This is a translation of the annual report for the 2008 financial year as presented in original by the Board on 10 February 2009. This translation does not replace the original annual report. In the event of any lack of clarity or disparity between this translation and the annual report, the annual report will always take precedence.
The Board of Directors and President of Södra Skogsägarna Economic Association (corporate identity number 729500-3789) hereby submit the Annual Report and Consolidated Financial Statements for the 2008 financial year. The business result and financial position of the Parent Company and the Group are presented in the following income statements and balance sheets, along with notes and comments to the financial statements.
Purpose of the organisation
The purpose of Södra is to promote the economic interests of its members through trading in and processing forest products; securing a market for its members’ forest products at market prices; promoting high-value, advanced forest production while respecting cultural and natural values; supporting and developing individual forestry; monitoring and promoting the economic policy interests of members; and running operations otherwise compatible with the above.
Changed financial year
The storm Gudrun in 2005 changed key assumptions for Södra’s business operations. It led to an extension of the 2005 financial year to encompass the 18-month period 1 January 2005–30 June 2006 so that the effects of the storm could be included in a single financial year. The following financial year was also extended to encompass eighteen months. From 2008 the financial year is consistent with the calendar year. The comparison period comprises 1 July 2006–31 December 2007 (figures in parentheses).
Market
During the first half-year, global economic activity was relatively strong despite the negative effects of high raw material prices and central bank rent increases. During the second half-year the global economy weakened significantly. Global BNP growth on an annual basis fell from 5 per cent in 2007 to approximately 3 per cent. In autumn the economic decline increased. Tighter credit availability, high interest rates on loans and significantly falling asset prices culminated in a financial crisis that from mid-October severely threatened global financial stability. The fear of inflation that pervaded the first half-year rapidly changed to a fear of deflation. In the final quarter of the year the decline in the world economy was exceptionally strong and most major economies went into recession. Central banks and governments were forced to implement powerful, coordinated measures in the form of reductions in key interest rates and stimulation packages to dampen the recession.
The USD, which had weakened over several years, reached a bottom level just before mid-year. When the financial unrest arose the dollar gained strength, at the same time as the SEK became weaker. The USD/SEK ratio strengthened from approximately 6.00 at mid-year to approximately 7.80 during the final quarter.
The market for sawn timber fell dramatically during the year. Production in Germany and Sweden continued at a very high level however due to the large stocks of storm-felled saw logs that had to be sawn. The US market weakened further and European exports to the USA virtually stopped. Changed building standards in Japan temporarily stopped exports to the country. At the end of the year new construction braked strongly in major parts of Europe, while the renovation sector continued to be active. Prices in SEK fell by almost 25 per cent, despite the positive currency effect at the end of the year.
The market for Gapro’s interior wood products was strong early in the year but weakened in line with the economic downturn. The downturn was evident first in Norway while the development in Denmark and Sweden was somewhat more stable. Price development was weak throughout the year.
Demand for pulp declined gradually as a result of changing demand in certain paper segments and the economic downturn. Unbalance in the market brought large inventory increases in the second half-year and in the fourth quarter global stocks of pulp reached record levels.
The pulp price, measured in USD, rose in the first half-year, and the price for bleached softwood sulphate pulp in Europe reached a peak of just over USD 900 per tonne in June. The equivalent price for bleached hardwood sulphate pulp was USD 840. The weakening in the pulp market during the second half-year led to lower prices of USD 250 per tonne for both softwood and hardwood sulphate pulp. The price trend in Swedish and Norwegian kronor was however more stable due to the stronger USD. The average net price in SEK received by Södra Cell was some 4 per cent higher than in the previous financial year.
The timber market was also affected by the economic downturn. Production was high in the forest industry at the start of the year and demand for raw materials was strong in the membership area and externally. There was much wood available due to the large stocks from the storms of previous years. Terminal stocks have however steadily declined. Demand fell after the summer and prices declined. In July, Södra and other buyers reduced saw log prices by some SEK 40 per m3fub. In mid-Sweden pulpwood prices were reduced by a total of SEK 60/m3fub in two steps during the autumn. In November, Södra reduced the price of hard pulpwood and removed the premium on thinning assignments and wood deliveries from members who harvest their own forest.
Storms Gudrun and Per
Södra Skog has completed most of the work relating to the storms Gudrun and Per. Wood volumes generated by Gudrun reached a total of approximately 25 million m3fub on land belonging to Södra members, with volumes generated by Per totalling approximately 8 million m3fub. The total wood value in the forest-owner chain is approximately SEK 11 billion. At its peak at year-end 2005/2006, Södra’s total wood stocks (at roadside, terminals and mills) totalled 10 million m3fub compared to the normal level of 1.5 million m3fub. At the end of 2008 there were 2 million m3fub at terminals and normal mill and roadside stocks. The annual accounts have, following individual estimates of the value of remaining terminal stocks, been charged with SEK 50 million in depreciation. All terminal wood is expected to be processed by autumn 2009.
Investments and acquisitions
Investments totalled SEK 1,277 million, of which SEK 751 million was in Södra Cell and SEK 264 million in Södra Timber.
Energy investments continued. The single largest investment decision pertained to increasing energy efficiency at Södra Cell Värö. Installation of a new evaporator and bark dryer worth approximately SEK 500 million means the mill will be independent of oil for normal operations. Major investments in energy efficiency were also decided for Södra Cell Mönsterås with a total value of SEK 39 million.
Södra Timber decided to build a new planing mill at the Långasjö sawmill. The plant will be commissioned in the first quarter of 2009 and is dimensioned for the entire sawmill production of 300,000 m3.
In spring 2007 an acquisition was made of closed sawmill company Billingsfors Sågverks AB. A study has been made of the potential for investments in new sawing and processing equipment. During the year Södra Timber acquired 18 per cent of the shares in Heca AB, which is the parent company of Uni4Marketing AB, a company which sells sawn timber products to North Africa and the Middle East.
Gapro made two acquisitions. Through the purchase of BDL Bygg- och Dekorlist AB in Jokkmokk, which manufactures mouldings from MDF board, Gapro has acquired expertise in painting MDF mouldings. Prior to the acquisition, Gapro was the company’s largest customer. An acquisition was made of Norwegian company Magne Bråthens Eftf. AS, which planes pine mouldings. The company is situated in Flisa outside Kongsvinger. During the autumn Gapro has focussed on moving production from subcontractors to its own production units in order to utilise available capacity, and this is expected to continue in 2009. Investments were made at the end of the year to further increase the efficiency and automation level of Gapro plants.
Södra Skog added 4,000 hectares of forest in Estonia, and now owns almost 16,000 hectares of forest in the Baltic States.
Södra invested SEK 50 million in SunPine AB. The investment makes Södra, in conjunction with Sveaskog and Preem, joint owners in a company that is planning to produce biodiesel from raw tall oil, which is a by-product of the pulp process. Södra’s ownership share in SunPine AB is 19.9 per cent.
Research and development (R&D)
Södra’s costs for R&D were SEK 77 million (75), of which SEK 56 million (56) were in Södra Cell. This includes costs for Södra operations and support for external research projects.
On the forestry side and in sawn timber, research is mainly carried out in collaboration with research institutes and universities. The overall objectives are to promote a high level of sustainable forestry production, product development of sawn timber products and increased knowledge of timber construction.
Södra Cell’s R&D investments focus on product as well as process development. A number of projects are run internally and in co-operation with customers, suppliers, and research institutes. Research is based at Södra’s research centre in Värö.
Södra also supports research through the Södra Foundation for Research, Development and Education. The foundation aims to promote university-level research relevant to forestry and forest industry operations in southern Sweden.
Environment
At the end of the year, Södra was running 83 operations in Sweden subject to permits and reporting requirements under the Environment Act and two operations in Norway subject to permits under Norwegian law. Pulp mills, sawmills, Mönsterås harbour and peat bogs are operations requiring permits. The operations with reporting requirements include factories for processing sawn timber, wood terminals, biofuel terminals and plant nurseries.
Södra’s impact on the environment is mainly through its discharges and emissions to water and air from pulp production.
A number of the wood terminals established after the storm Gudrun were closed during the period. Some remaining terminals are likely to become permanent. At the end of the year, 31 terminals were in operation subject to reporting requirements.
Pulp mills have permits with final or provisional conditions mainly related to discharges to air and water. Provisional conditions apply during a limited trial period after which the mill’s status is reported and final conditions determined.
The most significant applications/information involving official procedures during the year were:
– Södra Cell Värö negotiated the final conditions for energy and air emissions in the environmental court in April. Ruling was given the same month.
– Negotiations were held in June relating to the landfill expansion at Södra Cell Mörrum. Ruling was given in August. Södra Cell Mörrum also held proceedings in October to increase production to 560,000 tonnes. Ruling was given in December.
– The environmental court notified its decision pertaining to revised terms for Södra Cell Mönsterås, which also applied for a temporary production increase, which was granted in November.
– Södra Timber has one reporting requirement and ten operations requiring permits. In December, Södra Timber Ramkvilla was granted permission to double production. At the closed impregnation operations in Hultsfred, Hjortsberga and Lidhult, where Södra has been one of the owners, the county councils have requested Södra investigate environmental risks and required measures. Notification has been received regarding Lidhult that Södra is to pay approximately SEK 3 million of the cost of these measures. This decision has been appealed. A similar injunction has been advised for the Hjortsberga area, which has also been appealed. A risk analysis with proposed measures for Hultsfred will be submitted to the county council in 2009.
Financial risk management
Södra is exposed to financial risks through its operations. Financial risks refer to variations in profit and cash flow as a result of fluctuations in exchange rates, raw material prices, interest levels along with refinancing and credit risks. Södra’s financial policy for management of financial risks is approved annually by the Board, which provides objectives and governs the risk mandate and limits for financial operations. Transactions are handled centrally by the Treasury unit.
Under the financial policy, up to 20 per cent of Södra’s pulp production may be hedged using pulp price derivatives. Agreements have been signed for 2009 and 2010 for volumes representing 16 and 11 per cent respectively of anticipated pulp production. There is no hedging for subsequent years.
Södra is also able to take out financial hedging of oil, electricity and emission rights. Oil exposure may be hedged by up to 75 per cent for the coming 6-month period. For the period January-June 2009, 75 per cent of heating oil is hedged. In terms of financial electricity trading, 100 per cent of forecast net consumption may be hedged. For 2009 32 per cent is hedged, while 14 per cent has been hedged for 2010. Södra’s surplus emission rights are sold according to the guidelines in the adopted policy. For the coming 12-month period, up to 100 per cent of the net surplus may be sold. No emission rights have been sold for 2009.
Södra’s currency exposure is hedged in accordance with the financial policy. Up to 70 per cent of the estimated net inflow during the coming 12-month period is hedged, and up to 50 per cent of the inflow for the subsequent 24-month period. At the end of the financial year, 37 per cent and 0 per cent respectively were hedged. Under the policy, currency forward contracts, currency swaps and currency bonds may be used as hedging instruments. Translation exposure attributable to net values in foreign subsidiaries is hedged only in special circumstances.
Liquidity and loan risks relate to the risk of liquidity being insufficient when required, or refinancing being expensive or difficult. The financial policy states that the Group’s cash and cash equivalents combined with credit commitments shall represent at least 15 per cent of forecast annual revenue. In addition, the average credit period for Södra’s loan liabilities (including binding promises) is to exceed 2.5 years.
Credit risk is limited through the financial policy’s requirement that most of Södra’s cash and cash equivalents be invested in instruments with high liquidity, short duration and which have a Standard & Poor’s credit rating of A-/K1 or higher.
The majority of Södra’s trade receivables are credit insured. Sales are preceded by a strict credit analysis.
Interest risk represents the negative changes in market value that can arise with interest fluctuations in the yield curve (market interest for different terms). It is Södra’s interpretation that a relatively short fixed-rate term leads to lower financial costs for the group in the long run. The objective under the financial policy is thus to maintain fixed-interest terms for financial liabilities within the 3-15 month range. At the end of the financial year there were no external loan liabilities except from Södra members. For the Group’s interest-bearing investments, the financial policy indicates how the interest risk is to be limited through the allocation of investments over different fixed-rate periods.
Annual General Meeting
The AGM was held in Gothenburg on 14-15 May 2008. The meeting resolved to pay a dividend for the 2006/2007 financial year of 19.5 per cent of capital contributed, 12.5 per cent of the value of wood deliveries, and a bonus issue of 40 per cent of available paid-up capital contributed per 31 December 2007.
The Articles of Association were also changed at the AGM to state that repayment of capital contributed is to be made following AGM approval. The addition is in line with the existing liability of the AGM to adopt the annual report from the previous year and redemption of member shares included therein. This is to ensure that capital contributed continues to be classed as equity following the future transition to accounting in accordance with IFRS. Due to the new legislation pertaining to subordinated debentures, it was also decided to enable registration of subordinated debentures with securities administrators and the issue of subordinated debentures with a fixed duration.
Members
The number of members was essentially unchanged at the end of the year and amounted to 51,657 (51,736). The associated membership area was 2.33 million hectares, an increase of 20,000 hectares.
The Board adopted a decision to sell green electricity. The offer initially comprises surplus electricity from Södra’s pulp mills in Sweden, but ultimately also electricity from wind power. Sale is through the wholly-owned subsidiary Södra Medlemsel AB and is directed to members and employees in Sweden. The first delivery was on 1 January 2009.
From June 2008 Södra members have been able to trade in issued bonus capital via a trading site at SEB.
Accounting in accordance with IFRS
As resolved by the Board, Södra will apply the EU-adopted International Financial Reporting Standards (IFRS) from 1 January 2009. In its 2009 financial reports, IFRS will be applied alongside comparison figures for 2008 converted per IFRS. Detailed information including the effects on financial reporting will be presented in conjunction with the first-quarter report in 2009.
Human Resources
The basis of human resources activities is determined by the Human Resources policy, which stresses the importance of employees being actively involved in the business and in change processes. Skill and motivation are key factors alongside job satisfaction and job security. Leadership should be characterised by clear and open communication. The policy also states that Södra shall attract, develop and retain employees in an organisation characterised by mutual consideration and respect.
Human Resources policies are translated to specific objectives and plans throughout the Group. The objectives are followed up by the Group Senior Management Team and the Boards.
Prioritised areas include competency supply to meet the growing number of retirements in coming years. The annual recruitment level is currently about 250 people. One measure is the presentation of the company at selected universities; another is Södra’s regular trainee programme which is intended to develop managers and specialists for the future. The current trainee programme attracted 218 applications.
A Group-wide introduction programme was held during the year for 225 new employees. The introduction aims to make it easier for new employees to get to know the various business units in the Group and create understanding for the significance of each employee’s contribution. Regular management development and management training programmes as well as annual employee appraisals between managers and employees have been implemented according to the plan. A prioritised area is the reduction of workplace injuries. Goal-oriented measures led to fewer workplace accidents during the year.
To make Södra a better employer, regular employee surveys are held where all employees can give their view on working conditions. Results are reported back on a workplace and work team level, where the necessary improvement measures are implemented. The next employee survey will be run in spring 2009.
During the year a proposal has been developed that aims to offer all Södra employees in Sweden a more attractive long-term pension solution. This is one of a number of measures to help Södra be perceived as an attractive employer.
Appropriation of profits
The Board’s proposal to the AGM regarding the appropriation of profits is presented here.
The proposal involves SEK 255 million being transferred to members through profit distribution, consisting of a dividend on capital contributed of 4 per cent and on wood deliveries of 5 per cent. In addition, a bonus issue of SEK 76 million is proposed and a dividend of SEK 7 million on subordinated debentures per contract.
Other
Södra Vindkraft has in its first year of operation, evaluated 300 proposals from members for suitable locations for wind turbines. Work is now progressing on some 30 projects which comprise some 300 turbines. The project work has been dominated by managing of applications, wind measurements and communication matters.
Preparations continued in 2008 towards cooperation with Danish forest owners. They have formed SEUS (Skovejernes Udviklingsselskab) and applied for membership in Södra. The process of organising operators to handle contact with the Danish forest-owners has commenced. The financial situation with major currency fluctuations and changes in demand has meant that delivery start for member wood from Denmark has been postponed to 2009.
In 1997 Södra Cell AB performed a leasing transaction through which usufructs for equipment at Södra Cell Mörrum were leased in two main leases and leased back through two subleases. The transaction was performed with two US banks as counterparties. During the year the main lease and sublease with one counterparty were terminated with no financial effect for Södra.
At Södra Cell Tofte, eucalyptus supply has changed focus from import of wood to import of chips.
CTMP pulp, which is produced at the Folla pulp mill is used primarily in graphic paper, tissue and multilayer board. CTMP competes with hardwood sulphate pulp for these products and competition is often price-based. Rising production of low-cost eucalyptus sulphate pulp in Latin America has increased the competition for CTMP. Asia is the biggest market for CTMP, while the European market has stagnated and contracted. Several new CTMP mills are being built in China, and for that reason a clear surplus of mechanical pulp is anticipated in coming years on the global market. Given this background and the anticipated cash flow trend for the operation, the asset value of Folla has been impaired by SEK 35 million. The asset value of Tofte was impaired by SEK 183 million the previous year.
Events after the balance sheet date
In January 2009, Gapro acquired Werner Träförädling AB, the biggest hardwood sawmill in Scandinavia. The company has 20 employees, annual sales of SEK 40 million, and is located at Södra Vi in southern Sweden. Annual production amounts to 42,000 cubic metres.
Södra Cell Tofte had a four-week market shutdown in January 2009 in response to the weakened demand for pulp in the autumn.
In February 2009, Södra was granted permission from the ITP Board for self-administration of ITP1 pensions.
Outlook for 2009
In the wake of the autumn’s financial crisis, the international economy is expected to be weak in coming years with a global recession in 2009. Housing construction in the USA is expected to remain at record low levels. Major stimulus packages should help facilitate a stabilisation of the situation during the second half-year.
Demand for forest raw materials is expected to be limited in the first part of 2009 due to production cutbacks in industry. The situation in the pulp market is hard to judge, but currently there are high supplier inventories and low inventories at pulp customers. An improved balance between production and demand for sawn timber is expected to result in gradually improving market conditions. A continued positive result is anticipated for Södra, although at a lower level than 2008.