Hello, everyone, welcome to this SCA telephone conference call on today's announcement that SCA plans to split the group into two listed company. This conference call is also audiocasted on sca.com. We have it live. We will have a replay after the call. In the end of the call, we will also have a Q&A session. With us here today, we have the host of this call, our President and CEO, Magnus Groth. Furthermore, Fredrik Rystedt, the Executive Vice President and CFO of SCA is here. Magnus Groth will also present Ulf Larsson, who has been announced Executive Vice President of SCA and is today President, SCA Forest Products. With this, I hand over to you, Magnus.
Thank you, Josefine. I would like to start with a historic perspective, since SCA has been on a transformation journey ever since the company was founded back in 1929. The abbreviation SCA, as you know, stands for Svenska Cellulosa AB or the Swedish Cellulose Company. It started out as a forest products company, in northern Sweden. After that, the company grew rapidly through great vision and execution. The company started to transform in the '70s to also add the hygiene business and the packaging business. During this time, these other businesses grew to become more than half of the overall business. Then during the last decade, the focus increased on hygiene through further acquisitions and very strong organic growth while the packaging business was divested and two publication paper mills were also divested, ending up in the SCA that we have today.
Looking at our current business after the first half year of 2016, 57% of sales is related to tissue sales in the away-from-home category and consumer tissue, while 29% is related to personal care, including incontinence care, feminine care, and baby care, while our forest products business today account for 14% of the business. Within forest products, we have the forest holdings, of course, we have pulp, publication paper, solid wood, kraft liner, and energy. One year ago, we announced to divide the group into two separate divisions. Since then we have worked with this separation. We have realized that these two different businesses, the hygiene business consisting of tissue and personal care, and the forest products business, are very strong and attractive companies with strong financials and strong strategies.
We also realized during this process that actually the links between these different parts of the business have become less and less important, that the separation actually doesn't include that many things that need to be separated because the operations are already operated quite separately. This has brought us to the conclusion that we are announcing today, which is to list two companies in 2017 by splitting the current group. We do this to create further value for our shareholders. The way of doing this is to distribute the group's hygiene business to shareholders. That means that on the day of the distribution, the SCA shareholders at that day will receive another share, which then relates to the new listed hygiene company.
All of this, and this is important to note, is subject to a decision at the Annual General Meeting of shareholders during next year. If this proposal is then agreed and supported by a majority at the Annual General Meeting, the listing is planned for the second half of 2017. To summarize then, what SCA will look like after the split and after the AGM 2017 is that we will have two very attractive, separate listed companies on the Stockholm Stock Exchange. One company will be a hygiene company, which is a leading global company in the areas of personal care and tissue. The CEO will be Magnus Groth, myself. The company will have a new name yet to be decided and will be registered with headquarters in Stockholm.
The second listed company will be a Forest Products company with an efficient and well invested Forest Products business, including all the forest land and all the industry operations. The CEO will be Ulf Larsson, who is today the current CEO of our Forest Products business. The company name will be SCA, which is quite natural considering the history and the meaning of the abbreviation. The Forest Products company will be registered and have its headquarter in Sundsvall in Sweden, very close to the Forest Products operations. To say something more about the equity stories of these two attractive businesses, SCA's hygiene business is a leading global business offering products and services that make life easier every day for millions of people around the world. We are active in approximately 100 countries today.
We have two global market-leading positions with our TENA incontinence care brand and our Tork away-from-home tissue brand. We also have very strong regional brands in a number of markets in baby, feminine, consumer tissue, and a number of number 1 or 2 positions in most of the markets where we're active. This part is benefiting from the increasing awareness of the relationship between hygiene and health, and of course, also from the fact that we have a growing and aging population globally, which creates an ever-growing demand for hygiene products. Down at the bottom is what the hygiene business looked like in 2015 to give an overview of the size of this business. Moving over to the Forest Products business. This is founded and based on the fact that SCA's Forest Products business is Europe's largest private forest owner.
It accounts for about 10% of Swedish forest land or 6% of the surface of Sweden. For anyone who is interested in investing in forest assets, this is a very attractive opportunity. The value created in this forest land is then further value added in a world-class, efficient, and well-invested Forest Products business. Added to this, looking into the long-term future, we see a long and stable and growing demand for fiber-based products, where SCA Forest Products has a very attractive position, especially in the softwood part of this market, and has a long history of very responsible and sustainable forest management with a net growth of the forest land.
Now looking into the longer-term future, we see attractive opportunities in areas like liquid biofuels, green chemicals, renewable materials, and of course, energy. There at the bottom again, you have a little box showing the approximate size or the exact size of the forest products business in 2015 to give you something to relate to. The board has also decided on a number of organizational changes to support this process, effective immediately, the SCA directors have been appointed directors also in the hygiene company that will become the parent company of the new listed hygiene business. I myself have been appointed also the CEO in this new hygiene company that will become the parent company of the listed hygiene business.
The board of directors have also appointed Ulf Larsson, who's currently the President of SCA Forest Products and member of the executive management team of SCA to, in addition to his current assignment, become Executive Vice President of SCA. This means that when this split happens, Ulf Larsson is already employed in the company which will be the new forest products company. That means that Ulf Larsson then will be appointed to the CEO of the listed forest products, and again, subject to a decision at the annual shareholders meeting. I would also like to mention that the main shareholders of SCA have voiced their support of this split of the group into two separate listed companies. With that, I would like to introduce Ulf Larsson, and maybe Ulf, you could briefly present yourself.
Thank you for that, Magnus. I've been in the company for more or less 25 years. I started out 1992 in the forest part, as I'm an educated forester. I had several positions in the forest operations. 1998, I turned over to the wood mechanical business, since 2001 up till 2008, I was responsible for that part. From 2008 and up till now, I've been heading forest products. That is very short what I've done in the company.
Thank you. A long experience in forest products, also you have been a member of the executive management team of SCA for a number of years.
Since 2008.
Since 2008. Thank you, Ulf. With that, Josefine.
Yes. With that, we open up for questions and answers. Please, operator, can you help us with the questions, please?
Thank you. As a reminder, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel the request, please press the hash key. Our first question comes from the line of Ian Simpson. Please ask your question.
Thank you very much. Good news about the split. I was just wondering, why have you decided to structure it by spinning off the Hygiene businesses, which is the much larger part of the business? It would perhaps seem slightly more normal to spin off Forest, which is much smaller, or are there any sort of implications around keeping the name or tax or anything? Thank you very much.
The answer is that most of the Forest Products business is in the current Forest Products subsidiary of SCA. However, a major part of the Forest land holdings are in the current parent company. By spinning out the Hygiene part, we gather all Forest Products operations and all Forest land in one legal entity. That's the reason for doing it this way.
Thank you very much.
Thank you. Our next question comes from the line of Linus Larsson. Please ask your question.
Yes, congratulations to these developments. Could you talk a bit about your thinking around balance sheets for the respective entities, what you're thinking around that? On that note, if you could also address, will there be any offering of shares, or will this be a very straightforward distribution of share to the existing shareholder base without any other type of complication or sophistication?
Thank you, Linus. This will be a simple distribution of new shares in the new Hygiene part without further complications. I will hand over to Fredrik to say something about the asset base.
Yeah. Hi, Linus. As you know, SCA is currently a very strong company in financial terms. We haven't finally concluded on the different balance sheets for the two new listed companies, so to speak. Of course, with that starting point, we will secure that both of these businesses will have adequately strong balance sheets to support the future, both strategically and operationally. We'll come back with more on those details.
Because there are a number of things to consider, obviously. What you're thinking around the Östrand project, just to mention one of the significant ones, the mill is scheduled to start up in May 2018. How will you ensure that you have the right capital structure? I mean, not too strong and not too weak a balance sheet for the Forest Products division.
Linus, of course, the investment in Östrand represents a very significant investment, and we're very much aware of the cash flows that that will require. We will structure both of these companies to ensure that we can cope with these investments and all other operational aspects. We'll conclude that analysis as we go forward now towards the AGM.
Of course, just to add there, Fredrik, we're really excited about this project to expand the pulp capacity in the Östrand mill. The project is on plan and on budget and will create a lot of value for anyone who holds a share today in SCA or in the future in the Forest Products company.
Right. Just one final question, if I may. You said previously that the main shareholders are supportive of these initiatives. Will the main shareholders also maintain an unchanged ownership in both of these new entities?
This is a question that you will have to ask the shareholders.
Fair enough. Thank you very much.
Thank you. Our next question comes from the line of Jeremy Fialco. Please ask your question.
Hi, good morning. It's Jeremy Fialco. I've got three questions. The first one is if you can make any estimate of what the additional central costs are likely to be in the transaction costs associated with in having two separate companies. The second question is if you can comment on the likely total dividend that the two companies will pay out, particularly on the forestry side, given that you've got this very large piece of capital investment, that means it could be a cash flow negative company for the early years of its life. The third part is on the hygiene business as a standalone company. Will that still have an A and B share class as SCA does today? Thank you.
Okay, to start with your first question. Yes, all current A and B shares in SCA will give a right to get them an equivalent A or B share in the hygiene company as it is distributed. The reason for this is that all shareholders should retain what they had before the split. That's the first question or the last question. When it comes to central costs, we foresee that the current headquarters will be part of the hygiene business since they're clearly mostly supporting this global business. This is something that we will work with the central costs until the proposal to be presented to the AGM next year. I don't foresee any big increases, but this is some work in progress and we'll have to get back on that.
Finally, when it comes to the dividend, I can just refer to SCA's dividend policy, and as you know, any dividend proposal will be based on the financial performance during 2016, and that's again, subject to the AGM beginning next year, so I don't have anything more to say there.
Okay, thank you.
Thank you. Our next question comes from the line of Oskar Lindström. Please ask your question.
Yes, good morning, gentlemen. My main question is around, you mentioned in the press release that this will create more shareholder value. I was wondering if you could maybe explain a little bit where you see this additional shareholder value being created, both referring to the forest products business and to the hygiene business as a consequence of this proposed split. Thank you.
Yeah, thank you, Oskar. In two ways. First of all, the boards and the management teams of these two separate listed companies will be entirely focused on their respective businesses. I'm sure that this will drive value for the shareholders since they can then really focus on increasing performance in those very different businesses. From an investor perspective, I think just the clarity of the different businesses and what they are doing and what their business is will also generate value.
If I may, a follow-up question on this. You mentioned the increased transparency from an investor's perspective. When you were considering this split, did you at any time consider splitting up forest products into a forest land business and a forest industry business, given that those two have very different properties from the perspective of investors?
We have worked very intensely during the last year to look at a number of different opportunities and structures and alternatives and evaluated the pros and cons of all of them. The conclusion we have today is to split the group into two separate listed companies. Specifically regarding the forest products business, of course, as I started out, the business is based on the forest land. Without the forest, there would be no industry, and the huge investments that have been done and that will create a lot of value would not be possible without, of course, having the wood supply. There is a strong connection between these businesses.
Do you think there are things you can do to highlight the full value of these forest lands other than just having it as a separate forest products business?
What we have announced today is to split the group into two separate listed companies, one hygiene company and one forest products company. This is what we will work with now so that we have a proposal to bring to the annual shareholders meeting next year.
All right. Thank you very much.
Thank you. Our next question comes from the line of Mats Rosendahl. Please ask your question.
Hello. I would just like to ask, what do you expect will happen with the capital markets debt that you have, the EUR corporate bonds and the SEK corporate bonds? What is more likely, that they will be in the hygiene company or will they be in the old forest product company, or can you comment on that?
It's somewhat of a premature question. We have announced today that we will initiate this work. Of course, part of the process as we go forward is to analyze how and exactly where these bonds will end up. Of course, as I said previously, we have a very strong balance sheet at this point of time. We will ensure that both of these balance sheets as we go forward also will be appropriately strong. We will manage this process as we go forward.
Will you be able to keep the A-minus rating, do you think, from S&P?
If you look at the current balance sheet of the group will just be distributed, the combined financial strength of these two companies remain the same as you can imagine. We'll work on this as we go forward.
Okay. Thank you.
Thank you. Our next question comes from the line of Saul Casadio. Please ask your question.
Hi. Thanks for taking my question. It is essentially a follow-up on a couple of previous questions regarding the allocation of financial liabilities between the two entities. I appreciate it is early stage, if you can give us maybe some indications in terms of, let us say, leverage and rating of the two entities, at least in terms of target. I know it is early stage, at least give a sense are you going to be thinking about splitting the liabilities between the two?
This is Fredrik here. I do not think we can give more comments because we have not concluded on this. We have announced today that we will initiate a work to work out a proposal to the AGM. Of course, part of this work that lies ahead of us now is to look at this balance sheet, look at our debt structure, and discuss and analyze how to distribute this debt. We have nothing further to add at this point in time.
Okay. At least will you, I do not know if you can add some color on this, will you target the same rating for the two entities, or is it possible that one entity will be higher rated compared to the other one?
I can't comment on that simply for the reason that we have had very limited discussions yet with rating agencies, and we haven't, as I said, concluded on the different balance sheets. To have a view on the ratings for the respective company would be too premature.
Okay. Thanks.
Thank you. Your next question comes from the line of Stellan Hellstrom. Please ask your question.
Hi. First, I just wondered if you foresee any tax effects from the split.
I will hand over to Fredrik, in general, we are doing this through what in Swedish is called Lex Asea, which is a common way of distributing shares that is considered to be quite tax efficient. One of the reasons why we have chosen this mechanism to split the company into two separately listed companies is because it has relatively low transactional risks and relatively low transactional costs. With that, I hand over to Fredrik.
Hi, Stellan. As Magnus alluded to, from a Swedish tax perspective, this will follow the so-called Lex Asea rules, that basically means that the distribution itself does not trigger any taxation consequences for Swedish shareholders. That's for Sweden, if you look at other countries, there are very similar rules in most countries. From a general perspective, a transaction like this is tax efficient, of course, we will, as we go forward, evaluate all of these different tax consequences, they may be individual, of course, depending on the specific situation of the investor. Generally speaking, Lex Asea is what we will follow in Sweden, it's generally tax efficient.
The provisions that you have for tax in the forest operations specifically, that does not trigger any payments out from this deal as well?
No, that's right, Stellan. That is untouched here.
Very good. Finally, also, do you foresee or anything you can comment now on any changes to how the forest business operates? Maybe I am thinking particularly on the relatively low cash flows from that business, given that you only harvest a part of your growth in the forests.
Yeah. Hi, Stellan, Magnus here. I think this is premature. We have a very good strategy for our forest products business today. A benefit now with, again, the split into two separate listed companies during the second half of next year is that there will be an increasing focus on a number of strategic questions and opportunities, and I guess this is one of them. We have no further information at this time.
Very good. Thank you very much.
Thank you. Our next question comes from the line of Celine Pannuti. Please ask your question.
Yes, good morning. My first question is try to understand the thought process. A year ago, you announced that you were going to separate the divisions accounts and starting to do that next year in 2017. You seem now to bring that forward, or let's say faster by deciding to split. What was the thought process behind these two distinct announcements? That's my first question.
Thank you, Celine. You're absolutely right about the description of these time plans. We have now spent a year looking into the strategies of the different parts of the businesses, the synergies, the efficiencies, and also the differences and into the future how these businesses will develop. We have come to the conclusion that synergies are very limited. When we looked at the separation part of the work with dividing us into two divisions, we realized that there was very little to separate. We are more or less already working as two different companies. Realizing this, we concluded that we could take this step, you could say already now, but we've actually spent one year now analyzing the different options. It will be another year before this happens.
I believe that we are giving this sufficient thought to make sure that we arrive at the right solution.
Okay. My second question is about creating value, especially in forest. You mentioned to an earlier question the asset value, which by the way, I don't think you have revalued your forest for quite some time. How should we shareholders look at it in terms of trying to figure out what the value of forest is? To start with, helping us on the book value of forest. Second, to which extent that will be something you will put forward to the market to try to explain and for the market to value that part of your business.
Thank you, Celine. I guess this is something that we are working with continuously to be as transparent as possible. As we now initiate the work to create these two separate listed companies, we will be able to provide also exactly the type of information that we will then make official in these two separate companies going forward. That work continues, and I guess we will be able to provide more information, as previously communicated, first quarter next year on this, and specifically about the forest book value. Fredrik?
Yes, Celine, we actually do updates on the forest book value quite regularly. The way we do this is that with some regularity, we do an update of the harvesting plan, and the last time we did that was actually just a year ago. That harvesting plan forms the basis for a cash flow valuation that we actually do on a yearly basis. The value that you see in the books is actually a fairly recent value. Of course things vary, such as WACC rates, et cetera, and to be able to provide transparency on the book value as relates to changes in, for instance, WACC rates, we have information in our annual report where you can calculate the impact of changes of WACC rates, as an example. We're actually quite transparent already at this point in time.
We are also evaluating, as part of this process, whether we should further expand on the transparency. We'll come back on that particular issue.
Yeah. In fact, another point would be when you announced the CapEx investment in the new plant last year, you have given your views that you will be quite an efficient producer in a few years' time, but can you help us finding out what kind of value creation we should expect from this SEK 8 billion or SEK 9 billion investment? What is the added value to forest?
I can maybe start there, maybe you wish to complement mine. Just in general, we don't expose specific IRRs, for example, for our investments in more general terms. Of course, that's for competitive reasons. We've already communicated that the Östrand investment is a very attractive investment. We believe very strongly that it will generate good shareholder value. It's a very positive investment, Celine.
It would be interesting to know what kind of value creation we are talking about.
The information we have provided, Celine, is that with this investment, we will have one of the lowest cost positions for many years to come for softwood delivered in Rotterdam, where most of our pulp actually is traded. That will give us a very strong position for actually not only the years to come, but for the decades to come as we see the future. This is backed up by a fundamental underlying growth in demand for this type of pulp, which is driven by increasing trade, increasing e-commerce, which then requires more packing materials, and an increasing demand for tissue products. An underlying demand, and the fact that we have a very attractive fiber base, and that we will have a very efficient, integrated, and large-scale operation when this is in operation.
All of that together makes us convinced that this is a very attractive investment.
One final question, if I may. You mentioned that there would be changes, or let's say nomination, in terms of the director for each company. What kind of changes do you expect this will be over the next 12 to 18 months, and how do you assure that operational performance is going to be in line with expectation?
Celine, this is how it's going to work. The current management team and current board will continue to operate and do our best every day to improve the performance of SCA AB. In addition to this, already today, the current shareholders of SCA AB, the ones who have been nominated by the shareholders, are also now board members in the hygiene company that will become the new parent company for the separate listed hygiene company. I now today, being the CEO and President of SCA, already today in parallel is the CEO of this
New hygiene company that after the split then will be the parent company of the hygiene company. From that respect, we already have a board, and we already have a CEO of the hygiene business, and it's the same. It's an experienced board of a big listed company, and it's the same CEO who's running the overall business as today. While on the Forest Product side, Ulf Larsson is already today, and since several years, the President of the Forest Products part of SCA. Today, in addition, we nominate him as the Executive Vice President of the SCA Group, so that he is in a position at the day of the split to take over as the President of the separate and listed Forest Products company.
When it comes to the board of the Forest Products company, the nomination committee of SCA will do their work just as usual until the AGM, when they will then come with a proposal to the annual shareholders meeting. Actually a large part of the governance structure is already set today, not only on group level, but also in these two different entities.
All right. Thanks. Am I right as well to believe that there will be no link between the two company ultimately, so i.e., no cross-shareholding?
There will be no link. That's correct. It will be two completely separate listed companies.
Thank you very much.
Thank you. Our next question comes from the line of Ian Simpson. Please ask your question.
Thank you very much for allowing me a follow-up. Just a couple from me, if I may. Firstly, can you give any indication as to what the likely annual CapEx of the hygiene business as a standalone is likely to be? Just looking at historically when you've reported it by division and backing out your forest spending plans from your guidance, it looks like CapEx in hygiene would run along at about SEK 5 billion or SEK 6 billion a year on an ex forest basis. Is that the right number? Secondly, you seem to have very low borrowing costs relative to some of your peers. Is that in part because some of your debt is secured against the forest assets, leading to a lower rate? I'm not asking you to comment on the balance sheet structure of the companies post-split. You've made it clear you won't do that.
I'm just wondering if you can give any color on the likely borrowing rate of hygiene as a standalone business with that lower asset base. Thank you very much.
Your question on CapEx, we normally give guidance relating to the group as a whole for the year to come, so to speak, and we have done that also for 2016, so in the range of SEK 9 billion-SEK 9.5 billion roughly. Of course, that's very much impacted by the Östrand investment. That's why it's higher than it was last year. We haven't made a split between hygiene and forest publicly. Of course, as we go further in our communication at a later stage, we will of course split that, but we haven't done that so far. When you look at the borrowing cost and your specific question there, are we using the forest land as a pledge or we borrow directly against the forest land? The answer is no, that's not the case. We generally use our corporate numbers to do that.
The low funding costs that we have for the group as a whole is more a function of the financial strength and of course the cash flow characteristics, et cetera. Not specifically the forest land.
Thank you very much.
Thank you. The next question comes from the line of Kari Rynda. Please ask your question.
Yes, thank you. Kari Rynda, Handelsbanken. Sorry to get back to the allocation of debt, given that Östrand investment is pretty much done when this transaction is executed, what would be the reason to not have as much debt as possible in the Forest Products operation, which is relatively stable, which has stable cash flows and a potential for higher cash flows in the future, and have as strong balance sheet as possible in the Hygiene operation, which has growth and growth opportunities and therefore maybe is scope for M&A?
Yeah, Kari, once again, we will of course look at the different needs of the businesses as we go forward. We cannot clarify this any further than we've already made. Of course, we will ensure that both of these companies have adequate balance sheets for their respective needs. Just one clarification there, Kari. You said that when this transaction is executed, the Östrand investment is actually done. That's not correct. What we have communicated previously is that the investment of approximately SEK 7.8 billion is largely done in 2016, 2017, and 2018, just as a clarification.
All right. Fair enough. A follow-up on timing. What's the reason of not having an extraordinary general meeting maybe later this year? Is this process still going to take such an extended period of time that it's better to wait for the AGM next spring?
The reason why we are today announcing the intention to start working on this split into two separate listed companies is that we need this time to reach out to all the different stakeholders and to work together so that we can have a very
A strong and solid proposal to the AGM next year. We need this time for that. We see that all of the different work streams are quite straightforward actually, because of the structure that we have decided, but we just need this time to make it happen.
All right. Fair enough. Thank you.
Thank you. Next question comes from the line of Robert Goldsmith. Please ask.
Good morning. I actually wanted to ask three questions, if I may. Given the decision is to be as efficient as possible and to minimize costs, I presume you've taken some advice about the actual cost to separate. If you could illuminate us on what you expect the proposed costs could be. Second point would be, I presume at least for some period of time, there'll be some dual running costs of shared central costs, i.e., accounting, HR, et cetera, whilst you go about developing that for the two entities separately. The third question would be, what, if any, mechanism are you considering to deal with shareholders who may not be able to own one of the respective shares once the split has happened?
I.e., you're in certain indices now, it may be that certain shareholders have restrictions about holding the class of shares which doesn't suit their mandates. Thank you.
Okay. Should I say something about deal costs? We don't have a number to give you, but compared to other alternatives that we have looked into, we see that deal costs are relatively low to other alternatives, making this an efficient way of splitting the company into two separate listed companies. When it comes to dual costs, we don't foresee any significant dual costs actually, because we already have most of what we need in Hygiene and in Forest Products. I don't think that that will have any major impact on the financials. When it comes to the mechanism, this is very straightforward. Everyone that owns an SCA share the day before the split will then receive another share the next day, which is related to the distributed Hygiene business, so that they will have one Forest Products share and then one Hygiene share.
Then it is, at that point, a decision by every shareholder. I think this is very fair and very transparent and very open to make a decision whether they want to keep their shares or expand their holdings or change them in any other way. Of course, we hope that all shareholders would like to keep on investing in these two companies and buy more.
Right. It could be possible certain shareholders, say, for example, that own the shares for the hygiene business may not be permitted to whatever mechanism is in their mandate to hold forest. Would you propose to have any mechanism to reallocate or otherwise buy those shares yourselves?
No.
Okay. Thank you.
Thank you. Our next question comes from the line of Adam Kindrate. Please ask your question.
Good morning. My question relates to pulp and timber sourcing, because under the existing scenario, there is bound to be some sort of political pressure for you to source or pay good prices to the forest products company. Now that you're de-merging, surely this opens up the opportunity for you to put your sourcing needs to whichever company can offer you the best prices. Would you therefore expect some sort of sourcing gains post de-merger?
This is not a correct description of how we operate. We have an arm's length, completely commercial relationship between forest products and the hygiene business today and since many years actually. It's not a small part, but also not a large part of our pulp needs. SCA is today one of the biggest, if not the biggest pulp buyer in the world. We source pulp from all suppliers globally, and we work extremely hard to put pressure on all our pulp suppliers, including SCA Forest Products. This has been the case for many years, so we don't foresee any difference there.
Right. Good. Can I come back on the book value of the forest assets? The last time I looked in your legal documents or on your report, it seems some of the assumptions surrounding your valuation are a little bit unusual, if I may say so. You're using a discount rate of only 6.25%. It also seems to me that you're not discounting the cash flows to perpetuity. You're only discounting the next 100 years. Can you maybe comment on these two assumptions, which I think are very different to how most investors would approach a DCF valuation?
Yeah. I can give you some brief comments there. First of all, the discount rate, there we are using 625 currently. Of course, if you look at competitors that is within the range, so to speak, perhaps somewhat on the high side, but within the range. There we're constantly reviewing what is an appropriate WACC rate.
Provide sufficient transparency there. We also give data relating to changes in WACC rates. Therefore, of course, investors and others may use the WACC rate they feel appropriate and also calculate the consequences. You come to the issue of perpetuity or 100 years there, we're just using the method of biological assets that is good accounting practices. It's true that we're using 100 years. Of course, you could always adjust for perpetuity, but we are using the standard method of 100 years.
Are you saying then your evaluation is basically relatively conservative because you said your discount rate is on the high side compared to competitors?
When you look at different forest companies and how they would use the different WACC rates, you would find many different levels. We are within the range, as I said, of most forest companies. There are examples of lower WACC rates, for example, of higher WACC rates. Again, we provide sufficient data to be able to calculate impacts of changes of WACC rates.
Can you give me some indication of the range of competitors' discount rates?
I think there are many forest companies around the globe, so it's difficult to give you There are many examples, and you can look at both Nordic competitors and of course North American and others. I can't give you data here, but of course, we'll be glad to provide you, or you will also be able to find it on the respective homepages around your reports.
Sure, thanks. That's helpful. Just one last question. Do you have a precise date for the AGM next spring?
No, we don't. Typically, we have our annual shareholder meeting in April, we haven't set the date yet.
It's going to be somewhere like mid-April, I would guess.
We have our AGM in April, and we see where we end up. We will have to get back on the exact date there.
Good, thanks.
Thank you. The next question comes from the line of Mikael Zaps. Please ask your question.
Yes. Hello. Good morning, everybody. A little bit of follow-up on the pulp situation. A year ago you said, if I remember correctly, that this new Östrand facility or expansion would mean that on a group level, your self-sufficiency rate would go from 23% roughly to about 46%, if I remember correctly. Then as you of course state, this is pulp that goes to the market, and you buy from the market, so in a way, this is a financial hedge. Long term, the only thing we know is that pulp prices are very volatile. They go up, and they go down. The question is really here, how are you thinking around this? Are you trying to sort of hedge?
Are you trying to do long-term commitments around this part of the cost base that is changing a lot, or are you just sort of happy with being in the same position as competitors? That would be my question.
If I start, maybe I will also hand over to hear the forest perspective from Ulf. No, we don't hedge our raw materials whatsoever because we believe that gives us the maximum also price signals to our sales and marketing organizations. With the size we have, we don't believe that that's efficient. When it comes to self-sufficiency, it's a smaller share that we actually procure from SCA. The number you were referring to was actually, again, from a purely financial perspective. Going forward, once SCA has been divided into separate listed companies through the distribution of the hygiene business, then I guess these two separate companies with their separate boards will look into this in the future. I don't know if you have something to add there, Ulf.
No, already today, as mentioned, we are working with the market price between those two different operations. Going forward, when we have Östrand up and running, of course, SCA Hygiene will be a very important customer for us, as it is today already.
Okay, many thanks.
Thank you. Our next question comes from the line of Saul Casadio. Please ask your question.
Hi. Thanks for the follow-up. Just a quick one. Could you give us an indication when you are planning to come back to the investors to give a better idea of the balance sheet split? Is this going to be like a conference call before the AGM, or we'll have to wait for the AGM next year?
I have no real concrete answer to that question. I think the short answer is that we will of course present the final proposal with the prospectus that will be distributed after the AGM. Of course, we will be back with more details on the different balance sheets in time for AGM. Of course, we will do the analysis, and we'll come back as soon as we have more to say, but also prior to that.
It's going to be, if what I understand, probably it's going to be close to the AGM, we shouldn't expect anything in the next, let's say three, four months.
No, I don't think you should expect that to happen. We will conclude this analysis as we approach AGM.
Okay. Thanks.
The next question comes from the line of Kari Rynda. Please ask your question.
Yes, thank you. Just a quick one on the technicalities of this Lex Asea. Firstly, if we look at the relative valuation between SCA Hygiene and SCA Forest Products, does it make any difference to you? Does it have any tax implications on how these two different assets are valued in the split up? Secondly, from a shareholder perspective, what are the implications of relative valuation at the moment when he or she is then maybe selling their shares in SCA Hygiene? Because you must have looked into this more than what we have had time to do. Is there anything that you can comment at this point?
Yeah. The first question, for Swedish tax holders, there is no implication, of course, with the different valuation. The technical way to do this is that after the listing of these two companies, you observe the market prices of these two entities, you get a distribution of your initial acquisition cost. That's how it's technically done. There is no taxation for Swedish shareholders as a consequence of the distribution. Of course, there are similar or at least related rules also in other countries, they work a little differently. It varies by country to country, as I said previously, it varies also individually by investors. On your second question, Kari, no, we have not specifically made an analysis based or analysis on the distribution of the share or equity value of the company.
We have not made that analysis.
Okay, thanks.
Thank you. As a reminder, if you wish to ask a question, please press star one on your telephone keypad. The next question comes from the line of Caroline Brugère. Please ask your question.
Hello. Good morning. Caroline Brugère from Allianz Global Investors. Thanks for taking the question. Just a clarification regarding your answer on a previous question on the balance sheet. Is it correct to understand that you intend to have the same credit ratings for both companies in the future?
No, we haven't given that answer, Caroline. We have said that we have a very strong balance sheet at this point of time, and we have also a very strong rating. As we approach the AGM, and as part of the process that lies ahead of us, we will analyze the needs of these two different future companies, and we will make sure that both of these balance sheets are appropriately strong and adequate for both strategic and operational needs. We haven't concluded anything, and it's actually a premature discussion when it concerns rating. We'll come back to that as we come further. Today's announcement relates to a decision to initiate the work to prepare a proposal for the AGM and nothing else.
Okay. Meaning that given the different business profiles, and CapEx intensity of both businesses, we could end up potentially with different ratings.
Yes, of course, that could be the case, and it's possible that would be the outcome, but it's very difficult to speculate on that issue at this point of time, and we'll work with those issues as we come closer to the AGM.
Okay. You mentioned that you will meet the different stakeholders in the coming months. Does that include bondholders?
Yes, that's part of the process, of course, to have discussions with our counterparts and different stakeholders, including bondholders.
Okay. Thank you very much.
Thank you so much. Now we will finalize and conclude this telephone conference call. I hand over to you, Magnus, to make the final conclusion.
To finalize, the board and executive management team of SCA is very excited about this opportunity to create further value for the shareholders of SCA, doing this by initiating the work to propose to the annual general meeting in 2017 to decide on a split of the group into these two listed separate companies that we have been talking about. We feel very excited about the prospects of these two separate listed companies, we believe that the way of doing this is very efficient and, again, will create value for shareholders and exciting strategic opportunities for these two companies. With that, I would like to thank everyone for calling in and listening and for your questions, and conclude the conference.