODUCTS Market The market for bleached softwood kraft pulp (NBSK) in Western Europe amounts to 5.6 million tons, while the corresponding figure for bleached hardwood kraft pulp (NBHK) is 2.3 million tons. The largest customers are non-integrated producers of paper and hygiene products. Volumes delivered between continents are sufficiently large that price differences in different regions quickly disappear. The year 21 was marked by weak demand for kraft pulp and price pressure. Among other factors, this was primarily an effect of the weak demand among producers of fine papers, which comprise the largest pulp-customer group in terms of volume. The Western European market for solid wood products amounts to slightly more than SEK 1 billion, or 75 million cubic meters, annually. Consumption during 21 declined slightly but as a result of lower supply, due mainly to production curtailments by major Finnish producers, the supply and demand balance improved somewhat. The European sawmill industry is dominated by a large number of small and midsize mills. Combined, the five largest account for about 2% of the market. Despite demand historically being relatively favorable, prices and profitability have been restrained by high production and large supply. Major customer groups are woodprocessing companies and joineries as well as building-product wholesalers and building-supply centers that demand increased adaptation and product specialization. Competition from such alternative construction and joinery materials as plastics and steel is severe. However, in certain markets, such as the Nordic countries and Japan, the percentage of wood used in the construction sector is increasing at the expense of steel and concrete. SCA s strategy and market position The chain leading from the forest, via the sawmill and pulp manufacture, to publication papers offers considerable opportunities to take advantage of synergies. SCA s vast forest holdings generate raw material that is suitable, to varying degrees, for wood, pulp and paper products. The sawmills generate significant amounts of pulp feedstock, and the pulp is a key ingredient in paper manufacture. SCA produces totally chlorine-free (TCF) bleached kraft pulp at one plant, the Östrand pulp plant. A large amount of the plant s production is used for SCA s own manufacturing of publication papers and hygiene products. Product development at Östrand has focused on adapting the pulp grades produced to the finished products for which they are intended as closely as possible. Östrand is a cost-efficient plant: despite price pressure during the year, Östrand reported a positive operating profit every month of the year. In 21, SCA continued to develop its sawmill business. The Nordic countries and the rest of Western Europe, together with Japan, are SCA s principal markets for solid wood products. SCA s production focuses mainly on visible wood, that is, wood products for the manufacture of furniture, joinery products, panel and other interior furnishings and fixtures. 32

26 An increasing portion of production, 53% (43), consists of products that are directly adapted for further processing for a specific product made by a specific customer. The newly built Munksund sawmill, which continues to develop its product program and productivity, appears to be one of Sweden s most successful sawmill projects. A system of subcontractors and wood-processing companies is forming around the Munksund sawmill, using Munksund as a base from which to develop refined products and components for niche markets. The Tunadal sawmill continued to develop its production and productivity. Scaninge has developed a business with the world s largest purchaser of solid wood products, Home Depot, whereby Scaninge is responsible for furnishing a continuous supply of certain products to Home Depot outlets. Combined, SCA and Scaninge possess the resources to further develop this type of business relationship. The coordination of SCA s and Scaninge s forest management activities and timber supply further strengthened SCA s ability to cost-effectively maintain raw material supply to Scaninge and the Group s industries in northern Sweden. Rationalization and efficiency improvements in felling and silviculture continue to hold costs at a low level. The cost for felling a cubic meter of timber today is at the same level as at the end of the 197s, calculated in current prices. SCA s transport and logistics operations continued to develop favorably. System shipments of SCA Transforest increased to a level where the systems three vessels, which were specially built to efficiently ship SCA s products, could no longer meet the capacity requirements. All vessels were therefore extended, increasing their transport capacity by 17% or 12, tons a year and reducing their fuel consumption in absolute terms. This resulted in a considerable reduction in transport cost per ton, and a significant environmental improvement in that emissions per ton of seaborne product have been reduced, and much of the cargo that would have been shipped by truck can now be accommodated on the ships. BRIEF FACTS, PULP, TIMBER AND SOLID WOOD PRODUCTS 21 2 Net sales, SEK M 5,76 5,719 Operating surplus, SEK M 1,526 1,696 Operating profi t, SEK M 1,158 1,372 Gross margin, % 27 3 Operating margin, % 2 24 Deliveries, solid wood products, km Average no. of employees 1,519 1,519 SCA s production of solid wood products focuses mainly on visible wood. 33