Competitive timber market - mixed market conditions

Income statement, SEK million	2011	2010
Net sales, SEK million	9 851	9 777
Operating profit, SEK million	577	1 084
Profit after net financial items, SEK million	573	1 082
Free cash flow after investments, SEK million	-241	445
Return on capital employed, %	11	21
Equity ratio, %	60	57
Real productivity, %	1,6	2,9

Södra's operating profit for the first six months of the year amounted to SEK 577 million (SEK 1,084 million for the same period last year), which is equivalent to a return of 11 (21) per cent on capital employed. The deviation of SEK -507 million in operating profit is explained mainly by prices for purchased timber, which have increased by 15 per cent and so have had an adverse effect on profit to the tune of SEK 624 million.

"With the exception of the sawmill industry, which is in the midst of a deep depression, conditions have been good over the first six months of the year," said Group President Leif Brodén. The upturn in the trend for new construction is taking a long time to materialise in both the USA and Europe. There has also been a discernible weakening in the vital renovation sector in Europe.

"Delivery criteria on the European pulp market have been good over the first six months of the year, while Chinese deliveries have seen a decline."

"We expect that global timber costs will continue to be high over the rest of the year as a counter to the price uncertainty which we are starting to see with regard to our primary products," continued Brodén.

Södra increased its productivity by 1.6 per cent over the last twelve months, suggestions for improvements from staff making a contribution of 1.1 per cent. Both the pace of implementation of staff ideas for improvements and the annual growth in profits increased over the period, beating previous record levels. More than 80 ideas per week were implemented over the first six months of the year, and profits improved by SEK 76 million over the period.

The timber supply from Södra Skog to the mills was good throughout the spring. The market has been characterised by a waiting game, and despite a certain downward adjustment of timber prices, prices are at an historically high level. Södra's ever-more significant biofuel operations are on a par with last year. In our opinion, the demand for biofuel will increase as a consequence of the expansion of biofuel-based applications.

The pulp market has been characterised by historically high pulp prices in USD, which have been countered to an extent by a stronger Swedish krona over the spring. Södra Cell's delivery volumes of both pulp and electricity and district heating are on a par with last year. The pulp mills are expected to deliver an operating profit for the year which is in line with our return requirements. 

Two new products will be manufactured and supplied by Södra Cell before the end of the year: textile pulp in Mörrum and DuraPulp in Värö. DuraPulp is a new composite material which is completely renewable and biodegradable. This material can be used in many different applications such as interior fittings and packaging.

The prospects for the pulp market for the rest of the year are deemed to be hesitant but good.

New construction activity remains low on a number of important markets for Södra Timber. The renovation sector is slightly better. The investment in a new sawmill in Värö with a capacity of 750,000 cubic metres is into the commissioning phase. The next step is to fine-tune the plant over the third quarter. The sawmill in Åtvidaberg was closed in the spring, and Traryd has been converted into a purely hardwood sawmill.

The profitability of Södra Timber is extremely unsatisfactory, but it is thought that the market will gradually improve.

Trivselhus has seen a good order intake over the spring, while at the same time the Swedish housing market for single-occupancy houses is in decline. Näshult mill will be closed in response to shrinking demand, affecting 28 people. 

The interior products sector has been characterised by price pressure over the spring across large elements of its range on account of a strong Swedish krona.

Södra Interiör is continuing to focus on production synergies, brand building and new products. Focus on hardwoods has intensified over the spring, and oak boards are seeing the greatest sales success. Interior product delivery volumes for the first six months of the year are on a par with the previous year. The market prospects for interior products for the rest of the year are thought to be good.