A2. Use of non-International Financial Reporting Standards ("IFRS") performance measures
Guidelines concerning non-IFRS performance measures for companies with securities listed on a regulated market in the EU have been issued by the ESMA (The European Securities and Markets Authority). These guidelines are to be applied to alternative performance measures (APM) applied as of July 3, 2016.
The Annual Report refers to a number of non-IFRS performance measures used to assist investors and company management to analyze the company’s operations. A description of the various non-IFRS performance measures used as a complement to the financial information reported according to IFRS is presented below.
The Board of Directors of SCA has established that the Group’s overall profitability target is to achieve a return on capital employed of 13% over a business cycle. The target is 30% for Personal Care, 15% for Tissue and to be in the top quartile of the industry for Forest Products. The growth target for Personal Care is annual organic sales growth of 5–7%, while the target for Tissue is 3–4%. For Forest Products, the target is to grow in line with the market.
It is important that SCA maintains an effective capital structure, while at the same time ensuring long-term access to loan financing. Cash flow in relation to net debt is to be taken into consideration in the target to maintain a solid investment grade rating.
A number of financial performance measures and how these are used to analyze the company’s objective are described below.
CALCULATION OF PERFORMANCE MEASURES NOT INCLUDED IN IFRS FRAMEWORK
RETURN MEASURES |
Return is a financial term that describes how much the value of an asset changes from an earlier point in time |
|
Non-IFRS performance measure |
Description |
Reason for use of the measure |
Return on capital employed, ROCE |
Accumulated return on capital employed is calculated as 12-month rolling operating profit as a percentage of average capital employed for the five most recent quarters. The corresponding key figure for a single quarter is calculated as operating profit for the quarter multiplied by four as a percentage of capital employed for the two most recent quarters. |
This is the central ratio for measuring return on capital tied up in operations. |
Return on equity |
For the Group, return on equity is calculated as profit for the year as a percentage of average equity. |
Shows, from a shareholder perspective, the return that is generated on the owners’ capital that is invested in the company. |
CAPITAL MEASURES |
Shows how capital is utilized and the company’s financial strength |
|
Non-IFRS performance measure |
Description |
Reason for use of the measure |
Equity |
The equity reported in the consolidated balance sheet consists of taxed equity increased by the equity portion of the Group’s untaxed reserves and non-controlling interests. Deferred tax liability in untaxed reserves has been calculated at a 22.0% rate for Swedish companies and at the applicable tax rate for foreign companies in each country outside Sweden. |
Equity is the difference between the Group’s assets and liabilities, which corresponds to the Group’s equity contributed by owners and the Group’s accumulated profits. |
Equity per share |
Equity in relation to the total number of registered shares. |
A measure of the amount of equity that exists per share and is used for measuring the share against the share price. |
Equity/assets ratio |
Equity expressed as a percentage of total assets. |
A traditional measure for showing financial risk, expressing the amount of restricted equity that is financed by the owners. |
Capital employed |
The Group’s and business areas’ capital employed is calculated as the balance sheet’s total assets, excluding interest-bearing assets and pension assets, less total liabilities, excluding interest-bearing liabilities and pension liabilities. |
This measure shows the amount of total capital that is used in the operations and is thus one of the components for measuring the return from operations. |
SEKm |
2016 |
2015 |
2014 |
CAPITAL EMPLOYED |
|
|
|
Total assets |
165,748 |
152,372 |
154,736 |
Financial assets |
–6,958 |
–7,220 |
–8,215 |
Non-current, non-interest-bearing liabilities |
–13,312 |
–12,235 |
–11,001 |
Current, non-interest-bearing liabilities |
–30,598 |
–27,748 |
–26,701 |
Capital employed |
114,880 |
105,169 |
108,819 |
|
|
|
|
CAPITAL EMPLOYED |
|
|
|
Personal Care |
13,665 |
13,149 |
13,578 |
Tissue |
61,335 |
55,054 |
55,489 |
Forest Products |
40,109 |
37,216 |
37,831 |
Other |
–229 |
–250 |
1,921 |
Capital employed |
114,880 |
105,169 |
108,819 |
Non-IFRS performance measure |
Description |
Reason for use of the measure |
Capital turnover |
Sales for the year divided by average capital employed. |
Shows in a clear manner how effectively capital is employed. Together with sales growth and the operating margin, the capital turnover ratio is a key measure for monitoring value creation |
Working capital |
The Group’s and business areas’ current capital is calculated as current operating receivables less current operating liabilities. |
This measure shows how much working capital is tied up in the operations and can be put in relation to sales to understand how effectively tied-up working capital is used. |
SEKm |
2016 |
2015 |
2014 |
WORKING CAPITAL |
|
|
|
Inventories |
14,347 |
14,661 |
13,793 |
Trade receivables |
17,811 |
16,829 |
16,827 |
Other current receivables |
2,898 |
2,831 |
2,844 |
Trade payables |
–15,750 |
–14,351 |
–13,964 |
Other current liabilities |
–12,466 |
–11,580 |
–11,004 |
Adjustments |
43 |
–223 |
–146 |
Working capital |
6,883 |
8,167 |
8,350 |
Non-IFRS performance measure |
Description |
Reason for use of the measure |
Net debt |
The sum of consolidated interest-bearing liabilities, including pension liabilities and accrued interest less cash and cash equivalents and interest-bearing current and non-current receivables and capital investment shares. |
Net debt is the most relevant measure for showing the company’s total debt financing. |
SEKm |
2016 |
2015 |
2014 |
NET DEBT |
|
|
|
Surplus in funded pension plans |
1,186 |
371 |
3 |
Non-current financial assets |
722 |
1,032 |
3,137 |
Current financial assets |
568 |
775 |
1,260 |
Cash and cash equivalents |
4,482 |
5,042 |
3,815 |
Financial assets |
6,958 |
7,220 |
8,215 |
Non-current financial liabilities |
31,360 |
21,475 |
24,246 |
Provisions for pensions |
5,602 |
2,771 |
5,100 |
Current financial liabilities |
5,357 |
12,452 |
14,816 |
Financial liabilities |
42,319 |
36,698 |
44,162 |
Net debt |
35,361 |
29,478 |
35,947 |
Non-IFRS performance measure |
Description |
Reason for use of the measure |
Debt/equity ratio |
Expressed as net debt in relation to equity. |
Helps show financial risk and is the most useful measure for management to monitor the level of the company’s indebtedness. |
Debt payment capacity |
Expressed as the cash surplus in relation to average net debt. |
A financial measure that shows the company’s capacity to repay its debt. |
Interest coverage ratio |
Calculated according to the net method where operating profit is divided by financial items. |
The ratio indicates a company’s abillity to cover its interest expenses. |
PERFORMANCE MEASURES |
Various types of performance measures and margin measures expressed as a percentage of sales |
|
Non-IFRS performance measure |
Description |
Reason for use of the measure |
Organic sales |
Sales growth excluding exchange rate effects, acquisitions and divestments. |
This measure is of major importance for management in its monitoring of underlying sales growth driven by changes in volume, price and product mix for comparable units between different periods. |
SEKm |
2016 |
2015 |
2014 |
ORGANIC SALES |
|
|
|
Personal Care |
|
|
|
Organic sales |
865 |
2,282 |
853 |
Exchange rate effects |
–1,313 |
1,015 |
465 |
Acquisitions/Divestments |
–245 |
–18 |
12 |
Recognized change |
–693 |
3,279 |
1,330 |
|
|
|
|
Tissue |
|
|
|
Organic sales |
1,818 |
2,588 |
749 |
Exchange rate effects |
–1,375 |
4,602 |
2,158 |
Acquisitions/Divestments |
2,934 |
0 |
5,990 |
Recognized change |
3,377 |
7,190 |
8,897 |
|
|
|
|
Forest Products |
|
|
|
Organic sales |
–557 |
537 |
1,548 |
Exchange rate effects |
–134 |
252 |
143 |
Acquisitions/Divestments |
0 |
0 |
–726 |
Recognized change |
–691 |
789 |
965 |
|
|
|
|
Group |
|
|
|
Organic sales |
2,131 |
5,412 |
3,139 |
Exchange rate effects |
–2,822 |
5,868 |
2,766 |
Acquisitions/Divestments |
2,689 |
–18 |
5,276 |
Recognized change |
1,998 |
11,262 |
11,181 |
Non-IFRS performance measure |
Description |
Reason for use of the measure |
Adjusted gross profit |
Net sales minus cost of goods sold excluding items affecting comparability. |
Adjusted gross profit is stripped of items affecting comparability and is thus a better measure for showing the company’s margins before the effect of costs such as selling and administrative costs. |
Operating surplus/EBITDA |
Calculated as operating profit before depreciation/impairment of property, plant and equipment and intangible assets and share of profits of associates. |
This measure is a good complement to operating profit, as it shows the cash surplus from operations. |
Adjusted operating surplus/EBITDA |
Calculated as operating profit before depreciation/impairment of property, plant and equipment and intangible assets and share of profits of associates, excluding items affecting comparability. |
This measure is a good complement to operating profit, as it shows the cash surplus from operations adjusted for the impact of items affecting comparability. |
SEKm |
2016 |
2015 |
2014 |
OPERATING SURPLUS/EBITDA |
|
|
|
Operating profit |
11,279 |
10,947 |
10,449 |
Share of profits of associates and joint ventures |
–152 |
–199 |
–113 |
Depreciation/amortization |
6,258 |
5,961 |
5,478 |
Operating surplus |
17,385 |
16,709 |
15,814 |
Items affecting comparability |
2,710 |
2,067 |
1,400 |
Depreciation/amortization in items affecting comparability |
–80 |
0 |
0 |
Adjusted operating surplus/EBITDA |
20,015 |
18,776 |
17,214 |
Non-IFRS performance measure |
Description |
Reason for use of the measure |
Operating surplus margin/ |
Operating surplus as a percentage of net sales for the year. |
This measure is a good complement to operating margin, as it shows the cash surplus in relation to net sales. |
Items affecting comparability |
Under items affecting comparability, SCA includes costs in connection with acquisitions, restructuring, impairment and other specific events. |
Separate reporting of items affecting comparability between periods provides a better understanding of the company’s operating activities. |
Restructuring costs |
Costs for impairment together with personnel costs in connection with restructuring. |
This measure shows the specific costs that have arisen in connection with restructuring of a specific operation, which contributes to a better understanding of the underlying cost level in the continuing operations. |
Operating margin |
Operating profit as a percentage of net sales for the year. |
The operating margin is a key measure together with sales growth and capital turnover ratio for monitoring value creation. |
Adjusted operating profit |
Calculated as operating profit before financial items and tax, excluding items affecting comparability. |
Adjusted operating profit is a key ratio for control of the Group’s profit centers and provides a better understanding of earnings performance of the operations than the non-adjusted operating profit. |
Financial net margin |
Net financial items divided by net sales. |
This measure shows the relationship between net financial items and net sales. |
Adjusted profit before tax |
Calculated as operating profit before tax, excluding items affecting comparability. |
This is a useful measure for showing total profit for the company including financing, but not affected by taxes and items that affect comparability with previous periods. |
Adjusted profit for the period |
Profit for the period after deducting items affecting comparability. |
Shows the period’s total earnings capacity. |
Net margin |
Profit for the year as a percentage of net sales for the year. |
The net margin shows the remaining share of net sales after all of the company’s costs have been deducted, apart from income tax. |
CASH FLOW PERFORMANCE MEASURES |
Various performance measures and costs that have impacted the company’s cash flow |
|
Non-IFRS performance measure |
Description |
Reason for use of the measure |
Operating cash surplus |
Calculated as profit before tax, with a reversal of depreciation and impairment of property, plant and equipment and intangible assets, share of profits of associates, and items affecting comparability, reduced by tax payments. |
This measure shows the cash flow generated by profit and is part of the follow-up of cash flow. |
Operating cash flow |
Consists of the sum of operating cash surplus and change in working capital, with deductions for current capital expenditures in non-current assets and restructuring costs. |
This is an important control measure used internally within the organization that shows the combined cash flow from operating activities including all parts that the units have control over themselves. |
SEKm |
2016 |
2015 |
2014 |
OPERATING CASH FLOW |
|
|
|
Personal Care |
|
|
|
Operating cash surplus |
5,314 |
5,018 |
4,511 |
Change in working capital |
289 |
–314 |
–96 |
Current capital expenditures, net |
–805 |
–840 |
–884 |
Restructuring costs, etc. |
–75 |
–72 |
–186 |
Operating cash flow |
4,723 |
3,792 |
3,345 |
|
|
|
|
Tissue |
|
|
|
Operating cash surplus |
11,970 |
10,703 |
9,760 |
Change in working capital |
861 |
–285 |
55 |
Current capital expenditures, net |
–3,159 |
–2,260 |
–1,849 |
Restructuring costs, etc. |
–338 |
–491 |
–623 |
Operating cash flow |
9,334 |
7,667 |
7,343 |
|
|
|
|
Forest Products |
|
|
|
Operating cash surplus |
2,639 |
3,319 |
2,750 |
Change in working capital |
119 |
95 |
–342 |
Current capital expenditures, net |
–959 |
–869 |
–876 |
Restructuring costs, etc. |
85 |
–44 |
–92 |
Operating cash flow |
1,884 |
2,501 |
1,440 |
Non-IFRS performance measure |
Description |
Reason for use of the measure |
Cash flow from current operations |
Operating cash flow less net financial items and tax payments and taking into account other financial cash flow. |
This measure can be said to illustrate the cash flow generated by operations and that can potentially be used for strategic initiatives such as strategic capital expenditures or acquisitions. |
Strategic capital expenditures in non-current assets |
Strategic capital expenditures increase the company’s future cash flow through acquisitions of companies, capital expenditures to expand facilities, or new technologies that boost SCA’s competitiveness. |
Shows that size of the capital expenditures that are made in expansion and other growth measures. |
Current capital expenditures |
Investments to maintain competitiveness, such as maintenance, rationalization and replacement measures or investments of an environmental nature. |
Shows the size of the capital expenditures required to maintain existing manufacturing capacity. |