Swedish consumer goods company Svenska Cellulosa reported first-quarter results that largely tracked our longerterm expectations. SCA’s hygiene operations (personal care and tissue) were once again steady performers while the forest product division lagged as a result of still-weak European demand for paper and solid-wood products. After reviewing the results, we are maintaining our fair value estimate of SEK 136 per share and our no-moat rating.

Compared with the first quarter of 2012, SCA made the greatest strides in its personal-care business, where sales increased 6% and operating profit increased 21%. Encouragingly, all three personal-care subsegments (incontinence care, baby diapers, and feminine care) posted positive sales growth on a year-over-year basis. SCA’s costreduction efforts, lower raw material costs, and higher volume in the personal-care segment were the primary drivers of the operating margin expansion this quarter while lower prices were a small drag on results. SCA is increasing its marketing spending in the personal-care business, which we see as a positive signal, since SCA needs to better capitalize on its handful of higher-margin branded products and increase share in key markets.

SCA’s tissue operations turned in slightly positive year-overyear results, but most of the gains came from acquisition activity. Margins did expand to 10.6% from 10.1% in the prior year thanks to higher volume and some integration benefits from the acquisition of Georgia-Pacific’s European tissue business. Over the next few quarters we expect that input cost pressures will subside a little as additional global pulp supply should create a headwind for pulp prices. Finally, SCA said it is seeing some positive traction in its solid wood business as construction activity picks up. We expect modest growth in the forest product division in the next few years.