Hello. Welcome to SCA second quarter report for 2015. My name is Joséphine Edwall-Björklund. I'm Head of Communications for SCA, and today we have our CEO and President, Magnus Groth, who together with the CFO, Fredrik Rystedt, will go through the highlights of the report. Afterward, we will as usual have a Q&A session. With that, I hand over to you, Magnus.
Thank you very much, Joséphine. This presentation we will make in three parts. I will start with an overview of the quarter. Fredrik will dig more into the financials. I will come back to talk about the markets and the categories more specifically. Starting with the overall development. We continue to see good organic growth and operating profit, especially strong growth in the emerging markets, just as in the first quarter, resulting in a strong cash flow. We continue to innovate and the second quarter, we launched 10 new products. I'll get back to that in a while. During the quarter, we were also able to increase prices in Central Europe in tissue. This is a price increase that will have effect gradually in the third quarter with full effect in the fourth quarter.
A gradual effect of this, I know that this is something that we discussed in the first quarter review. During the quarter, we also decided to invest in a production facility in Brazil. Our inclusion in the FTSE4Good Index has been reconfirmed, and this means that we get very high rankings when it comes to environmental, social, and governance factors. That's something we're very happy about. I will let Fredrik dig into the numbers, overall, a positive development, as I already mentioned, in sales, profit, and margin, as well as cash flow. This reconfirms our focus on three strategic priorities, profitable growth, innovation, and efficiency. Talking specifically about profitable growth, we have taken the decision to invest in Brazil, approximately SEK 650 million.
The production is planned to start the second half of next year. The reason for this is that we are taking the next step after an acquisition in 2011, when we acquired a company that had a 10% market share in incontinence care products and approximately 4% market share in baby products. Since then, we have grown the incontinence market share to 23%. A very positive development and a large part of this growth, we have outgrown the current facility, and we are importing a large part of these volumes now to Brazil with very high duty costs and import costs. Now is the right time to invest in a local facility. Brazil is very attractive. It's almost 200 million employees. It's the world's third-largest retail market for incontinence products, and it's still growing at a high pace.
This is a strategic investment that we feel very good about. Then through 2017, we will see the benefits also on our profits when we have a much lower cost for our incontinence care business in Brazil. During the last quarter, we did not only speak about growing in the emerging markets, we also spoke about the fewer but bigger bets. The markets that we really focus on, we will invest in for the long term. Brazil is one of them, China, India, and Russia are three other focus markets. At the same time, we are reviewing some smaller positions with a criteria that is very straightforward. Do we believe that we can have a number 1 or number 2 position, and do we believe that we can have the best profitability and development in those markets?
Based on those criteria, we have decided at the same time as this investment to step out of the baby diapers business in Brazil because that market position was based on a value proposition and a very small market share. Based on the same logic, we have also changed our go-to-market model in Thailand from having our own sales force in the country to now changing that to an export model from Malaysia. Going forward, we are looking at similar simplifications of our emerging market positions that we have today. With that, I would like to hand over to Fredrik Rystedt for the financials.
Thank you, Magnus Groth. I will just give you a brief overview, and as you have seen, we grew our sales by 13%, and of course, included in that number is a big contribution with 8% from currency translation. This is, of course, a weaker Swedish krona in more general terms, but also particularly a stronger British pound and U.S. dollar. So that, of course, increased sales quite a lot. But we have also achieved price increases, and predominantly, as we have talked about before, we have done that in Latin America, we have done that in Russia and Eastern Europe, and we also have impacts from price increases in our away-from-home tissue business in Europe. As you can also see, volume continued to be consistent in all of our different business areas. So a good continuation.
If you look at a little bit of a longer-term perspective, you can clearly see that the first half of 2015 has picked up a little bit in terms of growth. One of the things here is that volume has been there this quarter. It was also there last quarter, in all business areas. Most of that comes from new innovations like Libero in Europe, for instance, and we also have good contribution from Vinda. So in this quarter alone, the contribution from Vinda is approximately 1%. We have a strong contribution from price. So we have raised prices, and that has an impact on the growth level of the group this year. Of course, as Magnus Groth talked about, we have achieved also other price increases that will gradually be there in the rest of this year or towards the latter part of this year.
If we take a look at the operating profit, it has grown by, as you can see, 10%, so a good growth. That includes two items here. Of course, currency translation, once again, Swedish krona and British pound primarily. But we also have an adverse impact from forest swaps. You may recall that as of 1st of January of 2015, we no longer take profit or gains from profit swaps into our income statement. So of course, for Q2 of 2015, there is no profit contribution from forest swaps, whilst in Q2 of 2014, we had SEK 175 million, and that's part of the other bar that you see on this line. So if you take away the currency and the gain from foreign swaps, those two, the organic or underlying comparable growth was 9% in the quarter.
Of course, most notably here, SEK 435 million negative impact from raw material, most of this coming from the Tissue operation. So if you recall from first quarter, we had a very significant negative impact both in Personal Care and Tissue. We still have that in Personal Care. So roughly 8% of the profit is gone due to raw material, but in Tissue, it's much more significant, so approximately 22% of last year's profit. So most of this raw material is in Tissue. We're quite pleased to note that the component price and mix is bigger, as you can see, close to SEK 500 million. So that is again coming from Latin America and Russia and Away From Home, et cetera. As I said, volume contribution has been there from all the different business areas. Just a few comments on the other.
I already mentioned that part of this SEK 175 of these SEK 240 that you see relates to the gains from forest swaps. There is also another part which comes from a wide number of different things. Actually, we have a positive part, which is savings efficiency gains, and we have, in the quarter, had levels of savings approximately equal to that of last year. So we continue to actually become more and more efficient. We also have higher A&MP, we also have higher SG&A costs for the group as a whole and of course, normal parts such as inflation, et cetera. Worth noting, however, is that A&MP and SG&A as % of sales are not increasing. So it's just a normal continuation of the business, so to speak. Finally, a couple of words on the cash flow.
If you look at the operating cash flow, including all investments, so strategic and continuous ordinary capital expenditure, our cash flow increased by 55%. Looking at the different components, working capital is performing better than it did last year. So we have good performance in many parts of the group, whilst CapEx for the first half of this year is roughly on the same level. So the big swing between last year and this year is largely due to the operating cash surplus. If you look at the number, it's actually a much bigger swing than what you would see for EBIT. The reason is very simply that, once again, the gains from forest swap is not a cash flow item. So the underlying cash flow impact is much bigger. The other part is pretty much about the same size, is increased depreciation this year.
That's why the operating cash surplus improvement is much bigger than what you would see for EBIT. With those words, Magnus?
Thank you, Fredrik. We'll dig into the three business areas in some more detail. I'm very happy to once again be able to state that better price mix, better volumes, and cost savings actually apply to all our three business areas. It's a recurring theme. When it comes to Personal Care, actually, those three improvements have made it possible for us to keep the operating margin at 11.3% in spite of the significant raw material headwinds that we had also in this quarter. In Personal Care, we have a negative effect on the fluff pulp from currency mostly, and a positive effect from the oil-based materials. The positive effect doesn't outweigh the negative effect in fluff pulp. That negative impact on the margin was approximately 80 basis points.
It's a significant negative impact, and that we covered then through price mix, volumes, and cost savings. Looking specifically into the markets and the sub-categories, again, we have a very good organic sales growth in the emerging markets. Looking at the categories, especially feminine care shows a very positive development. In the mature markets, we continue to see a very strong growth in baby. This is in Europe, where we are now finally delivering the entire large retail brand contract that we won almost a year ago. We also have the market share gains for Libero, both in the Nordic market and in Russia. In feminine care, we put in place a boost plan two years ago, which is paying off in higher market shares in most European countries.
In North America, we had lower sales for incontinence products compared to a year ago because of the strong competition in the retail arena, and also slow development in healthcare. However, if you look at this sequentially, quarter two compared to quarter one this year, we're actually seeing leveling off here and some light in the tunnel so that the incontinence products market or performance for us is, I think, gradually improving now also in North America. Emerging markets, Latin America, we have record high market shares in almost all Latin American countries where we are present in feminine care and in incontinence care. We also have higher sales for baby diapers, even though that entirely comes from price mix, so no volume improvement.
Because of the continuing depreciation of most Latin American currencies, we have increased prices across the line, not only in baby but in all our categories. In Russia, a very strong growth, which to a high extent, again, is price increases, but also an underlying volume growth actually. The innovations during the quarter in Personal Care are all in incontinence care. This is not a coincidence. We've been working very hard to upgrade our entire incontinence care portfolio over the years, also preparing for the increased competition from Procter & Gamble in the retail category. All our innovations that we're launching now are focused on incontinence care, many of them also on light incontinence, specifically for the retail market.
I'm very happy to see that the decisions that we made two years ago are actually hitting the market now with, hopefully, good success going forward over the next number of years. Moving over to tissue. Again, we had a good organic sales growth of 4%, but in this case, the improvements in price mix, volumes, and cost savings couldn't offset the raw material price impact, which is much bigger in tissue than in Personal Care. Here we see a decrease in operating margin from 13 or 11.8 to 11.3, but behind this is actually 320 basis points of negative impact from raw materials. Most of that we compensated for, but not entirely. Again, I think a good performance, and behind this comes now also going forward and gradually the price increases that we put in place in Central Europe here during the quarter.
Having a look at the markets, very strong growth in emerging markets, primarily Vinda, also Latin America, and more specifically Mexico, and a higher growth in consumer tissue than in away-from-home tissue during the market. Looking then at Western Europe, we had flat sales, this is partly driven by the fact that we've been in tough negotiations with the retailers during the quarter. What this means is typically that the retailer immediately stops all promotions of your products during those negotiations to put pressure on your back, of course. We're beyond that now. When it comes to away-from-home tissue in Europe, we have some one-time effects, because during the first and second quarter last year, we still had some supply agreements remaining from the remedies that we were forced to do when we acquired GP's European business.
If you remember, in 2012, we had to divest certain assets and contracts, we were still delivering under some of those contracts until the second quarter last year. This has now been discontinued according to the agreement with the competition authorities in Europe. It's a little bit of a one-time effect. We are not losing any market shares in Europe in away-from-home. In North America, we continue to see a recovery in away-from-home tissue. We had very strong sales in the second quarter and a good momentum going forward. In the emerging markets, as I already mentioned, behind this, we see very much Vinda in China and Latin America. The innovations is a mix of things, I actually have some of them here behind me.
Looking specifically at the Tork cleaning cloths, you could argue that what can you do with a piece of cloth? I think what differentiates us from our competitors here is that we have the size, the scale to really come with innovation that has a noticeable and tangible payoff and benefit for the user. As you can see here, we can prove that this new product is this one over here, our new industrial cleaning cloth. Requires 32% less time for cleaning a certain surface than other products. It uses 40% less solvent, so it also has a positive environmental impact, and it uses 20% less effort, which is very important for the people who are using this product in an industrial situation, for instance. I think that's a very good example of the type of innovation that. I'll put it this way. Buy more TORK.
It's a great brand. The new Plenty Easy Clean Wipes, I think is another good example. We tend to think about the kitchen roll as something we use for cleaning in the kitchen, but we are extending this category first to household towels and now to what we define as household tools. A tool that you can use for many cleaning applications throughout your household. We also have an example behind here that you can look at later. Finally, Forest Products continue to have a very strong performance, both in terms of sales and operating profit. The operating profit is very much driven by the strong USD, which is benefiting our Forest Products division since we are producing these products in Sweden. Especially kraftliner and pulp see increasing demand and a good price picture, while sawn timber, during the quarter, we experienced slightly declining prices.
Overall, again, a good performance in Forest Products. I just want to briefly say something about our three-year marketing platform, the participation of a female team in the Volvo Ocean Race, which finished in Gothenburg a few weeks ago, which is a global marketing platform with a focus on women and with a strong connection to sustainability and CSR issues. We are still summing up the output or result from this project, but we can already see that we are exceeding all the targets that we set at the beginning of this project, so that the SCA brand is now much stronger connected to our product brands.
We have met hundreds of thousands of consumers, talking to them, teaching them about our products, also about the company SCA and vice versa, SCA learning from these consumers and customers, and with an impressive media value that we are still looking at. Of course, having the Crown Princess of Sweden visiting us and sailing with the boat twice, both in Portugal and Gothenburg, she's the godmother of the boat, has a very positive impact on this project and also on SCA. To sum up then, a very similar summary to what we showed at the first quarter. Good growth in sales and profit, strong growth in emerging markets, strong cash flow. When it comes to the global environment, this is the same as we showed at the first quarter. We continue to see low growth in mature markets and good growth in emerging markets.
We will have currency headwinds due to the stronger U.S. dollar also going forward. The market remains very competitive going forward, no change. Thank you very much for listening. Time for some questions.
With this, we open up for question and answers. Yep. First question here.
Hi. Stellan Hafstrom with Nordea. I wanted to ask about tissue and the price increases that you carried out in consumer tissue. If you could give any help in understanding how much you've been able to raise prices, and also maybe if you can comment what you see competitors are doing to offset raw material prices.
It's not possible to completely, in one go, offset the huge currency headwinds that we had, especially in Europe, during this year. We can offset part of it to give you some indication. We also know that the retail environment in Europe is highly competitive, that it's tough negotiation with the big retailers. I'm very happy with the outcome, to put it that way. I think it compensates to the extent that we had expected. I can't give any specific percentage numbers on that.
Overall on competitor pricing, maybe also other categories, what you see and how they're acting?
When it comes to consumer tissue, specifically, we are seeing increasing prices across the board. In emerging markets with highly fluctuating currencies like Russia, Ukraine, Latin America, I think all competitors are adjusting prices according to the currency development. Everybody's doing the same. Europe is a bit special because of the tough competitive environment and the fact that we are the market leader in tissue, so it's our role really to set the price levels.
Very good. I also question on incontinence care and what you see there in terms of competitive developments, particularly with regards to Procter & Gamble.
Have you seen any different patterns of their approach recently, particularly maybe also referring to the new markets that they've entered?
No, not really. I think the message is the same as after the first quarter. They have achieved close to 10% in some markets, but not above 10%, which is very important from our perspective because if you're not around 20% or the number 1 or 2 actor, then it's tougher to be on the shelf in a retail environment. No big changes in pricing or product strategy, actually, that I can see from Procter's side.
Germany? Do you see anything?
No specific changes, no.
All right. Just a final one also, if you can give any comment on what you expect or what we can expect in terms of any acquisitions to add to your product portfolio if you're actively looking.
Yeah. As we stated many times, we don't speculate in that. We are as active as we have been over the last number of years in looking at different prospects, but the difficulty with acquisitions, you never know if or when acquisitions happen.
All right. Thanks.
Any more questions from the room? No. Let's open up from the telephone. Operator, please start with the first question.
Certainly. The first question comes from the line of Celine Pannuti from JPMorgan. Please go ahead.
Yes. Good morning. I have in fact, several a few questions. I hope you'll allow me. First of all, just to rebound on that question on pricing, you said that you cannot offset all of this year, all of the pricing in tissue, but over time, say over the next 12 to 18 months, would it be fair to think that the level of pricing will be able to offset all of the pressure you've seen?
We will have to pull all levers that we have. We have to continue to increase prices. We have to continue to cut costs, improve our product mix. We will work in all those areas. I can't be more specific than that.
Okay. My second question is on raw material cost. If you could give us a bit of an outlook for what we should be expecting incrementally in the third quarter, whether we should be expecting Personal Care, maybe to see some tailwind already. In tissue as well, if you could give us an update.
Fredrik.
Yeah. Hi, Celine. I can start with that. If you look at Personal Care this quarter, as we have elaborated on, we have a positive impact from oil-related products. Plastics has come down and therefore SAP and nonwoven, et cetera. What has actually taken place in the last couple of months is that the plastics indices has once again started to increase. This is not due to oil. This has to do with the supply-demand balance. There are not many producers of these materials, we are therefore expecting higher prices than we have seen now. From that perspective, the oil-based product is actually at its lowest here in Q2 and will rise in Q3 and Q4. Now you've seen SEK 435. We're not giving any specific guidance, of course, that benefit we've seen from oil is not going to be there.
If you look at the general picture, these SEK 435, all of that adverse impact comes from currency, in fact, more than 100%. If you look at the currency movement or the dollar rate as you saw it in Q3 of last year, it was still a high level, or the euro-dollar was still at a high level. The dollar strengthening appeared predominantly in the fourth quarter. In total, the Q3 raw material will be pretty much, of course, high as you have seen throughout this year, and perhaps more adverse or likely to be more adverse for Personal Care than what you've seen in the second quarter.
Okay, for tissue?
Yeah, as I said, Celine, all of the tissue increase of raw material has to do with the dollar rate. Of course, we don't know the average dollar rate for Q3, but if it looks like it does right now, then it will be roughly similar to what you've seen during this quarter, Q2. About the same.
Okay. If you allow me, I have a few follow-up. In fact, Fredrik, in your allocation, you mentioned that the savings you've done in the quarter were the same level as quarter last year. Last year, I think absolute incremental savings were up SEK 500 million. Is that a number we should be relating to? Is that what you're hinting at?
No. As of this year, we're not specifically providing numbers relating to efficiency savings, Celine. The reason we're not doing that is that the important thing is not what we achieve on specific activities or programs. The importance is the total cost development of the group. That's why we're not doing that. But the 500 number that you have, I think it's more the sequential or maybe annualized impact, but in reality, the actual savings was significantly lower than that. We have set the ambition for this year that we will continue to become increasingly productive to about the same level as we saw last year. It was not 500 last year, it was much less than that. But it's keeping up a good pace.
All right. Thank you. Just one final question. You mentioned that diapers, you are investing in Brazilian incontinence, but exiting diapers. Incontinence seems to be quite a strong category in Brazil, but what is your view on the diaper category as a whole? What is just that the portfolio you had was challenged because of its position, but are you still looking at the diaper category in Brazil as an interesting one?
One of the reasons why we're leaving Brazil in diapers is what I already mentioned. We only have a 4% market share, and we have a value proposition. Also, the machines we have are quite outdated, and when we move to the new facility, we will not invest in new baby machines. I don't see that we will come back in baby in Brazil. However, there will be room in the new facility to expand into other categories, and we will review that over the next year, to what extent we will expand in one or two other categories, but not baby.
The baby category in Brazil is not of interest to you?
No.
Okay. Thank you.
Okay, operator, second question.
Yeah, second question comes from the line of Oskar Lindström from the Danske Bank. Please go ahead.
Yes, good afternoon. Two questions. First one regarding organic growth. This was a strong 5% in Q2 and on the back of the 6% you had in Q1. This is at the higher end of your growth targets and certainly higher than you had for any of the previous quarters. My questions are really two. First of all, do you see any need to raise your organic growth targets, especially on the tissue side? Perhaps, because you now have Vinda contributing to strong organic growth there. The second question would be, to what extent is the organic growth impacted by the valuation of local currencies? I suppose a lot of this organic growth is coming from price increases in local currencies to compensate for devaluation of those currencies. Am I misunderstanding the logic here?
I will take the first simple question and leave the second difficult question to Fredrik. The first question is that, no, it's too early to change our targets. I think we're very happy to hit our targets for a few quarters, and we have a very good momentum also going forward. If I remember the indications we gave last quarter was that we expect to see a higher growth than last year, but not at the same pace as we had in the first quarter. I guess that gives you a little bit of a range. Exactly where we end up, I think is yet to be seen. Over to the tricky question, Fredrik.
Yeah. You're absolutely right. You have seen now, of course, both in Q1 and Q2, that we've had a positive price mix and, of course, more price than mix in these quarters, perhaps. Of course, that has to do with exactly what you said. I also showed the long-term trends before that we have had price increases contributing to a higher net sales growth. Of course, that's clearly helping. We've done those price increases throughout the last, you can say, three quarters or something like that. Russia, we started predominantly in Q4 and Latin America, the same. A part of the growth component that you see or part of the growth is, of course, related to exactly what you're talking about. But there is
If I may.
Yeah, please.
If I may come with two follow-up questions. First of all, to the easy question. You had 6% in Q1, 5% now in Q2. Should we expect this to sort of slowly come down somewhat during the second half of the year?
I think I already gave an indication and a range, so I can't be more specific than that.
It was worth trying. The second, more difficult question. If we had done sort of organic growth in constant FX rates, can you just give an indication of sort of what level would the 5% that we saw now in Q2 have been? Is that possible?
Yeah, of course, you can always do that. I think if I just may, before I answer that question, just come back to the first and the second, and now before it was six, now it's five. Does that mean a falling trend? I just want to highlight a thing you may remember, that first quarter was, of course, in that sense, impacted by two favorable comparables. One was the winter, very cold winter in 2014 on the U.S. away-from-home market, and the second was related to a distributor change that we undertook in Italy, and that contributed to approximately about 1% or something like that. From that sense, Q1 and Q2 are very similar, as Magnus alluded to before. To your second question, can you take away?
Yes, of course, you can always, and we are aware of the price and the mix and all the other components, but I don't think it's a very good analysis to do at its full because sometimes we have much more mix depending on the innovation pace, and sometimes we have price increases. I think, of course, what counts overall in the end is the margin. There is a price component, and of course, that means that if you take away price, then clearly you can see here that most of that price factor that you saw on net sales, of course, most of that relates to price this time, and therefore you could see the underlying in some sort of way. Not all of it, but most of it.
My final question, more on strategy. You mentioned, in this report and you've mentioned before that you want to focus more on fewer emerging markets, and certainly you acted in that direction. Something else that you've said is that you are interested in or considering entering into new adjacent, I assume, product categories on the retail side. Can you maybe give an update on your thinking on that? Has that become more interesting or less interesting compared to six months ago, say?
There's nothing new, really. In markets where we have a very strong market position, either business to business or business to consumer, a strong go-to market setup and already number 1 and number 2 positions. Yes, we could consider adding new categories because that would be then a synergy of course. It's part of our longer-term outlook, and there's nothing specific and nothing really new. What we are pushing more and more quarter-over-quarter is, for instance, wet wipes and soap, which I think we mentioned many times because these are two fast-growing adjacent categories where we are already present, but we are under-trading. If every bathroom, for instance, that used Tork products, hand towels, also had Tork soap in the bathroom, that would be a huge potential for us, and the same thing with wipes.
I think the Tempo EasyPull that I showed here, and that we have here also behind us is another example where we can grow in adjacencies to existing categories and also organically.
Right. Thank you. Those were my questions.
The final question from the telephone, I understand it's one more final.
Ladies and gentlemen, the next question comes from the line of Sophie Qiu from Credit Suisse. Please go ahead.
Hi, Magnus. This is Sophie. I have one question. Just wondering, your subsidiary, Vinda. I wonder, would you consider to maybe perhaps give them the production? Because right now, as far as I understand that most of the products, the SCA brands in China still produce overseas, I mean, outside China. Would you consider that? In terms of procurement, would you share the procurement with Vinda? That's my question. Thank you.
First question, actually, well over 95% of the products sold by Vinda are made by Vinda. There are a few Personal Care products and also the Tempo hankies that are still imported, but gradually they are building their own production capacity also for those today, smaller parts of Vinda. The reason why they're building this production capacity is that we are expecting these categories to grow, of course, going forward and become a bigger part of Vinda sales. It's a very small part of Vinda sales that they don't produce themselves today. That was the first question.
Procurement
procurement. We are looking at cooperating more closely with Vinda in many different areas, procurement is definitely one of them. We're also working more and more closely together when it comes to financing, innovation, product development, many different areas, go to market, and so on.
Got it. Thank you.
Okay. I understand that was the last question. Any final remarks, Magnus, before we end this press conference?
Well, the final remarks is that we continue to have a good momentum, both top line and profit and cash-wise. We are satisfied with the development, we are looking very much into the details of the business. We are continuing to talking about improving every day, we see many areas where we can do even better than we're doing today. Keeping up the pace, keeping up the momentum going forward, that's our main focus. Thank you.
Okay. Thank you for today, and goodbye.