Solutions! Company of the Year: SCA: SCA demonstrates that a clear strategy and rigorous financial objectives can produce a steady stream of positive results.

In an era when pulp and paper markets are in the doldrums, employees are nervous about their futures, the general public is still largely negative about the industry's environmental record, and investors are scrutinizing corporate managers for any sign of corporate malfeasance, it is reassuring to know that companies like SCA exist.

By just about any measure, it could be argued that SCA-or Svenska Cellulose Aktiebolaget to give the company its proper name-is a prime example of what the pulp and paper industry can do when it combines clear corporate objectives with a respect for its customers and other stakeholders that the group interacts with around the globe. Not only that, but the company even manages to turn in a decent profit year after year.

Today, the Swedish group is headed by president and CEO Jan Astrom. But it is probably fair to say that the torch borne by Astrom is one that he helped develop and refine as deputy to the previous CEO and now company chairman, Sverker Martin-Lof. It has been a long journey, but SCA recognized some time ago that the group needed to consolidate its product focus if it was going to be around for the long term and remain profitable. As such, the company opted to concentrate its efforts very much on hygiene and packaging, seeking to establish strong brands and positions at the top end of the product range.

The group also set about defining in very clear detail how it would choose which opportunities it would be willing to take up and what returns are expected for any investment. In tact, underlining the group's attitude to open corporate governance, anyone with access to the Internet can look on SCA's web site and see exactly how its value model works, as well as finding a vast array of information on everything from executive bonus schemes to corporate strategy and how the group's share price compares with its competitors.

As Astrom pointed out in an interview with Solutions!, "The target setting we do is very important and the goals remain very much the same as they have been since the 1990s: grow the hygiene and packaging businesses in a way that is profitable for the company. What we do is to look at where the opportunities lie right in the beginning at the planning stage and then we plan how we're going to meet those opportunities. But the long term goal is still the same and we're always moving in the same direction."

ITALIAN ADVENTURE

In a major coup for its long-term strategic plan, SCA acquired the large Italian tissue group CartoInvest last year. "For a while we had been seeking an opening in the Italian market and that's been a key part in extending our European coverage, filling the gaps in our coverage and widening our portfolio. With the CartoInvest acquisition we've certainly done that with the private label business and we've greatly strengthened our marketing expertise in those areas."

The move clearly stamped SCA's presence among the top ranking players in the hygiene business alongside Procter & Gamble and Kimberly-Clark. But, while the company has secured a major spot in Europe's consumer hygiene market, the group's ambitions do not end there. SCA has set itself a target of t 8%-10% of "profitable" growth each year. Some 3% or so of that total is expected to come in the form of organic growth within the group, but to meet its target the remainder will have to be delivered via acquisitions.

Some commentators have noted that the group could now find it difficult to expand in Europe in the wake of the CartoInvest deal, given competition concerns, but SCA sees few problems in identifying opportunities for the future.

As Astrom explained, "If you divide it into business segments, it is clear that in consumer tissue we can no longer make any pan-European deals, but that is only one area of our business. We can certainly still grow in Europe in the away-from-home (AFH) tissue area as there are practically no restrictions there, and in southern Europe especially we see a lot of opportunities on the packaging side. We have also established a bridgehead in the United States on which we can build for the future, and in the quality protective packaging business we've also made big moves in the United States with some smaller acquisitions to help consolidate that sector further."

Underlining the group's long-term commitment to a global expansion strategy beyond Europe and North America, SCA recently set up two new business groups within the company SCA Hygiene Growth Markets and SCA Packaging Growth Markets. "The ideal of starting up the new emerging business divisions is so that we can have people concentrate on growing those areas and working with P&L [profit and loss] responsibility without any danger of taking attention away from the business we already have," notes Astrom.

EMERGING TOGETHER

In keeping with the group's acquisition strategy (again, stated clearly on its web site), SCA's approach is to seek out partners willing to be taken over or establish joint ventures that will eventually fall under the Swedish group's control. In this way, the company has already made significant progress in penetrating the Andean countries of Latin America, such as Colombia, Peru, Chile, Ecuador, and Venezuela. Africa and Australasia also feature in the group's portfolio.

"On the hygiene side in Latin America we have some very nice joint ventures and that's the same in South Africa, northern Africa, and with our joint venture with Carter Holt Harvey in Australia and New Zealand," says Astrom. "That's the way we want to go. We really want to grow those joint ventures. For example, we can give technical support with converting machinery or whatever and they provide the local knowledge and expertise. The joint venture pays a license fee back to us. Then, when it's possible, we cement that into a full division within SCA. That's typically been our business model where we have a joint venture with the right to take over the majority control of the business eventually and that's the same for packaging as well.

"We're also very much in favor of learning a lot more about the hygiene markets in Asia and we've been making some good progress there already," he continued. "In fact, in the last four years alone we've gone from having zero presence in China to making it a US$ 100 million business, with much of that coming from the fact that we've followed our global customers into China."

Here again, SCA's presence in China is conducted through the Central Packaging Group, where it owns 48% of the US$ 100 million business.

MORE TO COME

With its emphasis on a joint venture approach to exploiting opportunities in the world's emerging markets, Astrom points out that SCA can minimize some of the risks inherent in operating in such regions while still delivering the growth needed to meet the group's expansion targets. On the basis of the evidence so far, the step-by-step approach to gaining market share and working toward majority control appears to have worked for SCA.

Not only that, but SCA also benefits from a broader market coverage, which can help reduce the impacts of regional downturns in the business cycle. On that point though, Astrom states, "We're not growing in other areas just to minimize or diversify the risk in a particular market. We're expanding outside Europe so that we can continue to see profitable growth for the long-term future of this company."

For the medium term, SCA is likely to remain largely a European company and it will not be shy about expanding where it can by looking at opportunities in Eastern Europe, especially with the new accession countries such as Poland and Hungary joining the European Union. Indeed, Astrom himself cites the strong growth potential to be found even further afield in cities such as St. Petersburg and Moscow in Russia.

But to survive and grow, SCA knows that it must deliver the numbers that investors are looking for. On that front though, the group looks to be doing something right. SCA boasts a strong track record on profitability, averaging a return on capital employed of 14.2% over the past five years. The group has also been cheering up investors with an average annual dividend growth of 12% since 1997. Needless to say, the group's share price has been performing well as a result.

Overall then, given the group's financial performance in recent years and the scope of SCA's global ambitions, it seems likely that SCA will remain among the world's top papermakers for a while yet. S!

A FITTING HONOR FOR SCA

The Company of the Year Award is given annually by the editors of Solutions! magazine to a pulp and paper company that demonstrates strong financial results, sound environmental policies, superior management practices, and strong health, education and training polices. Other important criteria include long-term commitment to the paper industry exhibited by capital investment, pursuit of strategic business goals, and global competitiveness. SCA qualifies for the 2003 Company of the Year Award by all these measures.

SCA, headquartered in Stockholm, Sweden. is one of the world's largest pulp and paper groups. with a turnover of some US$10.1 billion (SEK 88 billion). Based in Stockholm, Sweden, the company's president and CE0, Jan Astrom, presides over a group that employs some 44,000 employees located in over 40 countries.

SCA produces and sells absorbent hygiene products, packaging solutions, and publication papers. Hygiene products represent the greatest sales by business area (51%), followed by packaging (35%), forest products (13%) and others (1%). Europe accounts for some 80% of the group's sales, but the company does have some strong positions in certain segments in North America, especially in the away-from-home and protective packaging markets. SCA has also set up new business units to pursue growth opportunities in Asia and Latin America.

The group has pursued a clearly articulated long-term strategy of building its hygiene and packaging businesses, but a recently completed investment at the group's Laakirchen mill in Austria appears to suggest that the company's existing publication grade assets will not be abandoned just yet. As Astrom says, "The forest products division accounts for 15% of the total turnover, and although wood containing papers represent just 7%, it's very strong for the balance sheet and we're happy with it."

Among other things, SCA is listed on the Dew Jones Sustainability Index, the FTSE4Good Global Index, and the European Ethical Investment Register. The company has also been recognized for the standard of its environmental reporting.

SCA'S RECENT ACQUISITIONS AND DIVESTMENTS

2003

Acquisitions Segas, France Specor Systems, Inc., USA Divestments Apura, France Metsa Tissue, Finland (19,3%)

2002

Acquisitions Scaninge sawmills, Sweden Benedetti Paper Division, UK Packaging Resources, USA Bertako, Spain V+D Stabernack, Germany AR Fegersheim, France CartoInvest, Italy Mid-Lands Chemical Company Inc., USA Polyfoam Packers Corp., USA Divestments Zewathener, Germany

2001

Acquisitions Marko Foam Products, Inc., USA Encore Paper Company Inc., USA Anjou Emballages, France Cartonnages Industriels Mehunois, France Pakkausjaloste Oy, Finland ISC Inc., USA RPA, USA Tuscarora Inc., USA Georgia-Pacific's AFH tissue operations, USA (Acquisition of Metsa Tissue not approved by European Commission)

2000

Acquisitions Obalex, the Czech Republic (SCA acquires remaining 51%) Metsa Corrugated, Finland Metsa Tissue, Finland (65%) SCA/Johnson & Johnson Divestments Neopac A/S, Denmark Modo Paper, Sweden Joint Ventures SCA/Graninge, Sweden

1999

Acquisitions Nisa, Portugal Danisco Pack, Denmark Len-Pak, Ireland Papelera Noya S.A. (Panosa), Spain AM Paper Group Ltd, UK Metsa Tissue, Finland (11.17%) Nicollet, France Forsell Emballage, Sweden Danapak Papemballage, Denmark. Central Package Group, Singapore (11%) Joint Venture SCA/MoDo, Sweden (PDF)

NET SALES BY PRODUCT GROUP, 2002

Packaging                   32%

AFH and incontinence
products                    25%

Protective packaging         3%

Publication paper            8%

Pulp, timber, solid
wood products                6%

Consumer products           26%

Note: table made from phi graph.

Jim Kenny is contributing editor/Europe, for Solutions! magazine, and is based in Brussels, Belgium He is the former vice president of editorial for Paperloop and today heads his own company, DSI. Contact him by phone at [phone], or by email at [e-mail]