Year-End Report 1998

Year-End Report 1998 SCA in Brief 1998 1997 Net sales, SEK M 61,273 58,595 Earnings after financial items, SEK M 5,169 4,457 Debt/equity ratio, times 0.72 0.73 Earnings per share after tax, SEK 17.07 13.98 Cash flow from operations per share, SEK 21.56 24.54 Dividend, SEK 6.50* 5.75 * Board proposal * Continued stable earnings growth during the fourth quarter, despite significant production shortfall in liner operations due to rebuilding shutdowns. * Earnings per share rose 22% compared with 1997. * Cash flow goals for the year were fulfilled. * Board of Directors proposes a dividend of SEK 6.50 (5.75) for 1998. If approved, dividend growth over the past five years will amount to 14% annually. * The Group's strategic capital investments amounted to SEK 5,041 M in 1998, where SEK 3,154 M was attributable to Hygiene Products and SEK 1,393 M to Packaging. * Development in 1999 is difficult to assess, but the relative stability of economic growth in Europe and the U.S. provides some cause for optimism. Appended to this year-end report is the "President's Letter" (extract from the main content of the President's Letter in the SCA 1998 Annual Report). NET SALES AND EARNINGS The Group's net sales amounted to SEK 61,273 M (58,595), an increase of 5% compared with 1997. Adjusted for divestments, the increase was 8%. The improvement is attributable to favorable effects of higher prices, 1%, a net volume increase of 4% and positive currency effects of 3%. Compared with the third quarter of 1998, net sales rose 4% in the fourth quarter due to higher sales in all business areas. Group operating profit improved 15% to SEK 6,428 M (5,568). The reported operating profit includes capital gains of SEK 400 M (425). Financial items amounted to an expense of SEK 1,259 M (1,111). The change is attributed mainly to higher net debt. Group earnings after financial items rose 16% to SEK 5,169 M (4,457). Excluding nonrecurring items, the increase was 18%. Foreign exchange movements affected earnings positively with approximately SEK 270 M, attributable to Graphic Paper's revenues on exports from Sweden. Net earnings after tax amounted to SEK 3,379 M (2,759). Earnings per share after full tax and full dilution improved 22% to SEK 17.07 (13.98). Return on shareholders' equity was 13% (12) and return on capital employed was 14% (12). CASH FLOW SEK M 9812 9712 Net sales 61,273 58,595 Operating surplus 10,320 9,344 % of net sales 17 16 Current capital expenditures -2,058 -2,207 % of net sales 3 4 Changes in working capital -932 -533 Other operating cash flow changes -360 -91 Operating cash flow 6,970 6,513 Income taxes paid, etc¹ -1,694 -1,064 Free cash flow 5,276 5,449 per share, SEK 26.61 27.57 Interest paid after taxes -1,001 -599 Cash flow from current operations 4,275 4,850 per share, SEK 21.57 24.54 Strategic capital investments, net -3,930 -4,368 per share, SEK -19.82 -22.10 Cash flow before dividend 345 482 per share, SEK 1.74 2.44 ¹ Tax attributable to operating profit Operating surplus improved to SEK 10,320 M (9,344), corresponding to 17% (16) of net sales. Operating cash flow amounted to SEK 6,970 M (6,513). An increase in working capital reduced cash flow by SEK 932 M (553). The increase was due mainly to strong volume growth. Current capital expenditures amounted to SEK 2,058 M (2,207). Cash flow from current operations, defined as cash flow before strategic capital investments and dividends, amounted to SEK 4,275 M (4,850), or SEK 21.57 (24.54) per share. Cash flow for the year exceeded the Group's long-term goal of SEK 3,200 M by a broad margin. The short-term objective for the year, which totaled SEK 4,900, excluding increases in working capital, was also surpassed. Strategic capital investments, that is, expansion investments and acquisitions, amounted to SEK 5,041 M (4,414). Acquisitions totaled SEK 2,793 M (3,431), including the purchase of additional shares in PWA (96% at year- end), redemption of minority interests in Laarkirchen, the acquisitions of the Spanish tissue company Marpo and a minority holding (25%) in Lantero, a Spanish packaging company, the acquisition of a tissue company in the Philippines and the Russian tissue company Svetogorsk Tissue, an increase in SCA's ownership share in Productos Familia of Colombia to 50%, the acquisition of 33% of the shares in the Czech packaging company Obalex and all shares outstanding in Widmer-Walty Group, a Swiss packaging company. Previously announced plans to acquire shares in the Brazilian tissue company Melhoramentos have not been completed due to the country's financial crisis. Strategic capital expenditures in plant and machinery totaled SEK 2,248 M, with Hygiene Products accounting for SEK 1,617 M and Packaging for SEK 512 M. Projects in Hygiene Products include a new tissue production line in Mannheim, expanded conversion capacity for tissue, new capacity for incontinence products and the introduction of a new production technique for baby diapers. Ongoing projects in the Packaging business area include rebuilding and new construction in Obbola and Witzenhausen and new conversion technology for corrugated board at several production plants. Divestments, which amounted to SEK 1,111 M (46), consisted mainly of the sale of Mölnlycke's Clinical Products Division. NET DEBT AND DEBT/EQUITY RATIO Net debt at year-end amounted to SEK 21,370 M, which is SEK 2,352 M higher than at 1 January 1998. Of the increase, SEK 1,227 M is attributed to effects of the weaker Swedish krona. As a result of the weaker Swedish krona, shareholders' equity rose by approximately SEK 1,400 M. SCA's policy to hedge the Group's net assets outside Sweden is based on the principle that the debt/equity ratio should not be affected by foreign exchange rate movements. The reported debt/equity ratio was 0.72 (0.73), with an interest coverage ratio of 5.1 times (5.0). SIGNIFICANT EVENTS DURING THE FOURTH QUARTER 1998 AND THE BEGINNING OF 1999 The Hygiene Products business area increased its ownership interest to 50% in Productos Familia, which, in turn, has acquired all shares in Tecnopapel, a tissue company in Ecuador. The Packaging business area acquired all shares outstanding in the Widmer- Walty Group of Switzerland. Toward year-end, Packaging also acquired the corrugated board operations of the British company Rexam for GBP 195 M. The acquisition will increase SCA's market share in Great Britain from 13% to 21%. The transaction was approved at Rexam's Special General Meeting and approval by EU's competition commission is expected in February 1999. DIVIDEND The Board of Directors has proposed a dividend of SEK 6.50 (5.75) per share, an increase of 13%. If approved, the dividend will amount to 4.9% of shareholders' equity's book value. Dividend growth during the past five years, accordingly, amounts to 14% annually. HYGIENE PRODUCTS BUSINESS AREA SEK M 98:4 98:3 98:2 98:1 9812 9712 Net sales 6,951 6,490 6,395 6,328 26,164 24,018 Operating profit 583 600 605 616 2,404 2,567 Volume growth % Tissue products 9* 2* 0* 15** Fluff products 1* 4* 5* 8** *) Compared with the immediately preceding quarter **) Compared with 9712 Net sales in 1998 totaled SEK 26,164 M (24,018), an increase of 9% compared with the preceding year. The increase represents net effects of 11% volume growth, lower prices and changes in the product mix. Changes in currency rates yielded a positive effect on sales of slightly more than 3%. Operating profit amounted to SEK 2,404 M (2,567). The decline was caused by lower product prices, increased expenses for new product launches and higher research and development expenditures. Operating profit benefited from the strong volume growth, however. Lower earnings were reported for tissue and incontinence products, while baby diapers and feminine hygiene products showed improved earnings. Currency movements had no effects on operating profit. Compared with the third quarter, earnings declined marginally in the fourth quarter due to somewhat weaker earnings in the institutional tissue segment and some conversion costs incurred in conjunction with ongoing investments and structural changes. Other product segments reported unchanged or higher earnings. PACKAGING BUSINESS AREA SEK M 98:4 98:3 98:2 98:1 9812 9712 Net sales 3,832 3,725 3,650 3,828 15,035 14,282 Operating profit 316 396 395 373 1,480 1,196 Deliveries m sq. m. Corrugated board 704 703 724 728 2,859 2,784 Production and deliveries, liner products, see table "Volumes" on page 14. Net sales during the year totaled SEK 15,035 M (14,282). Accordingly, sales rose slightly more than 5%, with half of the increase attributable equally to higher prices and volume improvements and half to currency effects. Operating profit amounted to SEK 1,480 M (1,196). The increase was due to higher prices, lower raw material costs and productivity improvements. Currency movements had marginally negative effects on earnings. The decline in fourth-quarter earnings compared to the third quarter was due to production shutdowns in Obbola and Witzenhausen for rebuilding projects. In addition, kraftliner prices continued to decline in parallel with some price pressure on corrugated board products. GRAPHIC PAPER BUSINESS AREA SEK M 98:4 98:3 98:2 98:1 9812 9712 Net sales 4,959 4,779 4,491 4,673 18,902 16,562 Operating profit 469 492 425 465 1,851 884 Wood-containing 380 358 317 279 1,334 458 publication papers Fine papers, paper merchanting, 89 134 108 186 517 426 market pulp Production and deliveries, see table "Volumes" on page 14. Net sales in 1998 totaled SEK 18,902 M (16,562), an increase of 14%. The improvement was equally attributable to higher deliveries, higher prices and currency effects. Operating profit for the year amounted to SEK 1,851 M (884). The earnings improvement in wood-containing publication papers was based mainly on higher prices, but increased volume deliveries, lower raw material costs, favorable currency movements and productivity improvements also contributed to the increase. The improvement in earnings from fine papers and pulp was attributable to higher prices and productivity improvements. Deliveries of fine papers were unchanged compared with the preceding year. Compared with the third quarter of 1998, higher deliveries were the main factor behind improved fourth-quarter earnings for wood-containing publication papers. Fourth-quarter prices for fine papers declined compared with the third quarter, and deliveries were slightly lower. The decline in earnings was limited by lower pulp prices. Pulp operations, however, showed a sharp decline in fourth-quarter earnings, compared with the third quarter. FOREST AND TIMBER SEK M 98:4 98:3 98:2 98:1 9812 9712 Net sales 998 901 1,033 1,053 3,985 4,158 Operating profit 206 140 188 188 722 812 Earnings in 1998 were down 11%, compared with 1997. Earnings for the year include capital gains of SEK 32 M (8) from the sale of forest land. Sawmill operations reported a sharp decline in earnings compared with 1997, due mainly to lower prices and higher raw material costs. Fourth-quarter earnings from sawmill operations were unchanged, compared with the third quarter, while forestry operations reported a sharp increase in earnings. PERSONNEL The number of employees at year-end 1998 was 32,211 (33,404). MARKET OUTLOOK Development in 1999 is difficult to assess, but the relative stability of economic growth in Europe and the U.S. provides some cause for optimism. Volume growth for SCA products in 1998 was strong while price pressure in virtually all areas occured. Competitive pricing was also noted for both raw materials and finished products. Raw materials, however, were also affected by surplus supply caused by the financial crises in Asia and Latin America, while price pressure on finished products was caused by low inflation and competition in Europe. Prices for hygiene products at year-end 1998 were 3% lower than average prices for the year. Pulp prices also declined, which compensated for most effects of lower prices for finished products during the fourth quarter. Internal programs to improve productivity will be intensified in 1999 and are expected to gradually improve margins by 2 percentage points over the next two years. Demand is expected to remain strong, and determined efforts will be made to restore higher prices. The Packaging business area shows continued good demand. Corrugated board prices are relatively stable, but prices for both kraftliner and testliner declined toward year-end and, in the beginning of 1999, were about 5% below average prices in 1998. An increase of 15% in the price of kraftliner has been announced by North American producers. Conditions for a price increase in Europe during the second quarter are considered good. Within the Graphic Paper business area, prices for newsprint and SC paper are expected to remain stable. The price of LWC paper in the beginning of 1999 was about 3% below the average price in 1998. Demand for coated fine papers in sheets is strong, but prices in the beginning of 1999 were about 5% below average prices in 1998. Pulp prices appear to have hit bottom. SHARE DISTRIBUTION 981231 Series A Series B Total Registered number of shares 62,145,880 135,254,055 197,399,935 Unconverted debenture loans - 1,313,151 1,313,151 Outstanding warrants - 1,643,544 1,643,544 Total after full conversion 62,145,880 138,210,750 200,356,630 Calculated in accordance with recommendations by the Swedish Association of Financial Analysts, the effects of outstanding debentures and warrants represent a maximum dilution of 0.7%, which is taken into account in calculating earnings per share for the period. ANNUAL GENERAL MEETING The Annual General Meeting of shareholders will be held on 24 March 1999 in Stockholm. The proposed record date for entitlement to dividends is 29 March. Payment is expected to be made through VPC (Swedish Securities Register Center) on 7 April. Interim reports in 1999 will be released on 28 April, 29 July and 28 October. The Annual Report for 1998 is expected to be published in the beginning of March 1999. Stockholm, 29 January 1999 SVENSKA CELLULOSA AKTIEBOLAGET SCA (publ) Sverker Martin-Löf President and CEO This report has not been subject to final audit by the company's auditors. Copies of the Interim Report are available at SCA U.K. Holdings Limited, SCA Packaging House, 543, New Hythe Lane, Aylesford, Kent ME20 7PE, attention, Tony Staples, telephone +44 1622 883 025 Statement of Earnings 1 January - 31 December 1998 1997 SEK M ECU M SEK M ECU M Net sales 61,273 6,858 58,595 6,794 Operating expenses -50,953 -5,703 -49,251 -5,710 Operating surplus 10,320 1,155 9,344 1,084 Depreciation according to plan -4,013 -449 -3,843 -446 Share in earnings of associated companies 121 13 67 8 Operating profit 6,428 719 5,568 646 Financial items -1,259 -141 -1,111 -129 Earnings after financial items 5,169 578 4,457 517 Income taxes -1,680 -188 -1,337 -155 Minority interest -110 -12 -361 -42 Net earnings after tax 3,379 378 2,759 320 Operating margin 11 % 10 % Return on shareholders' equity 13 % 12 % Return on capital employed 14 % 12 % Business Areas Net sales 1 January - 31 December SEK M 1998 1997 Hygiene Products 26,164 24,018 Packaging 15,035 14,282 Graphic Paper 18,902 16,562 Wood-containing publication papers 7,478 6,390 Fine papers, paper merchanting, market pulp 11,424 10,172 Forest and Timber 3,985 4,158 Other operations 1,647 1,862 Divested units 144 1,804 Intra-Group deliveries -4,604 -4,091 Total net sales 61,273 58,595 Earnings 1 January - 31 December SEK M 1998 1997 Hygiene Products 2,404 2,567 Packaging 1,480 1,196 Graphic Paper 1,851 884 Wood-containing publication papers 1,334 458 Fine papers, paper merchanting, market pulp 517 426 Forest and Timber 722 812 Other operations 285 384 Divested units 3 29 Goodwill amortization -317 -304 Total operating profit 6,428 5,568 Financial items -1,259 -1,111 Earnings after financial items 5,169 4,457 Balance Sheet 1998-12-31 1997-12-31 SEK M ECU M SEK M ECU M Assets Long-term assets 55,147 5,823 50,351 5,787 Receivables and inventories 18,790 1,984 16,726 1,923 Financial receivables and investments 2,617 276 2,046 235 Cash and bank balances 1,819 192 1,582 181 Total assets 78,373 8,275 70,705 8,126 Equity, provisions and liabilities Shareholders' equity 28,404 2,999 24,653 2,833 Minority interest 1,386 146 1,496 172 Provisions 10,906 1,152 10,452 1,201 Interest-bearing liabilities 25,806 2,725 22,647 2,603 Operating liabilities and 11,871 1,253 11,457 1,317 other noninterest-bearing debt Total equity, provisions and liabilities 78,373 8,275 70,705 8,126 Debt/equity 0.72 times 0.73 times Equity/assets 38 % 37 % Cash Flow Statement 1 January - 31 December SEK M 1998 1997 Operating surplus 10,320 9,344 Changes in working capital -932 -533 Current capital expenditures -2,058 -2,207 Other operating cash flow changes -360 -91 Operating cash flow 6,970 6,513 Financial items -1,259 -1,111 Income taxes paid -1,279 -731 Other -157 179 Cash flow from current operations 4,275 4,850 Strategic capital expenditures -2,248 -983 Acquisitions -2,793 -3,431 Divestments 1,111 46 Cash flow before dividend 345 482 Dividend -1,145 -1,092 Net cash flow -800 -610 Net debt, 1 January -19,018 -17,462 Net cash flow -800 -610 Net debt in acquired operations -325 - Currency effects -1,227 -946 Net debt, 31 December -21,370 -19,018 Debt payment capacity 37 % 39 % Debt payment capacity Debt payment capacity is expressed as cash earnings in relation to net debt. Cash earnings Cash earnings are calculated as earnings before tax with reversal of depreciation on tangible and intangible assets, share in earnings of associated companies, nonrecurring items and deductions for income taxes paid. Quarterly Data Group 1998 1997 SEK M IV III II I IV III II I Net sales 15,918 15,234 14,857 15,264 15,003 14,262 15,114 14,216 Operating surplus 2,476 2,506 2,427 2,911 2,381 2,244 2,645 2,074 Depreciation -1,043 -1,006 -966 -998 -924 -958 -1,009 -952 according to plan Share in earnings 27 32 41 21 45 8 7 7 of associated companies Operating profit 1,460 1,532 1,502 1,934 1,502 1,294 1,643 1,129 Financial items -343 -338 -298 -280 -307 -285 -284 -235 Earnings after 1,117 1,194 1,204 1,654 1,195 1,009 1,359 894 financial items Of which, - - - 400 - - 300 125 nonrecurring items Income taxes -356 -426 -376 -522 -391 -351 -300 -295 Minority interest -30 -19 -29 -32 -120 -88 -71 -82 Net earnings after 731 749 799 1,100 684 570 988 517 tax Earnings per share 3.68 3.77 4.05 5.57 3.47 2.89 5.00 2.62 Quarterly Data Business Areas - Net sales 1998 1997 SEK M IV III II I IV III II I Hygiene Products 6,951 6,490 6,395 6,328 6,090 5,922 6,015 5,991 Packaging 3,832 3,725 3,650 3,828 3,519 3,465 3,975 3,323 Graphic Paper 4,959 4,779 4,491 4,673 4,341 4,108 4,174 3,939 Wood-containing 1,979 1,900 1,761 1,838 1,856 1,540 1,655 1,339 publication papers Fine papers, 2,980 2,879 2,730 2,835 2,485 2,568 2,519 2,600 paper merchanting, market pulp Forest and Timber 998 901 1,033 1,053 1,118 903 1,081 1,056 Other operations 365 467 404 411 463 427 511 461 Divested units 3 1 -1 141 466 427 466 445 Intra-Group -1,190 -1,129 -1,115 -1,170 -994 -990 -1,108 -999 deliveries Total net sales 15,918 15,234 14,857 15,264 15,003 14,262 15,114 14,216 Business Areas - Earnings 1998 1997 SEK M IV III II I IV III II I Hygiene Products 583 600 605 616 595 645 647 680 Packaging 316 396 395 373 336 291 376 193 Graphic Paper 469 492 425 465 436 210 173 65 Wood-containing 380 358 317 279 193 102 128 35 publication papers Fine papers, paper 89 134 108 186 243 108 45 30 merchanting, market pulp Forest and Timber 206 140 188 188 221 208 230 153 Other operations -30 -16 -34 365 -13 7 283 107 Divested units -1 -1 - 5 3 9 11 6 Goodwill amortization -83 -79 -77 -78 -76 -76 -77 -75 Total operating profit 1,460 1,532 1,502 1,934 1,502 1,294 1,643 1,129 Financial items -343 -338 -298 -280 -307 -285 -284 -235 Earnings after financial 1,117 1,194 1,204 1,654 1,195 1,009 1,359 894 items of which, nonrecurring - - - 400 - - 300 125 items Earnings after financial items 1,117 1,194 1,204 1,254 1,195 1,009 1,059 769 Excl. nonrecurring items Quarterly Data Business Areas - Margins 1998 1997 Percent IV III II I IV III II I Hygiene Products 8 9 9 10 10 11 11 11 Packaging 8 11 11 10 10 8 9 6 Graphic Paper 9 10 9 10 10 5 4 2 Wood-containing 19 19 18 15 10 7 8 3 publication papers Fine papers, paper 3 5 4 7 10 4 2 1 merchanting, market pulp Forest and Timber 21 16 18 18 20 23 21 14 Group Operating margin 9.2 10.1 10.1 12.7 10.0 9.1 10.9 7.9 Financial net margin -2.2 -2.2 -2.0 -1.8 -2.0-2.0 -1.9 -1.7 Profit margin 7.0 7.9 8.1 10.9 8.0 7.1 9.0 6.2 Five-year summary Full year 1998 1997 1996 1995 1994 Earnings after financial items, SEK M 5,169 4,457 3,573 5,731 1,060 Earnings per share after tax, SEK 17.07 13.98 10.71 17.55 2.94 Debt/equity ratio, times 0.72 0.73 0.67 0.69 0.52 Return on capital employed, % 14 12 11 16 6 Return on shareholders' equity, % 13 12 10 17 3 Volumes Thousand metric tons 98:4 98:3 98:2 98:1 9812 9712Change % Liner products Production 497 562 555 554 2,168 2,241 -3 External deliveries 173 183 173 186 715 704 2 Wood-containing publication papers Production 295 301 303 301 1,200 1,127 6 External deliveries 311 300 300 288 1,199 1,135 6 Fine papers Production 179 190 183 184 736 715 3 External deliveries 182 193 164 181 720 718 0 President's letter (Extract from the main content of the President's Letter in the SCA 1998 Annual Report). INCREASED PROFITABILITY AND EXPANSION For SCA, 1998 was a year of both consolidation and expanded operations. The merger during the year of the Group's hygiene products operations in a single business area and the measures taken to improve profitability in the corrugated board business were significant steps toward greater competitiveness. We also experienced a high rate of expansion in the Hygiene Products and Packaging business areas both through acquisitions and direct investments. Meanwhile, the rationalization of the Graphic Paper and industrial forestry operations continued. Product development has been assigned an increasingly prominent role in all sectors of operations, which has helped to strengthen the Group's market positions. International growth was dampened by the financial crises. But the impact on SCA's operations has been limited up to now. Our product portfolio provides effective protection against the fluctuations that have occurred, primarily in the raw-materials market. The Group's net sales in 1998 amounted to SEK 61,273 M and income after financial items was SEK 5,169 M. The trend of earnings was distinctly positive in Packaging and Graphic Paper - notably in the case of publication papers. Hygiene Products met its yield targets despite pressure on prices in European markets. The growth in volume for the Group as a whole amounted to 8 percent. Growth in the Hygiene Products sector amounted to a full 11 percent. The Group's operating surplus increased by 10 percent, exceeding the target figure of a 16-percent margin. The cash flow from operations amounted to SEK 4,275 M, clearly exceeding the long-term goal of SEK 3,200 M. Expansion investments amounted to SEK 5,041 M. SCA share The SCA share performed much better than the Stockholm Stock Exchange's Forest Index in 1998. The long-term trend is shown in the chart, where the annual effective return on an investment in the SCA share since 1980 (based on the average share prices for the year) is shown for each year. As the chart shows, the return between 1997 and 1998 was 15 percent. The average return for the entire period was 15 percent and the return for the most recent five-year period 17 percent. Thus, SCA has created value for its shareholders well within the range anticipated in our objectives. Increased profitability and expansion Our strategy for the Hygiene Products and Packaging business areas is to increase the profitability of existing operations and to expand through acquisitions. Accordingly, active participation in the ongoing consolidation of our industry in Europe, and expansion in such new markets as Central and Eastern Europe, Asia and Latin America have the highest priority. A new, integrated operation was created in the hygiene sector through the merger of SCA Hygiene Paper and SCA Mölnlycke. The new organization gives us better opportunities to deal with the competition in Europe since we are better able to utilize the effects of synergies in production, distribution, product development and marketing. The network of strategic facilities that is being built up in the production field in Europe, in which each mill is concentrating its production on specific products - thereby making it possible to significantly improve efficiency - constitutes an important project. In Mannheim, we began installation during the year of a completely new production line for high-grade tissue to be sold in retail outlets under private labels. Production is scheduled to start during the summer of 1999. The incontinence-care business continues to show strong growth in volume. Among other developments, SCA's positions in France and Finland were strengthened through acquisitions. Pant diapers for use in incontinence-care were launched in Europe. Products for light incontinence problems were introduced in the Italian and Spanish markets. We also began to sell incontinence products under our Tena brand in Mexico and a number of other Latin American countries. The Svetogorsk tissue mill in Russia was acquired and SCA's holding in Productos Familia, the Colombian tissue company, was increased to 50 percent. The financial problems that have affected these regions are slowing the pace of SCA's operations in the short-term perspective but few observers question the strong potential growth in consumption over a somewhat longer term. Our operations in the regions are still limited. 3 percent of our total sales and 2 percent of our capital are in Russian, Asian and Latin American markets. SCA's Packaging sector has been actively engaged in a program to boost profitability in its present business. Briefly stated, the program is based on efforts throughout the business area to maximize sales margins by focusing on market segments with more sophisticated customer requirements, rather than by attempting to maximize volumes. In Germany, which is SCA's largest market for packaging, the action program is being carried out at the same time that costs are being reduced sharply, in part through cutbacks in personnel. Meanwhile, SCA Packaging strengthened its positions in both Western and Central Europe through acquisitions that increased the business area's sales by SEK 900 M (or 6 percent). Just before the end of the year an agreement was reached with Rexam Plc covering the acquisition of the latter's packaging operations in the corrugated board field. This will strengthen SCA's already leading position in the Great Britain, increasing its share of that market from 13 to 21 percent, at the same time that attractive new segments are being opened up. The acquisition is in line with the strategy of participating actively in consolidation of the industry and increasing the Group's present total share of the market in Europe to 20 percent. The work in SCA's forest products sector, which includes the Graphic Paper and Forest and Timber units, was focused on continuing fine-tuning measures. With very limited capital expenditures, SCA is implementing improvement and rationalization programs that have resulted in a substantial increase in earnings in the fine-paper segment, in recapturing the Group's position as the leading producer of SC paper, in continuing fine-tuning of LWC paper production, and in sharp improvements in operations of our sawmills in Munksund, Tunadal and Lugnvik. Importance of raw materials The proximity to high-grade raw materials - our own forest holdings - is a critical factor in all of SCA's operations. The Hygiene Products, Packaging and Graphic Paper business areas are extremely dependent on cost-effective production of both pulp and paper products. The nearby forest raw material is an important element in our cost situation and our emphasis on quality. The chart shows that income generated in the Swedish forest products sector is of major importance in determining the level of Group earnings. The consistent level of earnings in forest product operations are striking, while earnings in the paper and pulp operations vary sharply from year to year. However, the semifinished products from the latter operations are processed in the hygiene and packaging business areas. SCA's employees - key to success SCA's strategic focus imposes heavy demands on skilled and involved employees in all Group operations. Growth in value in the company is ultimately being created by all the employees, who should be able to share that growth. In 1998 all employees in ten countries were offered an opportunity to subscribe for convertible debentures and attached warrants as a way of becoming part-owners of SCA. Forty-two percent of the employees - 12,000 persons - subscribed. I consider this to be a high percentage in a company like SCA which, as a result of acquisitions, is continuously acquiring a large number of employees who initially do not often know the company so well. A new incentive system that is linked to SCA's cash-flow requirements and growth in value was offered to approximately 60 executives. The system is based on long-term growth in value of SCA shares relative to those of comparable companies, and on SCA's cash-flow objectives. We plan to develop this type of value-based bonus system to include all employees at all levels, which I believe will stimulate all of us in our daily work. SCA - a part of Europe Sweden and Swedish industry and commerce need a Swedish connection with the European Monetary Union. This is an important prerequisite for our continuing investments at home. The greater part of SCA's operations and employees are in "EMU countries." For a company whose operations cover nearly all of Europe, but which is based in Sweden, Swedish membership in the EMU is highly desirable to facilitate trading in our shares and to create equal conditions for investors in different countries. Environment The environmental program is a priority, fully integrated part of SCA's operations. This is because our business concept places strong emphasis on the closed-cycle principle, which is natural since more than 90 percent of the company's products consist of renewable and recyclable materials. Envi- ronmental considerations are always involved at an early stage of decisions pertaining to development of new products or production processes. SCA is working actively to obtain environmental certification of Group operations. Forestry operations were certified via the Forest Stewardship Council and ISO 14001. Before the end of the year 2000, all of the pulp and paper mills will be environmentally certified in accordance with the European and international ISO 14001 and EMAS standards. Year 2000 problem Ensuring that our data processing systems will function in the year 2000 has been a priority concern for some time. Our production facilities are highly modern and thus contain, in addition to EDP systems, a number of computer systems that control processes. Using systematic methods and checking programs, as well as independent audits, all systems are being aligned with the aim of ensuring that they will function during the shift to the new millennium. Cash flow and dividend growth Our operations are always keyed to the objective of giving our shareholders a competitive return on their investment. The strategy for creating growth in value is based on being able to use the cash flow from operations for dividends and for profitable strategic investments. These investments in turn create a growing cash flow that strengthens the base for consistent growth in dividends. In conjunction with the Board's strategy review of the Group, the Board concluded that the current Group structure and earnings capacity suppports a somewhat higher dividend level in 1998 in relation to reported shareholders' equity. The Board has proposed an increase in the dividend for 1998 of 13 percent. Since the company was listed on the Stockholm Stock Exchange in 1950, SCA's dividend has been raised continuously or kept unchanged. Growth in the dividend during the most recent five-year period, including the dividend proposed for 1998, has amounted to 14 percent. The dividend today is equal to approximately 4.9 percent of the shareholders' equity's book value. Stockholm, 29 January 1999 Sverker Martin-Löf President and Chief Executive Officer The diagram illustrates the annual effective return, through 1998, based on the date of acquisition of the SCA share. For example, if the SCA shares were purchased in 1996, the effective return through 1998 amounted to 25%. Effective return is defined as the share's appreciation in value and the annual dividend being continually reinvested in SCA shares. The horizontal lines show that the average over the entire period is 15% and 17% for the past five years. The forest operations are of major importance for SCA's cost position and quality focus. The stable earnings level of the forest operations over time is also a counterweight to the varying earnings of the industrial operations in Sweden, particularly within Packaging and Graphic Paper. 3 ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/01/29/19990129BIT00010/bit0001.doc http://www.bit.se/bitonline/1999/01/29/19990129BIT00010/bit0002.pdf