Heading up SCA Hygiene's division keeps Alfred Heinzel a busy man. But he took some time out to explain his company's future plans to PPI

By Hugh O'Brian

SCA Hygiene absorbs yet more acquisitions

Alfred Heinzel has every reason to be pleased with SCA Hygiene’s performance

SCA Hygiene is Europe’s leading tissue producer with an annual output of 1.1 million tons. In 1999, sales reached over $3.2 billion, giving SCA a total market share of 20%. The man that has been in charge of this European giant since 1997 is Alfred Heinzel. He came to the SCA group in 1988 when the Swedish company acquired the Laakirchen paper mill in Austria from the Heinzel family, which has a long history in papermaking and paper trading. Moving back to the hygiene products side of the business in 1995 with the acquisition of PWA, Heinzel has been leading the charge as SCA has turned itself into Europe's top hygiene products company. The company has grown rapidly over the past five years through organic growth as well as acquisitions. Toward the end of 1999, the company was particularly active, snapping up various companies in the European tissue sector, including AM Paper in the UK, Panosa in Spain and the Portuguese tissue company, Nisa. And, of course, SCA has recently been pursuing shares in Metsa Tissue of Finland. With all this activity going on, PPI's Hugh O'Brian decided to catch up with Heinzel to discuss the state of the business and the outlook for the future of SCA Hygiene.

PPI: Which sector of the hygiene products business are you prioritizing at the moment?

AH: We are essentially in five business areas, which are adult incontinence, away-from-home (AFH) tissue, consumer tissue, feminine protection and baby care. The incontinence business can be further broken down into institutional and consumer sectors. As far as priorities go, the institutional incontinence business is our top priority since it is a growing sector where we have a very strong international market position. We have a global presence and an international market share of 30%. It is a very good business for us and we are investing in it to keep growing as the market grows with our Tena brand. Our next most important area is AFH tissue, with our well-known Tork brand. We have a very strong market position in many countries around the world and we intend to grow in this sector as well. Next comes consumer tissue, where we are also investing heavily with, for example, the new TAD (through air dried) tissue machine at Mannheim in Germany. Our recent acquisition of AM Paper in the UK is also aimed at the consumer tissue market. Feminine protection is an area where we have a strong market position in selected countries and we are looking at ways to increase our presence in other markets. Baby diapers is the category that we are still deciding on. We got out of the brands business in France recently and are now concentrating on private label, which is a good business for us. But to be honest, we could be interested in strategic alliances for the diaper business if the right offer came along.

PPI: What are the key market and financial figures that you judge your performance by?

AH: As far as the financial goals go, we look very closely at operating surplus and cash flow growth. Our target for operating surplus is 14% and our target for cash flow growth is 12%. For this year we are forecasting a growth in cash flow of 15%, with 9% of that from organic growth and 6% from acquisitions. This growth should help us increase our market shares and that is very important to us. We have a strong belief in PIMS, which stands for ’profit impact by market share’.

PPI: How do you view the battle between brands and private label products?

AH: We have taken the dual track approach whereby we offer both brands and private labels in most of our product lines. This is our strategy, which is clearly different from some other branded product suppliers, who only make private label to fill out their production schedules when demand for brands is down. By going for the premium private label grades, we can achieve good profitability levels in line with the brands.

PPI: What about the quality battle in Europe where TAD products are competing against conventional tissue? How has the startup of the new TAD line at Mannheim gone and how is the tonnage being accepted in the market?

AH: The machine started up about a month early and the quality has been very good. However, we did have some early production problems, which required some modification to the electrical systems. We carried this out in November. Since then production has been great. We are using the tonnage for our premium kitchen towels under the Zewa brand name. We are competing with numerous brands in the market, with Bounty from Procter & Gamble (P&G) being the big competitor. When we entered the market with the new TAD Zewa they, of course, tried everything to compete, including lowering prices, running big promotions and so forth. The latest market data we have shows that Zewa's share has bounced back up to 22%, while Bounty is at 18%.

PPI: Do you think that TAD is the trend going forward? Would you consider building any conventional, non-TAD machines in the future?

AH: We are convinced that TAD offers the superior quality that customers are beginning to expect. So we will not build any conventional machines in the future. We will only build TAD since it is the logical quality development. We are the leading TAD supplier to the European market today with a total production capacity of 140,000 tons/yr, followed by Kimberly-Clark (K-C) with around 125,000 tons/yr and P&G with about 95,000 tons/yr.

PPI: What about the shoe press technology that is being developed as a cheaper alternative to TAD?

AH: That technology does offer some improvements. I think that in the near future ’conventional’ tissue machines will automatically include the shoe press for quality improvement. But the quality does not match TAD, so I think there will be two types of machine: TAD and conventional with a shoe press.

PPI: What about your position in Italy? It is one of the few spots in Europe where you do not have a good position in tissue and it is well known that you have been searching for something there for quite a long time. How do you plan to get into the market?

AH: Yes, we have been looking around there and talking to several companies. However, the families that own the tissue companies do not want to sell. They are apparently happy with the status quo and don�!46;t need the money at present. However, we do want to get into the Italian market and are looking at an alternative plan to build a tissue line at our existing Italcarta linerboard mill in Porcari, near Lucca. We have the land and are working on the permits to build a line. We should decide on something in the next year. We are a net buyer of 50,000-100,000 tons/yr of jumbo tissue rolls, so we need a PM somewhere in Europe. It is just a question of where, and if we build in Italy, we could achieve two things at once.

PPI: You seem to have been more successful in Iberia. What draws you to those markets?

AH: We are attracted by the high growth rates. We have had a plan for some time to strengthen our position there and the recent acquisitions have been additional steps in that plan. With the acquisitions of Marpo and Panosa in Spain, combined with the purchase of Nisa in Portugal, our annual tissue sales in Spain and Portugal will total 100,000 tons. That gives us the leading market position in the Iberian Peninsula.

PPI: How does the acquisition of AM Paper in the UK fit your strategy in that market?

AH: Our tissue position in the UK was based mainly on the Prudhoe mill that we bought from K-C in 1996. This mill is producing high quality branded products. We wanted to improve our position in the private label sector and AM has a very strong position in the premium private label area. AM Paper's share of the UK consumer tissue market was 14%, so as a result of the acquisition, SCA’s combined market share in the consumer sector in UK doubled to 28%. Therefore, the acquisition fits in perfectly with our strategy to offer both brands and premium private label products to the market. The fact that the company has a TAD machine was also interesting to us.

PPI: What is the current outlook on Metsa Tissue? It appears that Metsa-Serla is more willing to sell its share now that it has made it clear that tissue is not one of its priorities.

AH: As you know we bought around 20% of the shares in September 1999. We would certainly be interested in buying the rest of the company and are prepared to make the investment. But we will not buy it at any price - the price must be right to satisfy our financial goals.

PPI: How do you view eastern Europe?

AH: We consider eastern Europe as one of our core markets and feel that there are strong growth prospects there. Annual growth is over 10%, versus growth in the order of 2% in western Europe. In the incontinence products sector we already have very strong market positions and on the tissue side we have production facilities in Poland and Russia. We are the market leader in eastern Europe in premium tissue grades. Profitability is clearly much lower than other markets, perhaps half of what it is in western Europe. But we are making money and are confident that our investments will pay back quite well over the long run.

PPI: How much emphasis are you placing on regions outside Europe?

AH: We already have rather good positions in incontinence products in Latin America, North America and Asia-Pacific. On the tissue side, we have recently been most active in Latin America and are starting to look more closely at Asia. In Latin America, we have increased our tissue presence quite a bit in the past three years. We see very good growth prospects for those markets, both for tissue and fluff products. In Colombia, we now have 50% of the shares in the tissue company, Productos Familia. We previously had a 50/50 joint venture with Productos Familia in the fluff segment and the cooperation has developed very well. We also have an interest in Ecuador through Tecnopapel, which was purchased by Productos Familia.

PPI: What about the deal to buy Melhoramentos Papeis in Brazil. Why did that fall through?

AH: We were very close to finalizing the deal to take a 50% interest in Melhoramentos, which has a capacity of about 60,000 tons/yr of tissue and a market share of 10%. Unfortunately, the currency upheaval in Brazil made it impossible to carry out the deal. However, we are still looking at ways to move into the Brazilian market.

PPI: Do you have any plans to increase your presence in Asia?

AH: We are currently involved in several joint ventures in Asia on the fluff products side. For tissue, we bought a share in the Filipino tissue company, Holland Pacific Paper, in late 1998. It has a tissue capacity of around 25,000 tons/yr, but has only been selling about half that much. The company has a 22% market share and we are working to improve performance and results. We are also installing production lines for incontinence products there to develop the natural synergies between tissue and fluff products. We see our purchase of Holland Pacific as a test to see if we want to do more in the Asia Pacific region.

PPI: How are you making use of the internet and e-business within SCA Hygiene?

AH: We were a bit passive in the early stages, but now we have become much more active. Instead of e-business, we call it c-business for ’collaboration’. We feel there are many ways in which this new media can help our business. A very important area is consumer advertising and promotion, especially among young women for our feminine care products. There are lots of young net surfers and so we have moved an enormous part of our advertising/promotional spending to the web sites. In the area of business-to-business contacts, we have developed a top-level web site that retailers are putting on their site as a link. It is very important to get a good position on retailers’ sites. A third area where we are making use of the internet is, of course, as a research tool for our R&D departments. This is for information such as scientific literature, patent searches, trade data etc. And finally, we are putting the internet to use in our supply chain management functions to tighten the supply chain and inventory management.

PPI: We have heard you refer to ’networks’ within SCA Hygiene. What are these networks?

AH: Our ’network’ is a plan that we have been pursuing to concentrate production on fewer and larger mills. These are so-called strategic mills, with an annual capacity of 100,000 tons or more. We want to concentrate our product lines in certain mills that have the lead competence for that product. For example, the Edet mill in Sweden is the lead mill for our industrial wipes and towels product line. To concentrate production there we have rationalized production in other smaller mills. For example, we have closed the Croisset mill in France and moved its PM 8, which was built only in 1995, to Edet. Following the expansion program, the Edet mill has been designated as the ’Wiper Center’ for the entire SCA Group and will be concentrating on hand-wiping grades such as the Tork brand, industrial wipes and toilet rolls. As another part of this plan, our other Swedish tissue mill in Nattraby has been shut down. These moves will lead to improvements in several areas. This includes better fulfillment of customer needs through greater flexibility, as well improved quality of our products and service. We also see a cash savings, which we think will improve our relative operating margin by around 2% - certainly not negligible. In addition, we expect lower long term capital expenditure due to this streamlined operating structure.

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