Earnings Call: Q3 2016

Oct 27, 2016

Hello, and welcome to SCA's Interim and Third Quarter Results for 2016. My name is Josephine Edwell, Head of Communications for SCA, and together we have our CEO and President, Magnus Groots, who will, together with Sreede Glusberg, our CFO, go through the highlights in the report followed by a question and answer session. So with this, I leave over to you, Magnus. Thank you, Josephine. Organic sales was flat in the 3rd quarter, impacted by challenging market conditions for our hygiene business, and this includes both slower market growth, both in emerging and mature markets during the quarter and increased competition. Growth was also impacted by capacity reductions, specifically the closure of 1 publication paper mill in our Forest Products business and closures of tissue capacity in our hygiene business. Breaking down this flat growth, we can see that the hygiene business is still growing 1%, forest products down 3% and emerging markets growing with 4%. We continue to see good organic growth in operating profit and an increased operating margin and strong contribution from efficiency gains and in this quarter specifically from the hygiene part of our business. Strong cash flow and following our strategy, we had a good flow of innovations, 4 that I will talk about in a minute. In addition, during the quarter, we initiated the work to propose to the annual general meeting at the beginning of next year to split the group into 2 listed companies, hygiene and forest products. And during the quarter, Rosso decided to implement restructuring measures in 2 of our tissue plants in France. This has been communicated previously. At the end of the quarter, we have decided to close our baby diaper business in Mexico. And as you will see later, the baby segment of our hygiene business is the one that's been underperforming in the quarter, and this closure is a consequence of that underperformance during the last couple of quarters. And this will have a negative impact then on growth in the Q4 for our Personal Care part of our business. Our capital structure and dividend policy for the future hygiene business, subject then to approval of the Annual Shareholders Meeting, has been communicated this morning in a separate press release. And with that, moving over then to the financials. Again, organic sales growth flat. However, growth in hygiene was 1% and a negative growth in Forage Products. Adjusted operating profit grew by 7%, operating margin by 60 basis points and earnings per share showed a significant jump. However, in the Q3 last year, we had a number of items affecting comparability, significantly more than the Q3 this year. So comparing like for like excluding items affecting comparability, earnings per share would be up 12% and a strong cash flow. Return on capital employed, where we have a target of 13% remained flat at 12.8%. Percent. However, during the year, we have closed the transaction of Warsaw, the away from home tissue business in North America, and this is contributing in a very positive way to our growth and to our profitability. However, the goodwill has a negative impact of 0.4% on return on capital employed. So again, comparing like for like, we would actually now be above our long term target for return on capital employed up to 13.2%. Our innovations follow our strategy, which is to put more emphasis on what we call a new core, soaps and wipes. And Tempo Fresh to Go is an example of that. It's a new wipes assortment. It also follows our strategy to launch innovations in the winning channels. And the new napkin box for Torque, which is, as you know, our away from home tissue assortment is focused then on a channel that's growing for this category today, which is the cash and carry channel. NOSOPRAS in feminine carry is another example of soaps and wipes launch in Latin America, and we are upgrading assortment for incontinence for men, which is a fast very fast growing segment within incontinence care. With that, I'd like to hand over to our CFO, Ferdy Tristep. Thank you, Magnus. I'll take you through a few slides on the result development. And starting with net sales, as Magnus already alluded to, we have an organic growth of 0% and various components. So if I just start with price and mix, we had a positive slightly positive price impact for price and mix impact for tissue, and this is largely coming from away from home and to some degree, LatAm. Personal Care was largely flat for the quarter. And of course, forest as a consequence still of lower prices and in average, a weaker Swedish crown in the quarter, forest is still negative. Volume is positive or slightly positive for both Personal Care and Tissue and a minor drop in forest. We look at the currency here. I get many questions on Brexit. And roughly, if you look at the number here on this slide, about 3 percent impact on net sales, roughly half of that comes from the weakening pound. If you look at this slide, it looks, as you can see, a falling growth for all of the units with the exception of Horus. So if I turn to these, you can see that we have, as Magnus said, been impacted in this quarter by type of competition. There's been some price pressure, and we've also had capacity reductions. And specifically, if you look at Personal Care, both volume and price mix dropped in comparison to the previous quarter. And specifically, that relates to a drop in Baby. We also have a lower growth rate for Personal Care because of tougher comps. Many of you will remember the price increases we made during 2015 and, of course, also the private label contract that was part of Personal Care Baby, to be specific. And that is now all in the comparing numbers and hence a part of the explanation for the lower growth rate in the quarter for Personal Care. For tissue, the main contribution there was the Mother Reels sales. We have reduced capacity there, and we've simply sold less Mother Reels. And we also have a lower growth rate for Asia or for Binda in particular. This is a more detailed or granular view of sales, and it's kind of complicated. But if I ask you to start by looking at the bottom of the page, you can see the organic sales growth by category. So you can see for incontinence, baby, etcetera. And if you actually look at that, you can see that 4 out of 5 of the hygiene categories are growing. But of course, you can also see the big decline there in Baby. And the bars will show the contribution from each of these categories to the growth of organic sales for the group as a whole. Particularly, if you look at that Baby decline of 7%, that is pretty much all of it coming from emerging markets and specifically Russia, Mexico, some Latin American countries and Turkey. And there are various reasons for a competitive pressure or political or other harsher market conditions, and Magnus will allude to that a little bit later. The forest contributes also one of is also a negative contributor to the group, as you can see here, with 0.5% or 3% for forest as a business and all of that. Actually, the entire 3% is coming from the closure of Ootrekin that we executed during Q4 of last year. If I turn to profit, the adjusted operating profit, if I start with pricemix there, we can see that we had a positive pricemix contribution, minor for Personal Care and about SEK 150 or so for Tissue, but we also still have a negative offset from the forest business. Roughly the same kind of pattern for volume contribution, both Personal Care and Tissue Positive and Forest, it's slightly negative. One thing that you saw already in the Q2 is that market prices related to raw material has become lower, and that's still the case. So we have a considerable contribution from lower raw material cost. Most of this, most of this, the absolute majority is within tissue, and this is, of course, related to pulp. But we also see reductions in, for instance, sap and flat pulp and some other plastic material. The other bar there, negative SEK 177,000,000, we continue to do really well in terms of efficiency. So this hasn't been a very, very good quarter, which is part of that bar. But as you've also seen in previous quarters, we continue to increase spending on both A and P SG and A. So A and P is up by if you compare it to net sales, it's up by about 0.5%. We continue to increase our market investments. Also, SG and A is up by 0.8% in relation to sales. A large part of that is actually relating to Vinda and a larger sales force. Brexit, once again, if you look at the Brexit impact on the total result, it's approximately SEK205,000,000, so pretty significant. And out of that, SEK 120,000,000 or so is related to transactional impact, so simply exporting into the UK. And that's a pretty significant impact on margin. So if you look at the margin impact, it's 0.4%, So it's not small. It's been a fairly significant impact in the quarter. Taking the next slide here with cash flow. We continue to do well on cash flow. So if you look at operating cash flow without strategic investment, the increase was approximately 10%. And this is, of course, coming from the higher results, as you've seen, the operating surplus, as you see on the slide. But we also continue to do well in working capital. So if you look at individual items and starting with accounts receivables, if you compare it to last year, we have reduced accounts receivables by 2 days, And we've done exactly the same by accounts payable. So this work or efficiency work is continuing to do really well. Looking at the total cash flow, including strategic investments, the increase is less. It's 2%. And this is just a reflection of the fact that strategic investments is much higher than it was in the corresponding period last year. The absolute majority of this increase, as you can see on the slide, is relating to Erstrand. Now you know that we have an intention to spend approximately SEK 7,800,000,000 in Erstrand. So far up to now, we have spent approximately SEK 1,900,000,000 of those SEK 7,800,000,000. Items affecting comparability. No surprise, we have communicated all of this prior to the quarter. So of course, a big portion of it relates to French manufacturing sites that we have restructured during the quarter or announced that we will restructure. We have announced also the closure of the baby diaper business in Mexico, a nonprofitable business that we have decided to shut down. The Wassa integration is proceeding according to plan, and we continue to take restructuring measures and cost relating to this. And this is exactly in line with our business case that we originally made and the time plan as well. And the last part, the EUR 20,000,000 there relates to just write downs of intangible assets no longer in use. The cash flow impact from the SEK 710,000,000 is approximately SEK 325,000,000. So there's a lot of write downs in this number. Some of those words, Magnus? Thank you, Fredrik. Looking closer then at Personal Care. Organic sales growth was flat. The increased operating profit was 1% based on high volumes, better price mix, cost savings, lower raw material costs with a negative impact from investments in increased marketing activities across the categories and across the markets and the highest selling costs. Adjusted operating margin improved by 60 basis points to 12.8%, and our adjusted return on capital employed remains over our target of 30% at 32.5%. Looking at the different geographies and segments in Personal Care, we had zero growth both in mature and emerging markets, but the big difference is between segments. As you can see, incontinence products continued to grow and Feminine Care continued to see a strong growth, while we had a decline of 7% in Baby Care. And looking at the different geographies, in Western Europe, we were growing in all of the different segments, while in North America, we saw slight decline in our Inco business. However, our profitability in North America Inco business is improving, and we see a stabilization of that business quarter over quarter. In emerging markets, there's a common theme here among the different geographies with the baby declining in all the different geographies, but for some different reasons actually. In Mexico, we have had a weak development, but that was even strong in the quarter based on some quality issues. In Russia, the decline was mostly based on tough competition in the quarter between the main competitors. While in Middle East and Africa, our baby sales in Turkey, which we include in this part of our business, have were set back. We were launching a completely new assortment at the same time as the political unrest during the quarter. So different reasons, but all affecting our baby business in emerging markets. Tissue. Net sales growing 5% 4%, of which Warsaw contributes 5%, We have a negative currency impact, so organic sales growth ended at 1%. And operating profit, strong improvement by 13% based on better pricemix, high volumes cost savings, lower raw material and energy costs, so really benefiting from all the areas. And again, increased investments in marketing activities and higher selling costs due to the competitive situation. Adjusted operating margin was up 110 basis points to 12.7 percent, and our return on capital employed ended at 13.8%. And this would have been close to 15% then excluding the Warsaw goodwill. And looking into the geographies and different segments. In the mature markets, we had lower sales for consumer tissue, and we have taken measures that we have communicated to reduce our capacity in order to improve efficiency during the year, and this results in lower sales of the semi finished goods, that is mother reels, as you know. We make mother reels in the actual pit machine, and then we convert it into the final product in the converting machinery. And this is the semi finished mother real product that we are now selling to us due to the capacity reductions over the year. So it's the lower margin part of the business that we have been discarding and focusing, of course, as we always are doing on the branded part of our business and finished goods part of our business. We saw slightly high sales for Away From Home Tissue in Europe. That's developing well, while sales were slightly lower from away from home in North America, very much due to our ongoing integration work. And this focus area to get back to growth in away from home also in North America. Emerging old markets all continued to grow even though at a lower pace than in previous quarters. 4th, products. Finally, organic sales growth was negatively impacted, as now mentioned several times, by the closure of publication paper machine, but we also had a negative impact from price mix and volume. Adjusted operating profit was negatively impacted by lower pricing of kraftliner and pulp primarily. We also had higher energy costs that were partly offset by lower raw material costs even though that had a smaller impact, resulting then in an adjusted operating profit margin of 14.6%. And with that, I'd like to take a look at the prices in the quarter and as we're usually saying something about the coming quarter when it comes to prices in our different First Products businesses. And as you can see from the graphs here, we have seen a slight decline in the quarter in publication paper, while the other product areas actually saw a small increase or stable type development during the Q3 compared to the Q2. Going forward, I think, to the Q4, we more or less see a stable development in all these different areas compared to Q3 this year. And quarter 4 compared to quarter 4 last year, a slight decrease in most of these areas. During the quarter and in preparation for the proposed split into 2 separate business companies, we have worked with our strategic framework. And this is and we're very happy and very excited about this strategic framework, something that we have launched internally during the quarter and now externally. With a new vision, we very much emphasize the positive impact on hygiene of hygiene, on well-being and on improved health. So we want to put hygiene into a wider context to our new vision. Our mission is unchanged until the proposed split has been approved and happened. We are still, of course, producing, marketing and selling hygiene and forged products. Our objectives or our reasons to be are very much to generate increased shareholder value through profitable growth, of course, something we've been discussing this morning, but also very, very much important, our customers and our consumers. And every day, 500,000,000 people around the world are using our products to fulfill their hygiene needs to improve their health and well-being. We are also very much focused on contributing to a circular society, playing our role in a wider context and to make sure that our employees are able to realize the full potential, which is absolutely essential to reach our other objectives. Our strategies are unchanged. However, we have split what we used to have as a strategy of profitable growth into focusing and winning in chosen geographies and categories and customers and consumers, while our emphasis on innovation and efficiency is also unchanged and a very important part for our future development, both in hygiene and forest products. So this is a new framework, and we are aligning our strategies and our operations to this. During the quarter, we also launched a number of other initiatives, the first one being a new communication platform, which is based on the Hygiene Matters report. This is a report that we are now presenting for the 8th time, and it really positioned ourselves as the thought leaders in hygiene and the impact on health and well-being. This year, we launched it together with the UN body, the Water, Sanitation and Supply Collaborative Council, summarized as the WFSCC. And we have worked with them to make sure that in this report, we look at how can improved sanitation hygiene contribute to United Nations' new global development goals. We have also joined the Circular Economy 100 program, which includes 100 companies that exchange knowledge and best practices on how we can contribute to a circular society. And last week, we were also recognized as a world leader for our work in reducing climate change by the NGO CDP. So very proud about that. Summing up then. Organic sales growth impacted by challenging market situation and capacity reductions, good organic growth in operating profit, increased operating margins and strong contributions from efficiency gains and continuing to see a very strong cash flow. Thank you for listening. Okay. Thank you, Magnus. Let's open up for the questions. Yes, Stellan Stoss. Stellan Stoss from Nordea. First, I had a question on the demand for lower prices, perhaps in tissue that you talked about in the previous report. How do you see that playing out going forward? We've seen raw materials and current just moving a bit in this quarter, but how is that playing out? We are experiencing increasing price pressure, and we are every day working to balance volume versus margin and as you can see also about performance in the 3rd quarter. So that's a continuing effort that we are working on. Okay. Also on with Brexit now, are you seeing any type of moves to increase prices to compensate for the weak currency? So far, we have not seen any moves to increase prices in our categories in the UK. Most of the retailers have committed not to increasing felt prices, and that makes it very difficult for us to increase prices in our factories. Mikaeli of Kepler Cheuvreux. Two questions. The first one, I mean, now we see the organic sales growth that you're reporting and you're describing it very well. Can you try to link this to the sort of longer term growth rates that are expected to be substantially higher? Is there something happening in the marketplaces for, let's say, Tissue and personal care? So for instance, I mean, I noticed that in personal care, you are gaining feminine care where you are small relative to many others. In incontinence, you are at roughly 2%, if I remember correctly. But there you are big. Is there something going on that we should be aware of? There are no specific competitive dynamics other than the fact that we'd overall see a higher competitive pressure. And as you can see here from the report, we're also investing more in advertising and promotion. We have a stable or positive development of our market shares in most categories and markets, so we're happy about that, but we are investing more behind that. When we look at the overall market growth, of course, this quarter was impacted by a number of different discrete things that happened in Colombia, Ecuador. We had a big transport strike. We had the situation in Turkey. We had the Brexit, of course. So a number of these singular incidents. However, we also do feel that the overall market growth is slowing down in our capital. Okay. Could you a little bit sort of, I mean, specify that? Or is it hard to say? It's hard to say. It's based on kind of the overall growth of the economy, both in emerging and in mature markets. Thank you. Maybe I just can add, Mikael, there is to be we don't we haven't changed our long term view on the growth aspirations. I guess that's part of your question. But of course, the market will be different by quarter or for year to year. And now we have seen and that's pretty obvious to everyone that some of these emerging markets have a fairly tough or challenging environment. Like Latin America, it's fairly obvious. And we have some political turmoil in a few countries like Turkey. And of course, we can see a general slower perhaps development in Asia. So I think this will happen. There will be variations, and sometimes markets are fantastic. Sometimes we are performing fantastic here. As you can see, as Magnus alluded to, our market shares are largely constant. If you look at it, there are ups and downs, but largely constant. So this is much a market issue, I think. And that will vary. Yes, many thanks. On a positive note, we're very much focused now on individual quarters. And then suddenly, we talked about the long term perspective. And of course, this quarter has also been impacted by the comparables, which was the Q3 last year when we had significant price increases and some very big contracts that were ramping up to full speed. So we have to also carry that in mind when talking about the short term and the long term. If you give the mic now, Olof Kjemarke ABG Sundal Collier. Regarding the coming split up of the company, you promised us more financial data at the beginning of 2017. Without going into any figures, can you say anything about the time frame when we will get that information? And also maybe what kind of divisions we will see in the old SAAs, so to say? And what I'm aiming at is, will we see will we be able to analyze the cash flow from the forest land operations in old SA, so to say? I can I mean, we have communicated what we will do? So the Q1 reports there, as we have communicated, you will see much more about forest. So we'll be back during Q1. And of course, the Q1 report is due late in April, of course. But during the quarter, we'll also provide additional numbers so you'll be able to fully compare and understand what you will actually see the end of Q1. So you'll see more during the basically Q1. So that information can come any day during Q1? Not any day, towards the latter part of it, just to facilitate. So, obviously, you can expect new information during at the time of our Q1 report. And for example, forest land and sawmill operations, will that be merged from a reporting point of view? Yes. We haven't communicated that. So now you're asking about the segments that we will communicate. And in that work, which we haven't completed, of course, yet, we will do that. But we are looking at 100% that and to make it as transparent and easy to read for investors and analysts as we possibly can. So I hope you will be happy when that comes. Fair enough. Coming back to the Q3 report then and Hygiene and more specifically Personal Care. You talk a lot about increased competition. And you mentioned slightly lower sales also for Inco in North America year on year. Was that also due to higher competition? Competition has remained high in North America since the last, actually, 18 to 24 months. So there's no change. We have been very determined to improve our margin and also our total profit in North America and in retail specifically and some great progress actually in that area. And this has then also included discarding some lower profit SKUs. However, we also launched new SKUs that are performing quite well. So from a volume point of view, we are more focused right now on overall profit so that we have a good stable platform to build on for the future as we then turn to developing our income position in North America. Okay. Thank you. Thanks. It's Linus Hossen with SCB. I appreciate you too very much on margins. You worked hard on restructuring, and you've announced restructuring assets in France, Spain. And you've been very detailed about the costs of those. Could you say something about the benefits of those restructuring initiatives and the timing of those? The benefits are substantial. That's why we are doing them and you see some of those already in the margin improvement for sure. The timing typically you see the benefit immediately in the quarters after these changes have been announced since we include the full cost of restructuring in what we communicate. I don't know, Frederic, if you want to add. No, no, I don't. I think the timing will differ. So the ones that you have now seen announced through French, we will not see much benefit in this year because it simply takes time to execute. Sometimes we announced complete closures like we did with the Oriente, and of course, the impact is much more immediate. So that will vary by nature, so to speak. If you look at the closure here of maybe Mexico, you will not see any impact on profitability, if you put it that way during this year, but you will see it from the start of next. So it's different depending on what we do. And Linus, if I just may add, we don't take closures lightly and restructuring charges. This is something we want to avoid, of course, to the highest extent possible. So we need to have a good return on this. Otherwise, we don't want to do it. When we look at underperforming parts of our business, our first assumption is always that we should fix it and we should improve performance and, of course, use those assets to the full extent. But when we have assessed and come to the conclusion, this will not be possible, that's the decision to make restructuring. And linking this restructuring and exiting of certain operations to the organic growth. If you look at the quarter, how much of a burden were closures, exits on the group's organic growth rate in the Q3? Yes. I mean you could see the closure of one paper machine in Forest. So it's, as you saw here, pretty much 0.5%, so for the group as a whole. We also have an impact from primarily the tissue business in Europe of a slightly smaller than that, but that's approximately 8%. And on that note, the exiting of the mother reels or the gradual decline of your sales in the mother reels business, is that something that will continue? Will that continue to maybe improve margins but affect organic growth negatively in the quarter? Restructuring in general has a negative impact in some cases, not in other cases because we move then the volumes to other mills, and that's what we ideally want to do. But in this case, there was a combination. So that will vary from case to case, the impact on volume. Let's rephrase it maybe. So if you look at your mother reels business today, how big is it? And how big would you like it to be strategically? Strategically, we would like to be more balanced than we have been when it comes to we have been a net seller of Navios historically. And depending then on the supply demand balance, you could argue that even though it varies, margins on a semi finished product will be lower than on, of course, a finished product. So we would like to continue to reduce our MAZI retail sales. And I'm not sure if we give specific numbers on that. We don't, Linnis. That's fair enough. And then maybe just one final question. Can I just add maybe to that? Because mother reels is more to some degree, you could argue, it's more of a commoditized product than finished, of course, needless to say. And it's also, therefore, more price sensitive. So we would of course, if you have a tougher price or environment pricing environment, then by definition, we would choose perhaps to sell less because profitability is not sufficiently good. So it's not only capacity reductions, it's also a choice of volume versus profitability, if you like. So it's both those factors. That makes perfect sense to me. Maybe just one final question on forest products and relating to media reports. And the question is, has SCA received any kind of a bid for forest products at this stage? As you know, in this, we never comment on craftings like that. There's no change today. Oscar Lundstrom from Danske Bank. I have three questions about tissue and one about the capital structure press release that you came out with this morning. I'll start with the tissue questions. Last quarter, when you were standing here, you talked about pricing pressure on tissue. Today, you've not mentioned that. And we did see some support from pricemix to the EBIT of tissue in this quarter on a year on year basis, granted. How should we think about that pricing pressure? I mean, I realize that pricing pressure isn't necessarily the same thing as prices going down. But what is the pricing situation in tissue? Again, there's a balance between price and volume to some extent, and we are trying to manage that to the best in the best possible way in the short term when raw material prices move. And I think we've been quite successful in this quarter, as you can see, on margins and on profits, with then slightly lower growth in tissue, of course. And this is the balance we have to try to play in a successful way going forward, but pricing pressure remains. And as raw material prices come down and new capacity, to some extent, is coming online in Europe, there is pricing pressure. There is no change there from the previous quarter. And Oscar, I actually did mention it, pricing pressure, during when I talked about organic growth because it has an impact. So there is a balance of course, there's both ups and downs. And I mentioned specifically that if you look at tissue, we have had some pricing in comparison to Q3 of last year, some pricing benefits in the way from home and LatAm. But we also see pricing pressure in the market as a whole. And in Europe, of course, we see that. And there's always lag effects. So it's difficult to talk about price pressure on an individual quarter, but there is price pressure in the market. Right. But just to be clear, you've not sort of had to renegotiate contracts at lower prices during this past quarter. There's not been that type of price. Price impression not something that happens overnight because we have different terms and conditions with all different customers. So I don't want to be specific about individual customers or contracts. I understand that. My second question is related to that, and that's the mother reel or the reduction of your capacity or your net sales of mother reels. Is that one way for you to manage pricing pressure? Because I mean, I reckon that you sell these to nonintegrated tissue converters. And well, if they're not getting supplies of mother reels anymore, it's difficult for them to be in business or to Well, there are other supplies on mother reels. But to a certain extent, of course, this is a way to manage that. But there are many other suppliers of other reels that sees no reason. Federico already said that when we have price volatility, it's higher on other reels, the phenophilic products and the final products, and that's what we see today. And then we decide to hold back in that area. And a follow-up on that. Are you closing Mother Reel capacity or just reducing your net sales and producing on existing assets? The impact on the quarter is a mix of both from closures during the last year, but also some extent that we are not seeing sufficient profit margins in that part of the business. Okay. And my third question on tissue relates to raw material costs, which was much more of a benefit this quarter on a year on year basis compared to the impact that we saw in Q2. And while tissue prices, when I look at it, are down by about the same amount, slightly more, but not. Is there something else? Is it a lag effect? Or last quarter, you also mentioned FX impact recovered paper prices, which had spiked in Europe or in North America. What's changed to give a larger contribution this quarter compared to last quarter on a year on year basis? Yes. I mean, it's when you see these numbers that we show on the bar chart here, it's compared to last quarter. So of course, it depends on what happened last year as well, right? So if you look at what's actually happening on the actual raw material prices at this point, they're actually quite stable. So if you look 1 quarter ahead, then we don't actually expect any major movements for any of these businesses just sequentially. But of course, if you look at it compared to if you look at Q4 versus Q4, our expectation would typically be that tissue would also for Q4 have a benefit from raw material prices, not sequentially, but in comparison to Q4. And to some degree, that would also be the case for Personal Care. So you can say largely now raw material prices are stable. So what is actually lower, PULP and also for Personal Care Plus Pals, SaaS is actually lower than last year. Recover paper the other way, it's actually up. And packaging in the quarter is also up. So it's a mix. But it will be positive also in Q4. That would be our expectations when you compare it to Q4 of last year. Thank you. And my final question regards the separate press release this morning about your new capital structure and financial targets regarding capital structure. And I know you mentioned an ongoing potential acquisition process, and I'm not going to ask about that. But following that, you also said that any acquisition, as I understood it, would not breach your new financial targets regarding capital structure. Does that mean that you will seek and the capital target regarding or the financial target, as I understood, is the capital structure was to remain an investment grade? So does that mean you would not want to sort of significantly increase the net debt compared to where the new HyDE separate Hygiene business is today? The split that you gave us in that press release? Yes. I mean, first of all, it's really difficult to comment anything more than we've already said during the press release. But I think what your question is probably, is there a firepower? Are we able to buy anything given our balance sheet and the rating that we have communicated? And that's been confirmed by the rating agencies. Yes, of course, we still have a very strong balance sheet within Hygiene. So the policy that we have communicated, and by the way, we already have for SDA today, also enabled us financial flexibility and the possibility to buy or acquire other companies. So yes, of course, we could take up additional debt within the boundaries of our financial policy. The exact amount, though, we don't, of course, obviously communicate. Rutger Smith. I appreciate the rationale for closing the Mexican diaper business, but still Mexico is a large country, should be an interesting market. So in order to understand your business, why didn't you make it there? Yes, you're right. It's a very attractive market, and we are very, very successful in the Mexican market with a strong number 2 and position in tissue with the growing market shares, very strong position both in consumer tissue and away from home tissue, absolute market leader in Feminine Care and very strong position in Continence Care. So we are a big and successful player in Mexico. In Baby specifically, we see a little bit the same thing as we've seen in other Baby businesses that we have managed over the last year. It's an acquisition of a small market position with a value brand, not a premium brand positioning and with assets that require high investment in order to be competitive. And all this combined makes it very difficult to design a business plan that takes this business to the nice gross profit level that we need to make it investable and to grow it. And this is then in spite of having a very strong position, a strong, of course, distribution in the country and a strong sales organization and go to market. This is the essence we have made. Okay. I think we'll take the last question there. Karri, in the Handelsbanken. Last two, please. First, the baby business, which just to understand what kind of an impact on your growth this downscaling that you're doing will have it would be helpful if you would give us a rough ballpark numbers of how much of that business is branded Nordic, private label Europe and everything else, sort of a rough split between those three? I can just start. We don't give those details, but we're not scaling down with the exception, of course, as we have just talked about in Mexico. In Mexico, Baby is a fairly small business, so it doesn't have a big impact on organic growth, if you put it that way. We're not scaling down on Baby. So I'm not sure if you want to No. Just adding then on Europe, and in this case, including Russia, is overall a very well developing and profitable part of our baby business. So we're very happy about that. We also have very strong and successful baby operations in Vinda today through the acquisition of SA's Asian Pacific Business, specifically a marketing position in Malaysia and also in Latin America through our joint venture partner, Familia. We have a very, very strong baby position in Latin America. So we have mostly very, very strong baby positions around the world. All right. And then the other question about this capital structure once more. In your discussions with the credit rating agencies, what kind of net debt to EBITDA would still be solid investment grade for a high GM business? Yes. Here, if you look at the rating methodology, they're slightly different from S&C and Moody's, and both have issued their statements this morning. You would have to refer to them. It's, of course, not just a net debt to EBITDA. It's also free funds from operations in relation to net debt plus a judgment on the business risk that you have for the individual businesses. So there are many parameters. So it's quite difficult to give you an exact number, and you would to refer to the rating agencies to get more guidance on their methods. I wouldn't want to do that. And then maybe a very quick follow-up. What happens the year? Because now the net debt is SEK 40,000,000,000 and if split as or you're proposing to split it, what happens to the if there is further net debt, how do you see that being split up between the 2? Yes. I mean, we know there's going to be more net debt because one of the features of Forest, and I've already alluded to, is, of course, the U. S. On investment. So this is the number that we have set out for 30th September, but of course, as far as debt will build up. So we'll look at the individual cash flows, and each business will basically assume their own cash flow. So we made forecasts, and we'll come back to that when we have more numbers. So with this, operator, let's open up from the questions on the phone, please. Certainly. Your first question today is from the line of Ian Simpson from Societe Generale. Your line is open. Thank you very much. A couple of questions from me, if I may. Firstly, can you just remind us what proportion of your diapers business is in emerging markets these days and what proportion is in developed markets? Secondly, there was a recent story naming you as one of the potential bidders for BSN. I just wondered if I understand you're not going to say anymore on this, but I just wondered if was in any way related to the reference to a potential acquisition that you made in your filing today because I know that in certain countries, regulatory listings would require you to acknowledge the possibility of an acquisition if there was a specific news story that appeared in mass media? Thank you very much. Okay. I will start with the second question. We have no more information to give on any acquisition other than what we have stated today in the press release. Regarding the first question, the split, we don't provide that number, do we? But if you listen to my description of our businesses that I gave earlier, I think that shows that it's a pretty good balance between emerging and mature markets. Should I think maybe roughly fifty-fifty or thereabouts? Like it's not as if one is much bigger than the other. It's reasonably good, yes. Okay. Thanks very much. Your next question is from the line of Jeremy Falcao from Redburn. Your line is open. Jeremy Falcao, Redburn here. Just a brief one on Wassa. Could you talk a little bit about what you've done in terms of getting some of the revenue synergies from this transaction? I know that it was quite complementary business to you in terms of the different sort of washrooms versus institutional. So can you talk about that? And then also what the update is in terms of the synergies and the cost savings you're getting out of that? So remember, we only closed this transaction early this year, so it's still very, very early days. And initially, there is always a big focus on the cost saving part of the synergies, which is exactly what we have been focusing on and primarily then administration, we have since Wassa was a listed company as well as FCA. And then in the second step that we just are just taking now, we have merged the sales forces and actually announced our new setup for our go to market. This is something that we have rated Relentiv now to make sure that the 2 separate sales forces are completely focused on securing, of course, customers and volumes. So the first step we're taking now, and we expect that, that will be beneficial in the value term for also then the revenue synergies in Wassa. Overall synergies that we have presented is SEK 40 million after 3 years' and we are well on track to achieve those. We feel very, very comfortable about those synergies. And a very small part this year. So the majority is year 2 and 3. Okay. Thanks very much. Your next question is from the line of Celine Pannuti from JPMorgan. Your line is open. Yes. Good morning. My first question is on the efficiency benefits. If I look at others sequentially Q3 versus Q2, there has been quite a reduction both for Personal Care and for Tissue. Would it be fair to assume that this reduction is due to the delta inefficiency that you have created? And as a I didn't really understand what you mentioned in terms of whether the efficiency were coming fast or not fast. So but if I look at the tissue operation that you are closing down, when are those benefits due? And roughly, what kind of expectation? You said substantial what substantial means? That's my first question. My second question will be on the balance of volume and pricing. You mentioned that there is a bit of a pricing pressure. But in earlier calls, you were talking about higher volumes that you tried to my understanding was that you had probably left some volume on the table as you tried to raise prices. So why aren't we seeing that? Or is it does it mean just that the volume is quite flat in the market and you only see the pricing pressure? And lastly, on raw mats, I'm sorry, I didn't really understand your commentary. Are you saying that the benefit from raw mats in tissue would be the same as in Q4 as in Q3? And some question for Personal Care and Forest. I can maybe start with efficiency. Of course, efficiency gains will I'll try and answer your question. I'm not sure I fully understood it, and then you need to correct me, Celine. But of course, efficiency gains and the benefits of those will be unevenly spread through the year depending on what we do. And there are many ways that we can get efficiency gains. 1 is, of course, value engineering of our products and better waste management, for instance, or pure negotiation with raw material suppliers. There may be other things like manufacturing efficiency where we'll have more production or more efficient production. So there are many, many different things, and they'll come differently phasing wise. So in Q3, we've had a very good quarter in terms of what has been achieved in financial benefits, and that's what you see mainly reflected in the other line. There is also other parts of that, but that's the main reason. Yes. And that was my question. I think the line, sorry, I don't have it in front of me, went from if I look at tissue 270 to about half of that, does it mean that the delta is the increase efficiency? And it's the same question on Personal Care? The efficiency is a big part of it. There is also other things, but this is a big part. And in Personal Care as well? Yes. And you were also asking about, maybe I should take that question, the raw material, what you didn't understand there. We don't give forecast relating to whether the number will be the same for tissue or for Personal Care in the next quarter, so to speak. We can only talk about directions, So therefore, the impact on a sequential basis, we estimate to be roughly the prices are estimated to be roughly flat Q4 versus Q3. If you look at the Q4 versus last year's quarter, we expect raw material prices for tissue to be lower for Personal Care somewhat lower. So this was the guidance we can give and not to be more exact than that. Okay. Finally, Feline, on volume and pricing. And 1 year ago or now almost 2 years ago, we saw rapidly increasing raw material prices, and we have a very clear strategic direction to go for taking our margins. So we said that we would we look at the margins before going for volume increases. And in the growth that we saw last year, a big part, both in tissue and in Personal Care, was actually price. There was also mix, there was also volume, and a big part was price increases. And when we're now comparing quarter over last year's quarter, we then have a tough comp from that perspective. I also stated early this year, I think presenting the Q1 or maybe previous to that, that this year would be different because raw material prices started to come down and we could see that trend also going forward. So it would be important for us to balance then volume versus price. And this is what we've been trying to do, and we cannot be very generic about this because it's different from market to market and from customer to customer and category to category. But I think the overall result, we're quite happy with that we are able to continue to see growth while having a significant margin improvement. So and of course, going forward, we will have to continue to manage that balance between volume and prices and margins. It's very difficult to be more specific than that. And just one follow-up. If you look at the shape of raw materials, so I've come down, you see those benefit and probably we are going to see it flattening and at some point going up. But where are we now that the prices have come down, you talk about pricing pressure, are we seeing negative prices now in the marketplace? Or is it something that we should expect in 2017? I'm talking here about retail tissue. That's simply to be more specific than what I already stated that we see overall increasing competition in both emerging and mature markets and in Consumer Tissue in Europe due to lower raw material prices, but also in general. Your next question is from the line of Falko Cusadio from MNG. Your line is open. Hi, good morning. Thanks for taking my questions. I have a a bunch of questions on the proposed split. The first one is, in your engagement with rating agencies, agencies, are you able to confirm that the bonds will maintain the existing rating? That's the first one. So I mean the rating agencies have confirmed the rating for FDA hygiene this morning. So they've actually published their own press releases this morning. So we cannot add anything. Okay. No, I haven't seen that. So thanks for confirming that. We have confirmed the ratings for FDA hygiene. Okay, perfect. And the second question is on the pro form a numbers that you have provided. You provided profit and loss and the balance sheet, but I haven't found the cash flow pro form a for the hygiene business. Is it something that you will provide? Or it's in some other documents I haven't managed to see? That's a good question. Why don't we I mean, basically, the solicitation memorandum that's also been now released should contain all the relevant information needed. I'm not sure what you actually missed there, but let's talk about that. I mean, in general, we have now disclosed what we have perceived is necessary to maintain the certification process. So you're saying that the cash flow will be in there. Is it somewhere It's not there. It's basically what you see in the certification memorandum. Okay. I'll try and get a hold of that. And the other question is on the consent threshold. What was the consent threshold that you need to achieve? I don't think we have disclosed that actually. Will you disclose that? No, I don't think so. We will basically continue with the solicitation process. So the consent percentage is not something we disclose. Okay. And what's I haven't managed to look at the docs in detail, but can you tell us what's the what's going to happen to the non consenting bondholders? Once again, we need to refer to the documentation that we have sent out. But of course, our belief is clearly that this will go through as planned. So once you reach the threshold, the non consent will be dragged into the new entities? Or will they stay in the existing? No. Of course, there is documentation that we have for all the outstanding loans and bonds agreements. So there is this is very regulated what exactly will happen. So we have to refer to our own documentation, solicitation and memorandum. Those are the 2 points. Okay. Thanks. Your next question is from the line of John Ennis from Goldman Sachs. Your line is open. Thanks for taking the questions. I've got 2 actually. So the first one is around Baby. So moving into 2017, I just want to know what sort of efforts you can take to try and improve growth in the Baby division and therefore Personal Care? Or do you expect that part of the business to remain a drag going into next year? And then the second question is on tissue. You're obviously closing capacity in European tissue, but it seems like some competitors may be increasing capacity. So I wanted to get your sense on what you think the net capacity change will be and how that compares to the net volume change within tissue. Okay. Regarding your first question about Baby, we don't give any such forecasts. We are working really hard to make all our categories and segments profitable and successful. And that's our ambition, and it's only our last resort when we decide to take other action. And that's our ambition also the baby category. Secondly, yes, there is always a mix of new capacity coming in and capacity moving out of any market. And typically, of course, it's high cost inefficient capacity that is going out. We have a 30% market share in tissue in Europe, and we have a mix of highly efficient capacities and less efficient through acquisitions and for other reasons. And we announced our tissue roadmap at the Capital Markets Day earlier this year, which has the ambition to increase our cost efficiency in tissue. That's the overall. Then in addition, we aim to grow market share, of course. But this is, again, a balance that we're always working within each individual market. So we want to grow our branded fare, and we want to improve our efficiencies in the ongoing dynamic of new capacity coming in and leaving the market. Okay, great. Thanks a lot. So operator, let's have the last question from the telephone, please. Sure. We've got another question from Ian Simpson from Societe Generale. Your line is open. Thank you very much for allowing me a follow-up. I wondered if you could just comment on price competition in Western European diaper. This is something a number of your competitors have talked about having stepped up recently, but it seems that your sort of Western European diaper business is actually going pretty well. So any color on that would be great. Secondly, you talk about your commitment to maintaining a solid investment grade credit rating. How much headroom do you have to a solid investment grade credit rating with the Hygiene business? Is it sort of in the order of SEK 30,000,000,000 or SEK 40,000,000,000? Is it that sort of magnitude? Thank you very much. Okay. Baby, yes, we are happy with our European Baby business. And I don't really have anything more to say. I've also stated earlier that in general, we see an increasing competitive pressure in the hygiene business in its entirety, both in mature and in emerging markets, and I can't be more specific on that. Regarding our investment grade and the headwind, Frederic, is there anything you can say on that? Ian, I will be glad to do that. Actually, if you look at solid investment grade, it's a rating base. So it's, of course, the rating agencies that will define the boundaries, and they look at both financial measures. They look at business risk. And of course, they always look at the characteristics of the target. So it's actually difficult to give you any given number. It depends on what you do with the debt that you acquire. But I can say this, and this is something we've already communicated, that we stand by the finance, the policy that we have communicated, the solid investment grade. And of course, we're committed to that. And then we'll simply have to see what kind of firepower that would entail. But we have a strong balance sheet in SEA as it looks today and as you can see also in SEA hygiene after the potential split of debt. Thank you very much. Okay. Any final remarks, Magnus? Well, just to conclude then, organic sales, as already mentioned, was impacted by a challenging market situation and capacity reductions. We are happy about a good organic growth in operating profit and in margins and the strong contributions that we continue to see from efficiencies and the strong cash flow. Thank you. Okay. So with that, we conclude today's press conference. Thank you for coming and joining. Thank you. That does conclude the conference for today. Thank you all for participating. You may now disconnect.