SCA ANNUAL REPORT 2019 SCA ANNUAL REPORT 2019 INTRODUCTION Europe’s largest private forest owner SCA is Europe’s largest private forest owner with 2.6 million hectares of forest in Northern Sweden and 30,000 hectares in Estonia and Latvia. Based on this unique resource, SCA has developed an industry that generates the greatest possible value in and from the forest. 2.6 million hectares of forest land Pulp mill SCA ANNUAL REPORT 2019 SCA ANNUAL REPORT Sawmills Publication paper mills Kraftliner mills SCA’s forest holdings Estonia Latvia 2 Cover: SCA’s large forest holding is a unique asset that forms the basis for the company’s value chain. This is SCA Contents Introduction 3 This is SCA 4 The year at a glance Forest 6 President's message SCA owns a total of 2.6 million 8 Value chain hectares of forest in Northern 10 The green cycle Sweden, an area nearly the size of Belgium, and 30,000 hectares in 12 Forest and climate Estonia and Latvia. SCA’s unique 14 Vibrant local communities forest asset is a growing resource 16 Trends that provides access to high- quality forest raw materials while capturing a net of more than 10% Strategy and operations 18 Strategy of Sweden’s fossil CO2 emissions. 22 Forest Wood 28 Wood SCA is one of Europe’s leading 32 Pulp suppliers of wood-based products 36 Paper for the wood industry and building materials trade, with an annual pro- 42 Renewable energy duction capacity of 2.2 million m3 44 Logistics of solid-wood products. SCA has 46 Sustainable development five cost-efficient sawmills located 48 Fossil-free world close to its forest holdings in 50 Valuable forests Northern Sweden, as well as wood 52 More efficient use of resources processing and distribution to the building materials trade in Scandi- 54 Societal benefit navia, the UK and France. 56 The share and shareholders Pulp Board of Directors’ Report SCA produces market pulp at 58 Board of Directors’ Report Östrand pulp mill. The mill was 63 Sustainability reporting in accordance expanded in 2018 to double its with the Annual Accounts Act capacity. Östrand is now one of 64 Risks and risk management the most competitive production 69 Corporate governance facilities for bleached softwood 76 Presentation of the Board of Directors kraft pulp in the world. Together with chemical thermomechanical and Auditors pulp production, Östrand’s annual 78 Presentation of the Executive capacity amounts to 1 million Management Team tonnes. SCA’s pulp has high- strength properties, suitable for tissue and specialty paper. Financial statements and notes 80 Contents 82 Consolidated statements and notes Paper 124 Parent Company statements and notes SCA produces kraftliner – paper for corrugated transport packaging – and publication paper for maga- Sustainability facts zines, catalogs and commercial 134 Value creation print. SCA is Europe’s largest inde- 136 Governance and materiality pendent producer of kraftliner, with 138 About the Sustainability Report a total capacity of 865,000 tonnes 140 Strategic priorities and per year. Kraftliner is produced at the paper mills in Munksund, Piteå, sustainability targets and Obbola, Umeå. Publication 142 Ethics and values paper is produced at the Ortviken 145 Employees and the community paper mill in Sundsvall, with a ca- Renewable 147 Product development and innovation pacity of 775,000 tonnes per year. 148 Responsible forest management energy 149 Climate impact and climate benefits SCA is now one of Europe’s largest 151 Resource use and producers of forest-based bioener- environmental impact gy, with a total production of about 153 Social data 11.9 TWh per year. In Sweden, SCA 154 Environmental data has three pellets factories that have an annual production capacity of 300,000 tonnes. SCA leases out Other forest land for wind power produc- 156 Signatures tion. In 2019, 485 wind turbines 157 Auditor’s report were operating on SCA’s land with 160 Limited Assurance Report on the a total annual production capacity Sustainability Report of 4.4 TWh. SCA also develops products for the next-generation of 161 GRI Index biofuels and green chemicals. 163 Multi-year summary 164 Definitions and glossary 165 About the Annual General Meeting 3 166 SCA in the world INTRODUCTION The year at a glance Sales grew 4.5% while EBITDA increased 1%. Net sales SEKm 19,591 EBITDA EBITDA margin SEKm SCA ANNUAL REPORT 2019 SCA ANNUAL REPORT 5,319 27% Net debt / EBITDA Industrial return on capital employed 1.6x 12% Earnings per share Proposed dividend per share SEK 4.05 SEK 2.00 Financial information excluding the impact of the changed accounting method for the valuation of forest assets. The reported result can be found in the Consolidated statements and notes on page 82. 4 THE YEAR AT A GLANCE SCA grows seedlings for its own use and for other forest owners. The capacity is 100 million seedlings per year. Key figures Financial information excluding the impact of the changed accounting method for the valuation of forest assets. 2019 2018 SEKm SEKm Net sales 19,591 18,755 EBITDA 5,319 5,252 EBITDA margin 27.2% 28.0% Operating profit 3,703 4,002 Operating margin 18.9% 21.3% SCA ANNUAL REPORT 2019 SCA ANNUAL REPORT Profit for the period 2,847 3,659 Earnings per share, SEK 4.05 5.21 Proposed dividend per share, SEK 2.00 1.75 Operating cash flow 2,922 2,751 Strategic capital expenditures 1,256 1,967 Capital employed 77,107 46,082 Industrial return on capital employed 11.9% 20.1% Net debt/EBITDA 1.6x 1.3x Average number of employees 4,253 4,216 Accidents, LTA per million hours worked 7.4 9.1 Climate benefit, million tonnes of CO2 10.5 8.0 Net sales by geography Net sales by segment1) Sweden 14% Forest 26% UK 18% Wood 24% Germany 14% Pulp 16% France 6% Paper 34% Rest of Europe 29 % Asia 12% Rest of world 7% 1) Share of net sales before elimination of intra-Group sales 5 INTRODUCTION We generate value in and from the forest SCA continued to drive profitable growth in 2019. Our forest Growing forest resource holding increased in both volume and area. At the same time, SCA has never had so much forest. Forest is the unique asset we are strengthening the integrated value chain. The Östrand of SCA and the foundation of everything we do. We manage the pulp mill is being ramped up to optimal performance and SCA forests to maximize growth of renewable raw materials and a has taken its next major investment decision for a new paper new forest survey has shown that both the standing volume and machine in Obbola. growth is considerably higher than previously thought. Demand and market prices declined for all product areas. But We also aim to increase the area of forest land we own and despite a weaker market, both EBITDA and operating cash flow acquired forest in the Baltic states during the year. Our intention were higher than in 2018. is to continue acquiring forest when the conditions are right. I want to highlight the significant value of the forest in address- Value generated ing the greatest societal challenge of our time – climate change. Since starting operations in 2018, we have gradually ramped SCA’s operations generate considerable climate benefit as our up the Östrand pulp mill toward full production. The expansion well-managed forests bind carbon dioxide as they grow, and as of Östrand is an important investment for us and for Northern the renewable raw material produced can replace finite fossil Sweden. We are now where we want to be. The mill is in full products that leave a large carbon footprint. production with high pulp quality and a leading cost position. Our growing forest and renewable products mean that we can The investment in Östrand has enabled SCA to grow and to leave fossil carbon in the ground. generate value for shareholders, customers, suppliers and employees. The forest represents a significant capital value. Following re- cent major forest transactions, we are changing the accounting method. Taken together with the now larger standing volume, Profitable growth this means the value of our forest asset in the balance sheet In 2019, we decided on the next major step for continued profit- more than doubled. SCA ANNUAL REPORT 2019 SCA ANNUAL REPORT able growth. We will invest SEK 7.5bn in kraftliner production in Obbola in order to meet the demand for sustainable packaging. With the market’s most advanced kraftliner machine and the Vibrant local communities best available technology, we will substantially improve the mill’s SCA’s operations affect many people, particularly in Northern competitiveness. The project fits well into our strong integrated Sweden, where we have our forests and most of our industries value chain. and employees. The region’s forest owners sell timber to SCA every year. Contractors work in our forests, transport our timber, The kraftliner operations have delivered a strong cash flow sharpen our saw blades and train our employees. More than for SCA for many years. We anticipate that the investment will half of our cost base goes to recipients in Northern Sweden and already be profitable during the first year of operation and will helps to create a strong and vibrant region. make a positive contribution to our industrial return on capital. SCA’s forests also offer excellent opportunities for recreation. Thousands of people use our forests and particularly our forest Renewable energy roads for hunting, fishing, reindeer herding, nature tourism or to Our next main growth area is renewable energy and an exten- pick berries and mushrooms.