March 26, 2004

Talk with Swedish papermaker SCA

Jan Åström, CEO of SCA (photo: Alexander Farnsworth)
Jan Åström: "We've got a good mix"
Jan Åström, CEO of Stockholm-based SCA (Svenska Cellulosa Aktiebolaget), has that typically Swedish attribute of robust optimism.

SCA is among the ten largest papermakers in the world and has an impressively broad product portfolio.

The Hygiene Products division accounts for roughly half of group revenues, Packaging for a third and Personal Care (ladies' hygiene, nappies/diapers, incontinence products) for the remaining 15 per cent.

At SCA's historic headquarters in elegant Stockholm, Åström (48) sketched out his plan for growth via own label, the global "Tena" brand, and international expansion.

While doing so, Jan Åström knows that he can leverage considerable economies of scale with gross 2003 revenues touching €9.4bn.

He can also play on a value-added chain that reaches from forestry to packaging.


Mr. Åström, last year your sales fell by 3 per cent. What was this attributable to, how does this fit with your growth objective of 8-10 per cent per year, and how optimistic are you about the future?

The fall in the dollar against the euro has had a negative effect on our earnings reporting from North America and the majority of Latin American economies whose currencies shadow the dollar.

On our main market in Europe there has been general price erosion especially in the more cyclical segments where we have been engaged. 8-10 per cent represents the planned average over a five year period.

On a currency and price-adjusted basis volume growth was 4 per cent last year and 11 per cent in 2002.

So our underlying growth has averaged 7.5 per cent p.a. over the last two years, which is not far off our targets.

As regards the future, we see continued good growth prospects in hygiene products and in the personal care sector in Europe as well as generally strong growth in the southern hemisphere.   

Part of your corporate strategy is to increase the proportion of value-added products. How can you achieve this in a price-driven market such as Germany?

Our brands offer a broad range, strong product differentiation and good distribution. Everything we sell has top quality, regardless of whether it is to a convenience store operator or hard discounter.   

Do you think that your other German retail customers are pleased when you also offer Aldi high-quality products?

We believe that we have a good balance between hypermarket and discount operators and enjoy a good relationship with both. I hope that the retailers themselves also see it that way.   

How big a blow was it when dm delisted you to offer nappies under the "Babylove" private label?

Of course, we are unhappy that we lost the account on such an important market as Germany, but since then we have compensated with private label diapers business in other parts of Europe.   

Especially in hygiene paper, you are a major provider of own label. How do you balance this with growing such major brands as Zewa or Danke?

We consider it part of our strength that we have a good balance between brands and private label. On a European consumer tissue basis, we do around 60 per cent private label and 40 per cent brands.

Brands are local, of course, especially as far as consumer tissue is concerned. However, with the exception of the UK, the only real growth you can find in consumer tissue in Europe is within private label. There is no one with a pan- European brand in this area.

The only ones who might be able to create such a pan-European brand would be the retailers themselves. In the USA, where 85 per cent of the consumer tissue market is in brands, it is completely different. There they have real national brands.   

What is happening at SCA Germany?

We have kept our European head-office for hygiene products in Munich and our German headquarters in Mannheim.

We have simply taken away our umbrella organisation by splitting it into three business groups on a European basis, i.e., into personal care, away from home tissue, i.e., institutional market tissue, and consumer tissue.

The most significant organizational changes were made in the consumer tissue division where we now have eight regions in Europe including eastern Europe and Russia.   

Are there any major synergies between your hygiene business and your packaging and forestry divisions?

We have strong synergies in the value chain as fibre, research and development, and capital allocation. For example we have a €3.2bn packaging business in Europe, which is the main supplier of boxes for our hygiene operations.

We also have as Europe's largest private forest owner a lot of forest lands up in the northern part of Sweden. Some of the wood pulp from this is also integrated in our tissue production.   

This year P&G is investing over $2bn in R&D. Does this frighten you?

Size is no guarantee of innovative quality. We have centralized our R&D team in Gothenburg which supports our global category management. We have also forged a number of international joint-ventures in the technical sphere.

We also pride ourselves on the speed with which we can take an idea from the drawing board to full-scale production. In this respect having a smaller organization than the big juggernauts in our industry is a distinct advantage.   

How much growth potential do you see in incontinence products?

In the last ten years, Tena has recorded low double-digit annual growth and is now a billion dollar brand. In fact it is the only one we have due to our heavy private label presence elsewhere.

For many years our growth in this area was driven by institutional and homecare sales, but, over the last few years, retail has become the fastest growing part of the business. In fact we are growing by more than 20 per cent a year on some retail markets.

We have now entered the North American retail market via our acquisition of Serenity from Johnson & Johnson in 2000. So we have really worked up this part of the business on both continents over the last three years.

Last but not least, we are also growing our joint-ventures in emerging markets such as Latin America, South Africa, and the Caribbean as well as in Australia.

Obviously, penetration is slower than in Europe or North America, but retailing and institutional income represent a huge opportunity. Overall, we now have 26 per cent of the global incontinence market in terms of value.   

What do you mean when you call your acquisitions strategy "selective"?

An acquisition needs to provide us with profitable growth, and we do not buy simply to grow our top line. Deals should be accretive in EPS and cash-flow per share within the first twelve months.

We also want to have a cushion when acquiring a company whereby the net present value should be at least 20 per cent higher than the total price paid. Otherwise we risk diluting shareholder value.

In emerging markets we are growing very fast through entering joint-ventures where we later take over a majority stake. When entering or buying new businesses we are constantly on the look out for synergies where we can combine sales forces, and production sites.   

But how about the country risk in the southern hemisphere?

There are more developed economies in the region than you seem to think. For instance, Chile is very developed with annual inflation down to only a few per cent and a very secure economy with about the same level of risk as one finds in Europe.

On the other hand, Colombia is generally regarded as unstable yet it represents one of our most successful joint-ventures. Due to the troubles in Argentina and Brazil we haven't started there yet, but regard these economies with growing interest.

Also, we most certainly want to be in China, but it's a very different market from anywhere else in the world. Even a Carrefour hypermarket in Shanghai looks very different from a Carrefour in Europe.   

80 per cent of your business still comes from Europe which is not generally regarded as dynamic.

Is this a problem for you?

If you take the consumer tissue market there is healthy underlying growth of around 4 per cent a year in the region.

But we have 7-8 per cent underlying growth in eastern Europe, which will continue to grow when the EU is extended later this year, as well as in the St. Petersburg and Moscow areas.

Also, we have been expanding pretty well in southern Europe, and a recent acquisition has given us an opportunity to become big in Italy and Spain within consumer tissue, where we already have 24 per cent of the market.

We have extremely good penetration in terms of both private label and retailer brands and successfully cooperate with a number of local retailers.   

To what extent can your brands be globalized?

In tissue you will never see a global SCA brand, but we do have one in incontinence. Tena has been our international spearhead because that is where we have had most of our organic growth.  

What is your agenda for 2004 and your longer-term vision for SCA?

My agenda is similar to that of any other CEO i.e. to deliver and secure profitable growth for my company. We shall continue our growth in both hygiene and packaging.

We shall also escalate in emerging markets thereby creating a global base both for tissue as well as for fluff products.   

What type of boss are you?

I think I'm recognised as a trustworthy person who keeps his promises and whom my managers can rely on. But obviously I am capable of taking hard decisions when necessary, for example, when it comes to restructuring.

What do you expect from your top management?

I expect them not just to have general business skills but also to understand the whole value chain. Otherwise, it's very difficult to run the business.   

What type of people do you really respect in business?

People who are honest, work hard, and who deliver.

Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 13, 26.03.2004

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