Earnings Call: Q4 2015

Jan 28, 2016

Hello, and welcome to SCA's Year End Report Conference for 2015. My name is Josephine Edgo, Head of Communications for SCA. And today, our President and CEO, Magnus Groot, will together with our CFO, Frieder de Krista, to go through the report followed by a Q and A session. So with this, I hand over to you, Magnus. Thank you, and welcome. And to summarize 2015, we had good organic growth in sales and in operating profit and especially strong growth in emerging markets, 11% organic. A good cash flow and continued contributions from efficiency savings, so on a similar level to 2014. The Board of Directors have proposed an increase in the dividend of 9.5 percent to SEK 5.7 per share, and we'll talk more about this in a second. Looking at the year in full, we had organic sales growth of 5% and an operating profit increase of 8%. And the year 2015 very much was influenced by very high raw material headwinds, primarily relating to currency changes that affected then the raw material prices. So actually, the raw material prices increases that we have mitigated over the year amount to well over €2,000,000,000 approximately €2,300,000,000 So we have worked very, very hard with price increases, volume growth and with efficiency improvements in order to mitigate these raw material headwinds. Operating margin in spite of these headwinds improved by 20 basis points and earnings per share by 6%. And excluding items affecting comparability, the increase would be 11%. A very strong cash flow, improving 16%. And this sums up to an improve in return on capital employed. And as you know, we have a target of 13% of 12% for the full year of 2015, which is then an improvement with 0.8% compared to 2014. So we are moving in the right direction, but we still have a way to go to achieve our target of 13% return on capital employed. The dividend, again, an increase by 9.5% is the proposal. That equates to SEK5.75, and this is then based on the improvement in profit and cash flow over the year. Moving over to the Q4, and Fredrik will in a minute talk more about this. We continue to see good organic sales growth of 4%, to be more exact, 4.3% and an operating profit improvement of 5%. Looking at the earnings per share, it looks like a huge pickup. But included in this is the sale of the Industrievadan shares during the Q4 and also a tax provision related to Spain. And excluding this and items affecting comparability, the increase would have been 6% in earnings per share for the Q4. So a continued growth in earnings per share also in the Q4. And continuing a strong cash flow. And the Q4 last year was very, very strong in all these respects as well. So we continue to improve on that. Important events, and I will not go through all of these but highlight a few. And the first one, the decision to acquire Warsaw Paper Corporation makes us a strong number 2 in the away from home category in North America. So it's a very important step for us in the North American market. And I'm very happy that on the 21st January, we're actually able to close this acquisition, so very, very quickly. And the integration work has started with full steam. And the full integration effects, we expect to see in 3 years' time. But there's a very, very positive sentiment, and we're all very excited about now working together as one team in North America, SCA and Wausau. So very nice progress there. The other bullet point I'd like to highlight is the decision to divide the group into 2 divisions, the hygiene division and the forest products divisions. And what we have communicated is that beginning of next year, we will give more information around the Forest Products division, more detailed financial information. And we are right now working very hard to look at different options for this division into 2 divisions. And it's complicated. There are different possibilities and opportunities with different tax effects and different legal implications and so on. So this is something we will work with during the year. The strategic priorities are unchanged, so we continue to execute in all these three areas. And when it comes to profitable growth, one thing that has been very important for us during the previous year is to go for fewer and bigger bets, primarily in emerging markets, but also in some of our mature markets. And this we will definitely continue with during this year. And we see further opportunities to either improve or move out of markets or categories that are or categories in markets that are unprofitable and where we don't see an opportunity to improve and turn this around within the next 18 months. So that will be a very, very important part of the profitable growth part of our strategy also in 2016. Inefficiency, we have launched our new hygiene organization on the 1st January, and it's already in full force. It seems to be a very, very natural fit with how we are working. And in this organization, we now have 2 supply chain organizations, one for tissue and one for personal care, with full responsibility for efficiencies, quality, service levels. And I have high expectations that these two organizations will really, really contribute to efficiency improvements also going forward. We're also specifically looking into logistics this year, both in Europe and in Forest Products, to look at efficiency improvements in this area. The 3rd, but maybe most important strategic area is innovation, of course, because this underpins both growth and price mix and market share improvements. And during the year, as I mentioned, we launched 30 new products. And in the Q4, which is typically the slowest when it comes to product launches, we had 2, both in torque. And this is because in the retail area, we don't launch new products in the Q4. This we typically do in the 2nd Q3. We have them here behind me. And this shiny one is not only no touch, it also is equipped with sensor technology. So the increasing amount of customers who are now deciding to buy torque solutions that measures actually the level of tissue inside the dispenser. They can now choose this option. And of course, this helps the facility managers in seeing the consumption pattern in the washroom and also when the sensor needs to be or the dispenser needs to be refilled. And the other product is a very rugged product with high capacity that is used in arenas and other areas where you have a lot of traffic in a short time. So with a compressed tissue inside so that we can fit in twice as much tissue as we could previously. So the need for refill, again, an efficiency improvement for the facility management company. When it comes to number of launches, 30, we are happy with that number and expect a similar number next year or this year. However, what's very, very important that we're working with is to make these launches bigger, more global and also to execute faster on the launches. So we don't have product launches starting in one market and then rolling out slowly. So this is something we're working very hard to improve going forward. And there's some potential here definitely in getting more bang for our backs when it comes to innovation. And with that, I'd like to hand over to you, Fredrik, to talk about the financials in more detail. Yes. Thank you, Magnus. I will give you some more insight into the Q4. And starting with net sales here, you can see that our organic growth was just over 4%, so 4.3 percent for the quarter. And this is in this quarter mainly driven by volume. It's a little different to the previous quarters where we've had bigger price components. And volume was really strong, particularly in personal care across the board in all categories and also reasonable in the on the tissue side of our business. Look at the pricing side. Here, of course, the price increases that we've talked about before in Consumer Tissue in Europe and away from home on the tissue side, they, of course, impact the growth here that you can see. Latin America, we have previously increased prices quite a lot, as you know. And some of that was actually made in the Q4 of 20 14. So from a comparable basis, they are now sort of into the comparable numbers that from last year. So in essence, we have slightly less impact from price in these numbers. If you look at the full years, we have had this growth momentum, so around 4% to 5% pretty much throughout the year. And as previously, this is driven by innovation. We have new customers. We've reported on that, for instance, in the European baby business. But we have also, of course, been, to some degree, helped by currency driven price increases that we've made in Russia and Latin America, etcetera. So it's been a good momentum. And of course, not to forget here, Vinda continues to contribute also in the 4th quarter. If you look at the operating profit side, here again, we have and I'll come back to this in a second. But again, we have a very strong material raw material impact, a negative impact, as you can see. This equates to close to 2% of margin just for this quarter alone for the group as a whole. And we have compensated this through pricemix and on the volume side. So if you look at the price and mix, a lot of this on the pricing side is actually coming from tissue this time. A little less from personal care because of the comparables, but we have continued to increase prices largely for tissue as we have communicated. If you look at the volume, just the opposite. Personal Care continues to grow quite significantly on in most areas, but also tissue has growth. Raw material here, as before, a very significant portion is actually on the tissue side. So if you take the total number there of €530,000,000 or €529, €450,000,000 actually comes from tissue, and the rest is personal care. In personal care, we have a slight positive impact from oil based materials in this quarter, but the actual currency impact because of Latin American currencies is actually more than the 100% of the impact. The other number here, minus 70, this is a combination of a lot of different things. We continue to generate efficiency savings pretty much to the tune we did last year. So we keep that pace. But we've also spent more in terms of A and P, and we spend also more in terms of sales and sales cost primarily. And we have the ordinary salary inflation within these numbers. If you just this is maybe something you are quite aware of, but it's actually quite interesting to look at the currency because we have repeated this discussion pretty much every quarter this year or for 2015. And this gives you a little bit of the impact on the different individual currencies. These are just examples. So of course, the main impact comes from the euro dollar movement and the purchases of pulp we make in Consumer Tissue. But if you look at some of the other currencies there, U. S. Dollar ruble or reais in Brazil and Mexican peso, peso. If you look at those, what you can see there is they have a very, very significant impact on the purchases of raw material. And what's more noticeable here, this weakening of these currencies, or put it differently, perhaps strengthening of the U. S. Dollar has actually continued. So we keep on seeing these negative trends. And that's why you see pretty much similar numbers in every quarter for raw material. So the underlying trend is not necessarily negative for the raw as such, but the currencies keep on moving in the same direction. We talked about price increases at the early part of this year or throughout this year and the attempt to compensate. And this picture actually gives you a little bit of the feeling of how we have done in these different areas. If you take a look at the upper right, Personal Care, the raw material costs have been 200 basis points or 2% in margin for the full year. And we have actually through price and mix, and this is important, a considerable part is actually mix improvement, we've also compensated a significant portion in price. So the net impact on Personal Care is actually positive. And hence, you see as a consequence a higher margin. If you look at tissue, a tougher challenge, but we have compensated in primarily price on the tissue side. So we still have a net impact and that we have compensated with primarily efficiency gains. Forest Products is a different story. There, of course, the price and mix has been very positive because the weakening Swedish crown and the strengthening euro, if you take it versus last year, has had a positive impact, but the underlying pricing of the products has actually been down. So quite the opposite there. One thing we have showed this before. This is our different businesses in the D and E markets compared to mature. And as you can see on the table in the middle here, we have continued to improve in the mature markets. And that we have done for several years. So this is, of course, innovation driven, and it's also efficiency driven. And we continue to have a larger share of our sales now in emerging markets. So now we're at 32%. In 2013, we were at 24, as you can see. But margins are still down. And if you look at markets such as India and such as Brazil, we continue to have investments and high cost ahead of us. And of course, as an example, Brazil, there we've taken a decision this year to establish production capacity, which will take the cost down eventually. But we continue to invest. And of course, that has a big impact on the overall margin for the group and especially as the portion of the markets continue to grow. Finally, just a couple of words on the cash flow side. We're quite pleased with the performance this year. So if you look at the operating cash surplus, that has, of course, increased quite a lot, actually more than the EBIT increase. And this has to do with the fact that in 2014, we had currency swaps included in not currency, sorry, forest swaps included in the EBIT number. That's not cash flow. So in essence, in 2015, we don't include that. So the improvement in cash flow is actually bigger than what you see in on the EBIT line. And we have continued to strengthen our position in working capital. So if you actually look at the exit working capital in percentage of sales, it was 7% just over 7% in 2015 compared to approximately about 8% in 2014. So it's been a good year in terms of cash flow. Finally, on the strategic and maintenance capital expenditure, There we have a big increase. And this is to a large degree, if you look at the full year related to, of course, Ostrand. And we took we actually did part of the Ostrand investment already in the Q4. So that's why CapEx is slightly higher in the Q4. But we've also taken pretty big capital expenditure also for Brazil, as an example. So with those words, Magnus, okay, we move over to a closer look at the different categories. Personal Care, to start with, as mentioned, in the 4th quarter, continued growth both in profit and in margin. And this comes from all areas: better price mix, higher volumes, cost savings. Our target when it comes to return on capital employed for personal care is 30%. So we have a quarter where we're actually above our target. Of course, we want to do even better. So but this is a positive development. And this actually comes both from mature markets and emerging markets. So we have a 7% growth in mature markets and 11% in emerging markets. And looking at the categories, incontinence products is worth mentioning because we see an improvement here year over year now and quarter over quarter. The reason behind this is that we have been successful in growing market share in Europe and also slightly in the in North America, in the health care part of our business, which is the biggest part of our incontinence care business, while in the retail part, where we have been losing some market shares to due to the entry of Procter and Gamble and high competition from retailer brands over the last year or so, we have stabilized market shares now. And we are expecting to turn around in retail in Europe during this year. When it comes to retail North America, we are still challenged, and we're working very hard with a turnaround plan for that part of the incontinence care business, but that's a tiny part of our incontinence care business. And as you can see, Feminine Care is really, really continuing to grow quarter over quarter. The slightly lower growth in Baby Diapers is partly reflected by our effort to cut out smaller positions like we've done in Brazil, in Mexico, in Thailand. So most of this growth then comes from Western Europe. Tissue, where we have growth, but a slight decline in operating margin. Again significant raw material headwinds compensated by pricemix, volumes, cost savings. Our target when it comes to return on capital employed is 15%, so still some way to go here. Digging into the geographies. We had a tiny growth actually in mature markets. There are some reasons for this. We have been pushing for price increases very, very I think throughout the year. And when there's been a choice between volume and price, we've been pushing for price. And this is partly then reflected also in the volume growth in mature markets. Also in the Q4 last year, we had quite significant pre customer preloadings in away from home in Europe, which we haven't seen to the same extent this year. So that was a tough comparable for us. The emerging markets continue to grow 10%. And as you can see at the bottom there to the right, Asia, Latin America, Russia all continue to show good organic growth in spite then of the pressure on purchasing power for the consumers in these countries. They because of the legislations of the currencies, but they still continue to increase the purchase of our tissue categories. And the difference in growth between consumer tissue and away from home also reflects the fact that most of the growth in emerging markets is consumer tissue. And in away from home tissue, specifically in Europe, we had this pre loading last year. Finally, Forest Products, where we had a slight decrease in operating profit and a decrease in the operating margin in spite of lower raw material costs and energy costs and some higher volumes. And the effect here comes, to a large extent, from price. And this is in sawn wood products, in pulp and to some extent also in printed products. We also have here an impairment loss of trade receivables in Egypt, which amounts approximately €40,000,000 And this relates to currency restrictions imposed in Egypt first half of last year. And these receivables have now become overdue, and that's why we are prudent and impairing for them. So overall, an operating margin of 14.8%. And in this, we also have a positive effect now from the depreciation that we made of the Utlik and Mill at the end of last year, I think in September, Frederic. So with that, to sum up, overall, quarter over quarter, we continue to have good organic growth in sales and operating profit. We have taken several strategic initiatives that we continue to execute this year. And with this, I'd like to hand over to Jussphine. Thank you for listening. Okay. So let's start with the Q and A. So we start here in the front row, Margherita. Linus? It's Linus Larsson with SEB. You've made changes to your financial targets, And I assume something has changed, but exactly what changes have given you reason to change your financial targets? Yes. The reason and I'll hand over to you, Fredrik, for the technicalities that we're doing this and not really saying much about it, as you can see in these presentations, is that it's a modernization. We've had the same targets for many, many years. And at that point, when they were put in place, we were mainly a first products company with a smaller part in hygiene. And now we want to relate and modernize the targets and actually relate them to our investment rating. And Frederic, maybe you want to No, I think you're absolutely right. If you look at the capital restriction, if I put it that way, it's actually based on the previous previous was D and E ratio, so debt to equity ratio. And of course, the primary purpose of a restriction like that is to have a safe and secure access at favorable turns to the capital markets or the funding side of things. And of course, as you know, the rating in agencies and funding institutions, they wouldn't typically look at D and E. They're more cash flow related. So we think it's much more modern and appropriate to tie our capital structure to the rating agency logic, if I put it that way. So it's not a change in behavior. It's much more a modernization. And then when you look at the dividend policy, it's been it was set in, I think, 1997 or something like that. And it was related to a measure which has not been followed for, I think, the last 10 or 15 years. So we're basically just updating. So it's not a change of behavior, Linus. This is just a modernization. May I follow-up on the Personal Care side? You've pruned your asset base, made changes in Brazil, Mexico, in the results? How much is already reflected in the 4th quarter operating profit? And how much is still to be reflected? These changes have an impact in the Q4 already. Some of them and some of them we'll see coming in the Q1. But there, the ones that we see now going forward are quite small compared to the ones that were already reflected in the Q4 actually. And finally, if I may, just one last question regarding the reorganization that you're planning into 2 divisions beginning of next year. And you said that you're looking at different options. Could you please elaborate what and you talked about legal and tax implications. And I mean, could you say a bit more about that? What potential outcomes could there be? The reason why this is complicated is from an organizational forest products are working very much in their business unit already today. But from a legal structure, actually our forest assets are split in different legal entities, and a large proportion is in the parent company. And also, actually, some of the ownership of actual industries in different companies. So that's why we're looking, is it possible to also make a legal split? How long would that take? What would be then stamp duties, for instance, that you would have to pay or other tax implications? And those different options, we're right now exploring. So it's too early to say what the different options could be. Nick Galioff from Kepler Cheuvreux. You showed us a slide there where how effective you had been in sort of taking back or clawing back the higher raw material costs, and this was very successful on the Personal Care side, but then not so successful in tissue. Could you talk a little bit about the differences and the future there? It's partly a geographic explanation to this because we are heavier relatively in Personal Care in the emerging markets where there's a higher acceptance to price fluctuations and price changes and where many of our competitors are in a similar situation also. While the tissue business is very heavy towards mature markets and specifically Europe, where we, of course, are negotiating with all the big retailers and where it's more difficult to achieve price increases year over year. But we're very happy with the progress we've made in Europe in a tough general climate. So and where we'll continue to work with all of the different levers, so price mix, efficiency improvements and also balancing that with volume growth, of course. Thank you. Hi. Stefan Hellstrom with Nordea. To touch upon that question again maybe also, I think you previously said that you were hoping for price increases in the away from home tissue in the beginning of this year. And now you're saying that there's no preloading. Does that have any effect on that? We actually have put in place some price increases for this year in Away From Home Europe. But we've tried to do it in a way to avoid the same preloading effect that we had last year. But yes, you're right that, of course, there's a balance. With massive price increases, you get big preloading. So there's a balance. Very good. Also reflecting on your strong volume performance here in Personal Care and the improvement in incontinence care, you had increasing A and P spending in 2015. And do you feel the need for continuing to do that in 'sixteen or actually maybe even decreasing? The P spending, yes, partly from incontinence care. Again, the fight with P and G, which actually had a very, very positive volume effect. So it's not all bad. It's also been helping us in several areas. It comes from India, which is an entirely new business that we're building from scratch, and also from China and Vinda, where they have been pushing very hard to actually grow more than 50% of the market growth and probably about 60% of our overall market growth in the Chinese market. So they have taken the opportunity, if you look at the market dynamics, to really capture some growth and to improve the market position. And going forward, I think that in some areas where we are spending more also like in Feminine Care, for instance, it has a huge payback. So you have to look at, of course, the margin improvement in the end. And in other areas, we have to balance it. So it's always a trade off. But there's nothing wrong with increasing A and P, of course, in categories where you have very high gross margin so that you also have a high EBIT margin. Those are the categories you want to grow. Sure. Also reflecting on your the headwind that you had on raw material here, I mean, can you say something on how you see that going forward, particularly in light, I guess, of the lower oil price and the effects of that. Yes. Stellan, I mean, I showed before the currency graphs that you saw. So of course, we'll continue to have negative currency implications. If you look at the oil related materials, we had a positive impact in Q4. It was actually not that big, but it was there. And we'll have that as we continue if oil prices or actually plastic indices stays where they are at this point will have a benefit in Q1 and onwards. But of course, if you look at the different units, starting with personal care, it's actually difficult to forecast because of the very significant movements you have here in the currencies, but it should be pretty much on par with last year in that sense. So we'll compensate some of the raw material with oil based material benefits. If you look at tissue, it will be still continuing higher cost Q1 of last year of 2015, but not as big, hopefully, as you've seen this quarter. Any more questions from the floor? So then operator, let's open up for questions from the telephone, please. The first is from the line of Celine Pennutti. My first question is on pricing. You mentioned the pricing element in Away From Home. Where is the rest of the negotiation in tissue? And likewise, in Personal Care, you just mentioned that FX continues to be an issue. Should we expect to see further pricing to recoup that FX weakness in emerging markets? So same question pricing at Fluke and Personal Care, please? Okay. Starting with away from home, typically, the negotiations are annual then with a price change from 1st January. And this is what we are seeing this year in Away From Home Europe. And we don't have any major price changes in North America. So that's the price increase in away from home. In Consumer Tissue, it's more of a rolling process depending on the contract structure and depending on the customer. And of course, we are pushing very hard to continue to compensate for raw material headwinds in Consumer Tissue in mature markets. And again, in emerging markets, it's easier because there's a higher acceptance of this. Personal Care, finally, yes, we are planning for price increases in emerging markets in Personal Care during the Q1. So this is something that we're working with right now. Is there any magnitude? I mean, should we expect something and the likes of the same level as we've seen in 2015? It's very difficult to say because of the volatility in the currencies and the raw materials. And one thing we learned last year, and you can see it, for instance, in the ruble graph previously, is that these currencies swing back and forth and that you have to time this correctly. And I think we did it quite successfully. So it's very difficult to say something about the magnitude. I think, Giulian, we can say, as we did last year, we'll promise we'll really, really try to increase prices, but we cannot promise the impact. So it will depend on the competitive situation and, of course, a lot of other factors such as demand, etcetera. All right. And then the other question I had on was on these strategic priorities when you mentioned that you have moved out of some countries and categories and that there is more to be done. I mean, first of all, can you quantify what impact this had on Personal Care in the Q4? And as you look at 2016, where you said there's still opportunity, what is the percentage of your business that you think needs to be fixed? Or is it in that category, in that like the magnitude of the work you have to do there? We're in the middle of that work now. So it's very difficult to give any specific numbers, and it could also change over time. So I can't give you any numbers on that. And regarding Q4 of last year, I don't know, Frederic. Yes. It's actually quite small. It's as you know, it's Thailand had an impact, but it's relatively small. It's positive, but it's small in comparison of the totality. South Africa was pretty much executed during the quarter, and the impact is very small in Q4. And then finally, Brazil, which is pretty much closed at the end of the quarter. So it had a small impact. So next question please, operator. Yes. It's from the line of Oskar Lindstrom. Yes. I have three questions. I can go ahead and pose. The first one is a bit of a follow-up on the question from Linus earlier about the options, as you expressed it, for the Forest Products subsidiary and especially around the timing of the move of the legal ownership of the forest lands, A, will that be completed by the end of this year? And then on that also, can you be more specific about how you plan to avoid capital gains, tax or stamp duty if you make such a transaction? Sorry, but I can't be more specific. We are evaluating those options now. So it's too early. All right. How about the timing of the move of the forest lands from the parent company? Also too early to give you further guidance. Okay. And to answer my second question, that's fine. It's regarding organic growth in emerging markets that we've seen in 2015 has been very high. How much of this has been volume and how much has been price? It's been a good I don't have the exact number. It's been a good mix of both actually. Of course, there's a lot of price in it due to the currency fluctuations, but there's also good underlying volume growth in almost all markets. You want to be more specific there, Frederic? No. It's exactly as you say. We have really good volume. But of course, we've raised prices. If you take Latin America, as we've already alluded to, we've raised prices a lot in Russia. But pretty much on all and I think you mentioned it, in all categories in personal care in most or pretty much every geography, we've had good volume growth. And this helps us also from a cost perspective because we're seeing much better capacity utilization in our plants. So and this, of course, helps for return on capital employed. So it's a positive development. And follow-up on your answer here. On balance then between better capacity utilization in your plants in emerging markets and the ongoing investments both in Vinda and India and maybe some other markets, should we expect margins in emerging markets in the hygiene side to improve or I think it's important that we as the management really balance that so that we don't end up with having too much D and E markets with low margins. So this is a balance we have to make. And the big bets that we're making right now, like, I mean, Russia, we're in since many years. But if you take Brazil and India are I mean, the positions in China, of course, that's developing very promising. Promisingly, those are the bets that we have made. And then the other positions we're looking at is more to see how can we improve profitability. Maybe we can also complement because what we are doing when we make these big, especially organic bets like you see in Brazil and India, we work with fairly rigid business plans. And that, if you look at that, is actually value creative. So we look at creating value in the end, but that actually means that we need to invest over a period of time. So asset utilization in India, as an example, is very small at the outset when we build the machinery and the equipment and we don't have the market. And we also build a sales organization, so it takes time to build that up. And as we go along, we increase the asset utilization. Same thing for Brazil basically. There we import at very high cost. And as we put the plant into work, of course, our cost position over time will increase. So we keep very, very tight control yes, we'll improve. And exactly. Yes, so we keep very tight control of the business plans that we've made. All right. My final question sort of links on to this one, and it's about your sort of strategic investments. And if we look at the 2 big ones recently have been Wassa paper on the tissue side and of course, the ongoing investment in Ostrand on the forest products side. So do you feel any sort of urgency to sort of make larger strategic investments on the Personal Care side? I mean, you are making some organic investments, but sort of the financial size of those seems significantly smaller than what you've done in tissue and are doing in Forest Products. Is it difficult to find good acquisition targets in Personal Care? Is that sort of one of the limiting factors? We're continuing to working hard. We're looking at acquisition opportunities, but you never know when they arise. And it's difficult to find the right opportunities, I'd say, in any category. So it's not specifically for personal care. I wouldn't say so. I mean, the positive side of personal care is that it's much less capital intensive. Last year and this year, we're putting more new personal care machines, I think, into our plans than we've done for many, many years. Over the last 3 years, we already made important upgrades of the baby business in Europe with a very, very positive effect on profitability and growth. We've also been doing this in incontinence care that we're continuing to invest in. And with the very high returns in these categories, we actually do a lot of investments, but they don't show as much on the balance sheet, which is a good thing, of course. But we also continue to look at M and A opportunities. The next question is from the line of Ian Simpson. Just a couple from me, if I can. Diaper wider drivers of performance there? And then on forest, just wondered if you were able to sort of provide any commentary on the likely outlook of pricing for 2016 sort of considering FX and that sort of thing and how we should think about that impacting on profitability. And then just lastly, when you're sort of talking about forest and your potential options when it comes to legal ownership shift, I mean I can sort of see the benefit of shifting the organization and running these things as divisions. But what's actually the benefit of shifting the legal ownership structures? I mean if you're having to think of ways to get around stamp duty and all that sort of stuff, why not just leave the legal ownership as it is? What upside do you see? Thank you very much. Okay. I didn't hear Kate. What's your first question regarding Baby in Europe specifically? Yes, exactly. It is a sort of driver to the share gain you're seeing there. We are gaining share in most markets, both where we have our own brands, Libro in Northern Europe and in Russia and our private label partners in most of the big European countries. So very positive momentum, and this is because of the fact that we have a very, very good product assortment now that's very, very competitive. And also, we continue to ramp up the big contract that we won over a year ago now, but this takes time to ramp up. But we actually just finalized that, you could argue. But so it's a good combination of growing market shares in private label, in brands and ramping up this contract. Then when it comes to forest and price outlook, Frederic. Yes. Thank you, Magda. It's actually quite challenging. But if you look let me just start with pulp. You've seen that underlying prices, as expressed in dollar, have come down a lot. So we'll see it around the $800,000,000 level or slightly there below. And of course, what's also happened is that the softwood and hardwood pulp have come together. So the gap is now very, very narrow. So it would be a likely yes, that you'd see a more positive underlying U. S. Dollar based pricing on pulp or softwood pulp as we go forward. But it's really, really difficult, of course, to estimate. If we look at sawn timber, there we've had you can say continuously in the last several months or several quarters, we've seen an underlying price movement downwards. Good volumes, really good volumes, but we've seen a price movement downwards. And hopefully, that will stabilize as we go along. And of course, publication paper for the time being relatively stable. But over time, as you know, publication paper has a demand issue, and therefore pricing should be at risk there as it has been before. Then the rest is, of course, currency. Now we've seen in comparison to last year slightly stronger Swedish crown. That's a negative in price. So on balance of all of this thing, it's actually quite difficult, but it should be slightly either flat or slightly down. And then the third question was regarding our work to divide the company in 2 divisions. And what we want to create is a very, very strong forest products company that's integrated and where we create the most value for our shareholders, of course, in putting together forest land with forest assets that then monetizes, creates cash flow from this forest land. So that's why we're looking also at different legal options. The next question is from the line of Kartik Swamy. Kartik Swamy Nathan from Bank of America Merrill Lynch. The first I had was some additional color on what happened to central costs during the Q4. I was under the impression that the 3rd quarter's cost level might have been artificially depressed, and you should see some level of normalization towards, let's say, 250,000,000 per quarter range. So if you could provide a little bit more color as to what kept it so low and how to extrapolate that going forward. Secondly, I think we've had quite a lot of commentary on raw materials. But if you could kindly clarify, with what kind of time lag should we expect the decline in oil price, which has fallen off a cliff since you last spoke, and pulp, which has been consistently declining across both grades, begin to come through into COGS, gross margins and profit? And then finally, it was a quick follow-up on the question on return on capital. So as I understand it, your major cost cutting programs have ended as of 2015. You've hinted at new initiatives to come in logistics and some areas of tissue in Europe. And clearly, the emerging market side of the business remains at a very big gap to where developed markets is. But you've also given some commentary of the idea that you want to expand areas like Personal Care further, but at the same time, emerging markets may be capped and never reach the level of developed markets. So what I wanted to understand was how does that equation play out in order to get you to your 13% group return on capital target? Yes. Central cost, if we look at the development there, what's now less of cost, of course, relates to the team SCA effort that we've done. So we've lowered the cost a little bit. Whilst we previously have a bit over €800,000,000 if we look forward, we should see around €700,000,000 for 2016 or thereabout. The reason why it varies, it does because we have typically project costs that we may undertake during the individual quarters. So there will always be some fluctuations on that as we go forward. But if you look use that level roughly for 2016 of €700,000,000 or wherein that means you should get it approximately right for the full year at least. If you look at the oil price, I think I alluded to it before slightly. We had a positive impact in Q4 of 2015, and we'll see a little bit more than that in 20 16. So Q1 will be positively impacted. And that's why I said that if you look at Personal Care as a whole, we'll see raw material roughly on par with last year. If you look at tissue, of course, still very negative because we don't have the oil based component in there. I think the last question you had on raw material was there on pulp, and it's declining pulp prices. But if you actually look at the underlying pulp prices, it's not declining. What is actually declining is a softwood pulp. But if you look at the hardwood side, we have an increase of price. So the net impact for the group is actually not positive. And there is a real simple reason for it. We if you take tissue in general, we use a lot of both of these. And over time, as we had a big gap between soft and hardwood, we've used an increasing percentage of hardwood pulp into our product. So actually, the impact from the underlying U. S. Dollar based pulp prices has not been positive. And finally, if I start and you fill me in, Frederic, around how will we manage now cost efficiencies and growth and so on to achieve our target of 13% return on capital employed. Starting with efficiencies. If you look at our overall cost structure for the group, 75% of sales is cost of goods sold, and that's why I emphasized these supply chain units that we have put in place and how important they are for really, really finding the savings in this 75% of our cost base. And behind those 75%, a big part is raw materials, where we are improving both in, of course, procurement but also in raw material rationalizations in our products, in designing new products so that they can use less material and so that we have less waste in our processes in improving machine efficiency and, of course, then in the whole chain, including logistics and so on. So that's why I really emphasized that area. And this is also one of the reasons why it's unlikely that we would announce that we would make a big investment in another emerging market this year organically because it has a drag on margins. And we've made our big bets now, and we work very, very hard to deliver according to the plans and to create a lot of value actually for the shareholders. But don't expect that we put the flag in another country big time with very negative margins because we want to keep that balance. And of course, our overall target is to improve margins year over year. So we're very much focused on that, and that's a restriction to how much we would invest in lower margin activities. Our next question is from the line of Cole Hathorn. Just continuing on from pulp prices. We've seen the pulp prices go down in China at the moment. I know you've talked about hardwood pulp prices and dollars rising in 2015. But your outlook into 2016, is there a possibility of potential surprise on margin side in the tissue business? And are you pushing for lower pulp prices there? And then secondly, on kraftliner prices, there's a ramp up from one of your competitors at the moment. What is your outlook for 2016 kraftliner prices? Okay. If I do China, I mean the kraftliner, I take the easy questions. No. So in the Q4, we had a negative impact in China from the devaluation of the Chinese currency. So that had a negative impact on the raw material purchases in China. Going forward, depending on what happens with the Chinese currency, we'll decide what happens then to the cost for raw materials, while actually you're right that the underlying cost for pulp in China is coming down slightly. Yes. Krebsch Leiner, I think it's absolutely a valid point. We have new capacity that's now come on stream. Right now, it's actually not impacting, but it's likely to believe that, that could impact as we go forward. The next is from the line of Robert Waldschmidt. Just wanted to come back on your financial targets. You're targeting investment grade. I believe right now you're at investment grade. I didn't know if you have any targets for the ultimate debt rating that you will have for the group. And then 2, in terms of dividend policy, in particular, you target a stable and rising dividend. Does that imply a potentially fixed payout ratio? Will dividends grow in line with earnings? Or is there a different translation for that statement? And then am I to understand that if you're unable to find organic investment opportunities and or M and A that you would return excess cash via special dividends? And then also, can you clarify how you see the tax rate evolving in 2016 and go forward? I mean, clearly, we have the provision for $300,000,000 of Spanish clawback for quite old implications. But I suspect go forward, your tax rate will be more around the 25% rate. Is that correct? Yes. I'll take the last question first. It should be around there. So of course, the Spanish issue is a temporary or one off thing. So you're right, it's approximately there about in the 25% to 25.5% range, so somewhere around there. You had a number of questions on the financial policies. And if you look at the first one, it's actually solid investment grade. It's not investment grade, solid investment grade. And then we don't have a specific debt to equity ratio as we've had in the previous policy. And the simple reason I mentioned it previously, we are targeting the credit market and the rating environment, if I put it that way. And their debt to equity ratio is not a major parameter. It's much more free funds from operations and those kind of things. And of course, these measures will over time vary. So that's why we trigger or aiming at a solid investment grade, whatever that takes. And that's where we are today already. We're A- today, so we're in fact well into that arena. I think your second question was on the dividend ratio. No, there is no such thing as a fixed percentage of net profit or cash flow. It is exactly what we say. We aim towards a stable and rising dividend. And that may vary, of course, how much that the dividend will actually be. The major difference there is, of course, we also consider the capital structure, which is also said in the statement. The final thing, of course, there is an intention in these different statements. And that is that 1st and foremost, we would like to invest into shareholder value creating activities or investments. That's our 1st and foremost ambition. If that is not and of course, then we'll distribute accordance with the policy. Should we not have anything to invest in, then of course, we would be in a position to repatriate. And that's, needless to say, we would do that. But of course, we are 1st and foremost looking for good opportunities to invest. Okay. Just to be fully clear on the actual target for capital structure, I mean, you say solidly into investment grade. I mean, does that mean that we should expect that over time you intend to improve further your existing rating? No, no. It says solid investment grade. In the rating environment, that actually means BBB plus or higher. We're now in A-. So the capital policy, therefore, would stipulate actually a lower rating than we currently have. So we have that today. So that's what I said. It's not a behavior change. It's pretty much exactly what we have today. It's just Okay. Thank you. Thank you. The next question comes from the line of Rosy Edwards. Please go ahead. Yes, good morning. Just a question on pulp. Can you just remind us of your exposure then now? I think you used to say it was sort of fifty-fifty split between soft and hardwood, although based on comments just earlier, it seems like that will have increased towards hardwood. And as much as you can say, is the increased exposure to hardwood something you're seeing across the industry? Have kind of manufacturers moved towards that? Or do you think you would kind of stand out from the ground there? No, I mean, again, I think we all adjust and work with different materials. So this is not unique to SCA. Everyone does this. And of course, the point is here is that we have one part or one pulp, in this case, software that has come down, and there is also hardwood that's come up. So they net each other out. That's the main point of the segment. So we will continue to optimize between hardwood and softwood always, depending on how the prices develop to minimize our overall costs. And this is we have that flexibility and so does the industry. So it's something we will be working with continuously. So is it still fifty-fifty? Or the 210 is 50? 60, 1, 39, to be exact now. And that's 61, hardwood? Yes. Okay. Thank you. Thank you. The next question today is from the line of Jeremy Fialco. Please go ahead. It's Jeremy Fialco with Redburn. A couple of questions. So the first one is on the promotional environment in Personal Care. I remember that in Care. I remember that in Q3, you talked about how you benefited from some competitor promotions and the phasing of them. So if you could just talk about what's going on there. And then the second question is on tissue capacity. So could you talk about the outlook for tissue capacity and where you see utilization going in some of your main markets in 2016? Okay. When it comes to the promotional environment, it actually changes quarter over quarter, so it's very difficult to say something about an outlook. So there could be a comment at the end of a quarter that it happened to be one way or the other, but it's very difficult to say because it has to do with everybody's launch plans and different tactics between different competitors. So no more information really to add there. When it comes to tissue capacity, there are some good news, and that the big increases of tissue capacity in North America seem to have now more or less all be on stream, and prices are still at relatively good levels. And there are some indications in some parts of the North American tissue business that price is also trending up. In China, we also have some kind of encouraging news that the risk that we saw for a very, very, very strong supply increase with a lot of new machines coming into the market has not materialized. So there's much less new capacity coming into China than the plans that have been announced by the different players. And at the same time, we continue to see old and inefficient unsustainable capacity going out. So of course, then there are other challenges in China. There's still a very competitive market, and there's the whole now change from that reduces the overall growth even though the change is to more internal growth, which is actually good for our categories. And then in Europe, we have seen some more capacity coming into the market in some countries this year. And of course, that makes it more difficult to increase prices. But in spite of that, we have been successful as presented over last year. Okay. And in terms of Europe in 2016, do you see any kind of increases coming on in 2016? As I already mentioned, in Away From Home, there were some price increases beginning of the year in consumer tissue. We are always negotiating with the retailers. It's a tough environment, but we're working very hard, of course, to recover the cost increases that we have from raw materials. Sorry, no, I was just asking about capacity in Europe in 2016, whether your what your expectations are in terms of the new capacity to come on in Europe. There has been some new capacity coming into Northern Europe, so on the border of Poland and Germany and also in France. And that's more or less already happened. And what we're seeing now is more capacity in Spain and Portugal, which has been undersupplied. So there's been quite a lot of tissue imported into this market before. But that's a local phenomenon that we're seeing right now. So that's the overall situation. Okay. Thanks very much. Thank you. The next question is from the line of Oscar Lindstrom. Please go ahead. Yes. Hi. Thanks for taking my question again. It's about your raw material exposure. I remember about a year ago, you said that and I was referring to 2014, you had total raw material costs of SEK 27,000,000,000, of which SEK 13,000,000,000 were for pulp outside of North America and then $7,000,000,000 was for oil based products. Could you provide an update on what those numbers were for 2015? Yes. I don't actually have that, Oscar, exact numbers. But of course, needless to say, this was expressed in Swedish krones. And since the dollar has increased, the numbers have also increased with the corresponding amount. So they're slightly higher now than they were, but I don't actually have the exact numbers. Follow-up on that also. When I look at my model for oil based products and how those the costs should develop for those, it seems the costs in reality are not coming down as much as my model. So I was wondering, is this something that is surprising you or is my model too rough? Have we seen are the producers of these oil based inputs expanding their margins? And what's the kind of feeling for 2016 on that? We've had this issue before. So if you look at 2015, what you saw was that the plastic indices came down at the early part of last year quite a lot. And that was on the back of the oil price coming down. And then so we got a 4 to 6 months lag when you translate the plastics indices into nonwoven SAP or whatever it may have actually sort of those kind of things that we use. So that meant that we had a positive impact in Q2 of last year, as you may recall. Then prices went back up again. And plastics indices started to go up in March time frame last year. And this was on the back of and you may remember this shortfall of production capacity. There was a forest marshmallow in a plant in the United States, etcetera, lots of things. So basically supply issues. And then we've seen now during the fall that plastics indices have fallen once again and then after that basically stabilized on a lower level despite the fact that oil prices have come down. So if you look at that, we have a slight benefit in Q4. We'll have a Q1 benefit, And that will continue if everything stays as it is right now. We'll have a slight benefit also in the following quarters. So unfortunately, the math, the way it works is that plastics indices, if that falls by 10%, then we get an average of benefits of 3%. That's the kind of relation you have. And then it's up to you to sort of define what's the relationship between plastics indices and oil prices. They have been, over time, very correlated. But as I just talked about in the last year or so, oil prices have come down a lot, plastics indices have not. So the impact is much less than what it appears to be just by looking at the oil price. So once again, we don't know. I think we'll see some benefits, but that's it. So with that story, Oscar, but we need to make that our last question. We need to conclude this conference. So thank you all. And any final words from you, Magnus? Well, the final words are that we continue to move forward executing on our strategies. This year is very exciting because we have a number of major projects that we initiated last year that we are executing this year. And we continue relentlessly then in all the different areas that we have just presented and discussed. So thank you very much for listening. Thank you.