Sodra Posts First Half 2012 Loss on Weak European Markets

July 10, 2012 (Press Release) - Södra's operating profit for the first half of 2012 was SEK -203 million compared with SEK 577 million for the same period the previous year. Profit after net financial items was SEK -215 million. The corresponding figure for the previous year was SEK 573 million.

The first half of the year was characterised by weak economic development in the markets for Södra's products. Production in Södra's business sectors also declined as a result of the market stoppages that were implemented at the beginning of the year. The result was also impacted by one-off items.

The economic crisis in Europe is causing anxiety which is affecting all major markets for Södra's main products. The recession has had an adverse effect on European paper demand, in turn reducing demand for pulp. The consumption of wood products in Europe, meanwhile, has also remained at a very low level, while the interior products market, too, has been hit by the weak performance of the construction and the Swedish home renovation sectors.

"We expect to see our markets gradually growing stronger in the second half of the year. We have also implemented a series of measures to strengthen our earnings potential. As a result, we anticipate that the capacity utilisation at our pulp mills and sawmills will be normal. Despite this, the full-year financial result for 2012 is forecast to be significantly lower than in the last few years," said Saltin.

"Despite the negative result and global economic uncertainty, Södra is in a strong financial position. With an equity ratio of around 60 per cent, we are primed to handle longer and deeper crises than the one we are currently experiencing."

Pulp

The pulp market recovered slightly in the first half of 2012. The world market price of bleached softwood sulphate pulp rose in the first quarter before dipping again slightly. The strengthening of the Swedish krona against the US dollar weakened the pulp price in Swedish krona. World stocks of hardwood and softwood pulp have decreased.

Production at Södra's five pulp mills during the period was 856,000 tonnes compared with 1,001,000 tonnes in the same period the previous year. This reduction was due to the market stoppages that were implemented at Södra Cell Tofte and Södra Cell Folla at the beginning of the year.

"World stocks are at a good level and we expect to see the chemical pulp market gradually grow stronger in the autumn," said Saltin.

In May, Södra Cell's board of directors authorised two energy investments at Södra Cell Värö, including a new lime sludge reburning kiln and a new pelletizing plant. These profitable investments capitalise on the synergies that already exist between Södra Cell and Södra Timber in Värö.

"Through these investments, we can further enhance the efficiency of the Värö combine while at the same time creating a profitable processing operation for our members' wood raw materials," continued Saltin.

Wood products

The consumption of wood products in Europe remains at a low level and the market continued its weak performance during the spring. Production in the largest producing countries has been constrained, which means that stocks of wood products are under control. A weak market combined with high raw material costs are weighing down on the profitability of southern Sweden's sawmills.

Södra produced 720,000 cubic metres of sawn wood products during the period, compared with 767,000 cubic metres in the same period the previous year. Södra Timber's profitability was under great pressure in the early part of the year. Production at the new sawmill in Värö has not proceeded according to plan.

"We have reviewed and analysed the profitability of each sawmill and have introduced a series of measures to strengthen our earnings potential. Logistics is another key area and we decided to re-open the distribution centre in Kinda. We expect some of these measures to bear fruit in the autumn but it could take longer for the other changes to take effect," said Saltin.

"The decision to shut down production that was made ahead of the summer has been reversed. We expect capacity utilisation at our sawmills to be normal for the rest of the year," she says.

The process of starting up the new sawmill in Värö continues but is lagging behind schedule. Additional measures are needed, mainly in the refinement area, before production can reach the planned rate. Supplementary investments are being made to ensure the scheduled completion of the sawmill, which is expected to reach full production capacity - i.e. with the sawmill operating on a three-shift basis - in the second quarter of 2013.

"Work on the new sawmill has not been proceeding according to plan. But the work of getting the sawmill completed on schedule is going full steam ahead and it has naturally been given the highest priority."

Interior products

The economic recession is also affecting the interior products market, causing a decline in volumes and pushing down prices. And while Södra Interiör has defended its market share, the market has shrunk because of the prevailing uncertainties about the economy.

At the beginning of the year Södra Interiör acquired parquet flooring manufacturer Berg & Berg in Kallinge which has some 90 employees. The company produces more than 500,000 m2 of high-quality parquet flooring per year and has net sales of around SEK 130 million. This acquisition will further increase the range of products available to Södra Interiör's customers, while at the same time providing good opportunities for synergies between the companies in areas such as marketing, logistics and product development.

Forestry

Timber volumes handled by Södra Skog fell as a result of the market stoppages at sawmills and pulp mills at the beginning of the year. Volumes were down by around 10 per cent compared with the same period in 2011. To increase the contracting rate, a local market premium was introduced during the spring with good results. With the exception of certain hardwood varieties, the standing stock is at a good level ahead of the autumn.

During the spring, Södra Skog launched a hardwood initiative which embraces the whole chain from forest management training for forest owners to acquisitions of saw timber. Despite the growing volumes from members there is a slight shortage of sawable birch and birch pulpwood.

The spring's seedling sales were excellent. Södra Skog is continuing to invest in both its nurseries to increase seedling volumes to 45 million seedlings per year. A campaign of discounts was introduced in the autumn to stimulate increased autumn planting. Investments in seedling operations are planned this autumn to increase the volume of seedlings with mechanical forms of protection so that the use of chemicals can be phased out.

SOURCE: Sodra