Comment from the Chairman and the CEO

After two years of the market being overshadowed by the effects of the financial crisis, 2010 began with a welcome upswing. Production in the Group’s plants was at full capacity. The only exceptions were shut-downs in the sawmills during the Christmas and New Year’s holidays as an adjustment to a weakened market position.

Christer Segerstéen: We can also note that 2010 was a strong year for Södra’s members. Operations in Södra exist to support the members, the forest owners, and are nothing more than an extension of the forest estate.

What were the key milestones?

Leif Brodén: Södra Cell Värö became the world’s first fossil-free pulp mill. Our other Swedish pulp mills are expected to make similar progress in the next three years.

Another breakthrough in the energy area was our procurement, construction and commissioning of ten new wind power plants in Mönsterås. We own six of these, while four are being built together with Statkraft on adjoining land.

During the year, Södra cooperated with the lamp company Wästberg to present the w101 lamp in Milan. The lamp won the 2010 Design S, Swedish Design Award and the Good Design Award in the United States. The lamp was made of the new pulp-based material DuraPulp which is fully recyclable, compostable and sustainably produced. DuraPulp saw the light of day in 2009 when the Parupu children’s chair was presented at the design week in Milan.

Södra decided to build a tennis hall of timber in Växjö, which is also a concept for a modern sports centre with a purely wooden design. The project is being pursued with assistance from Swedish tennis legends Stefan Edberg and Carl-Axel Hageskog.

Together with our partners Preem and Sveaskog, we also inaugurated Sunpine in Piteå, the world’s first plant for the production of green diesel from forest raw materials.

At the end of the year, the Board decided to invest in the production of textile pulp in Södra Cell Mörrum, marking a new chapter for Södra. For the first time, we will become a sub-contractor to the textile industry and do so with a sustainable product.

Why are new products so important to Södra?

Segerstéen: The correlation is simple. If Södra does not have sufficient capacity to pay for the wood, company operations will not benefit the forest owner. Consequently, the Group has to manage changes in behaviour patterns on the market, making new products a necessity. It is pleasing that this work is being done on many fronts in the Group. In addition to the examples Brodén has listed, product development is under way for sawn timber while Södra Interiör introduced several new interior products of many different types of Swedish hardwood during the year.

What ties together all of the new steps taken during the year?

Brodén: A factor common to the new product projects being conducted or launched by Södra is that they are all further steps on the path towards sustainability, recyclability and renewability that Södra always follows.

The 2010 financial year was characterised by relatively favourable prices for such products as pulp. The price is set by the global market and Södra cannot influence it. How do we address this?

Brodén: We cannot control prices on the global market. This means that we can only work with what we can influence, which is developing our productivity. This is absolutely crucial in efforts to secure our long-term competitiveness. Södra’s unique approach for utilising the ideas of employees is a large part of this.

It was another milestone year for productivity work. In total, 3,867 improvement proposals from the employees were implemented with an overall effect equivalent to SEK 134 million in annual profit improvement. The total average productivity improvement in the Group was 3.4 per cent during the year.

How important is productivity when the Board monitors Södra’s development?

Segerstéen: The improvement is proof of the Group’s ability to handle the very tough demands set by the members. The Company has to strive to maintain a place at the very cutting edge of the market. If we fail and become complacent, the customers will not be able to afford to choose us. In such a case, Södra would no longer be sufficiently competitive in terms of the capacity to pay for the wood.

Do these productivity efforts also apply to Södra’s many partners?

Brodén: We are under considerable pressure to develop productivity, but no chain is stronger than its weakest link. This sets equally high demands on both us and our partners. It is our obligation to invite suppliers in and help them to conduct productivity work, and thankfully most of them perceive this as natural and positive.

During the year, the construction of Sweden’s largest sawmill was begun. When will it be finished?

Brodén: The sawmill is being built at Södra’s combined facility in Värö and is scheduled for inauguration in autumn 2011. At the same time, the entire facility combining pulp mill and sawmill will be made free from fossil-based energy in normal operations and will become the first forest industry facility in the world of this type to be able to do so. This is a large-scale industrial project and a major challenge for the organisation. The sawmill has the potential to become very competitive.

What does the sawmill mean for the forest owners?

Segerstéen: What is good for Södra’s industries is also good for the members. The expansion primarily depends on a profitability estimate and the potential we have for increased wood deliveries from the members in the area. The new sawmill is an important signal to the members/owners that we believe in the sawn timber market and our ambition is to continue to reduce our costs in order to ensure the Group’s competitiveness and long-term capacity to pay well for saw logs.

How is the organisation preparing for the new sawmill?

Brodén: The Värö project is not only a large new sawmill, but rather an entirely new approach for the Group’s work with sawn timber. It is not only a matter of how the new sawmill works, but also of the interaction between our various production units, both within and between business areas. The new arrangement involves changes in marketing efforts, such as the establishment of a new customer service centre for timber products.

How did the market for wood develop during the year?

Segerstéen: This was the first year since 2004 that Södra did not have storm-felled wood in stock.

Forestry activity was high thanks to large industry demand for raw materials. During the year, the market went from a situation of continuously rising prices and a risk of supply shortages to a situation with well-filled inventories of standing timber and a downward price adjustment at year-end. The costs resulting from the price increases in the first half of the year impacted operations in the autumn.

What is the idea behind the change in Södra Skog’s field organisation?

Segerstéen: The operating activities were modernised to better meet the forest owners’ needs for professional service. The 31 previous districts were reorganised into 19 forestry operations areas. In parallel, the democratic member organisation was renewed to facilitate member activities, and 32 forestry districts became 36.

This was the second year that the members were offered the opportunity to certify their forestry operations according to two standards, the Forest Steward-ship Council (FSC) and the Programme for the Endorsement of Forest Certification schemes (PEFC). How is this proceeding?

Segerstéen: It is gratifying to note that interest in double certification – according to both FSC and PEFC – has exceeded our high expectations. This is great since demand for the supply of certified products continues to grow and double certification benefits Södra’s market positions. At year-end, 1.24 million hectares of member land was double certified, corresponding to 53 per cent of all member land.

How would you summarise the Focus on Forestry project that was concluded after being conducted for three years?

Segerstéen: The objective of Focus on Forestry was to enable forest owners to learn more about measures that increase the growth and profitability of their own forest estate. Involvement was overwhelming. Södra had 37,000 participants in the activities, nearly twice as many as our original goal.

Were the autumn owner meetings also characterised by considerable involvement?

Segerstéen: The owner meetings are a unique kind of meeting where Södra members focus on the role as owners of the Södra Group. Representatives of the Board participated and were given a large amount of good input to think about. The commitment I found is something I take with me like a vitamin injection for the rest of the year.