Head of communications for SCA. Today, our CEO, Jan Johansson, will go through the report, and afterwards we will have a Q&A session where our CFO, Lennart Persson, also will join. I hand over to you, Jan.
Thank you very much. Let's start with some overall updates. General market trend is the same as we reported last quarter, with stable demand in Europe, still good growth in emerging markets, both for tissue and personal care. Forest, we still see demand coming down from publication paper, but a stronger market for our solid woods and also a strong market for our kraft liners. If we look internally in the company, we still, of course, have a lot of changes that impact the results. First of all, we have the typical seasonality if we compare to Q4. We also had, as you all know, a very severe winter in the U.S. that impacted the away-from-home sales in the U.S. We have some divestments. We have Laakirchen that's been divested. We have the remedies from Georgia-Pacific.
They have impacted the sale with SEK 1.2 billion, and the operating result with SEK 110 million. As you have seen, we have restated our joint venture due to the change in regulations, but Vinda is not restated to Q1, so that's also a deviation when we compare year-to-date figures. Efficiency program is running according to plan. We had a saving in the EUR 300 million program with SEK 490 million in Q1, Georgia-Pacific SEK 136 million, and Forest SEK 245 million. We don't see any reason why we should not keep up the plan as we have communicated. If we look at summary Q1 to Q1, we had a sales increase of 9%, and if we exclude the acquisition of Vinda, the sales increase would have been 3%. It's higher volume.
We have good growth in emerging markets impacted by currency, I will get back to that a little bit later, and of course, the winter in North America. Operating profit increased by 18%, and if we exclude Vinda, it's increasing by 14%. If we look at cash flow, that is down with 27%. It's mainly receivables. We do have some inventory growth in inventories in the U.S. and Europe. U.S. mainly then due to the winter where the sales was not as expected, and Europe because of some updates and restructuring of almost our complete baby and Inco production facilities and businesses. I will comment a little bit on that later. If we look at the figures, we are improving earnings per share by 33%. We improve our operational margin. Even though we have made some acquisition, we still are on gearing a debt equity level of 50.
As I comment on the operating cash flow, the receivables, of course, is not a problem, and the inventory levels will be brought down. The one that went up with SEK 255 million in Q1 will be brought down going forward during this year. Just a few comments on Q4 to Q1. Seasonality, of course, as we always have. If we look at away-from-home U.S., the sales was down with as much as 12%. Partly seasonality, very much also driven by the cold winter. We also are upgrading, as I said, all our baby facilities in Europe, also in Southeast Asia. That has had an impact on the quarter, both when it comes to inventories and sales. We are restructuring the whole distribution system in Italy, also impacting the sales during Q1.
All of this will, of course, have a positive impact going forward during the year, both in increased sales and increased profitability. Forest, with the profit decrease of 36%, of that, 33% was swap of Forest assets because, of course, we had higher swap during Q4 than we had in Q1. Coming into personal care, looking at the growth figures, incontinence increased by only 1%, but that was also then impacted by the restructuring in Italy. As we communicated in Q4, the subsidies in Russia was brought down by 30% overnight. We had actually negative growth in Russia with 8% in Inco. If we look at emerging markets, 6% growth overall, as high as 20% growth in incontinence in Latin America and 10% in Asia. The negative impact of the restructuring will, of course, not impact Q2.
That means that will come back during Q2. Very big weakness of currencies in emerging markets. I think on average in Latin America, it's around 12%, 13%. In Russia, euro to ruble is 16%. That had a negative impact from a transaction point of view with one percentage point of the margin in personal care. We report the translation impact to you, not the transaction. Transaction is as much as one percentage point. We have been able to get a new, very interesting contract in private label in Europe that gradually will kick in during this year, starting with Q3. To start with, it will be around 140 million pieces. Then maybe it will increase going forward.
China, we focused a lot on China last quarter. If we compare Q1 to Q1 on the Sealer sales, the local brand in China that we acquired, we are down by 21%. If we look Q4 to Q1, we are up with 26%. I also communicated in Q4 that it will take time before we are back on track. Obviously, 26% growth in Q4 to Q1 is showing that what we are doing is actually working in China, which of course is very positive. That's also then the negative impact on the sales of baby. If we exclude baby, we had a growth of 30% in emerging markets for personal care, which means, of course, that we had a good growth in feminine and incontinence. Moving over to tissue. Here we can clearly see the impact of the weather in U.S.
You've probably seen reports from a lot of companies that when things are being closed, people are not walking outside. Of course, they can't use our products in restaurants, in hotels, et cetera. The sales in North America is down 9% Q1 to Q1, and we have not lost any market share in away-from-home. North America is 33% of the global away-from-home. Of course, it has quite a big impact on the sales. We also saw Vinda coming in slightly weaker than anticipated in the quarter, even though with a good growth from 9%, but maybe a little bit weaker margins that we expected. That, of course, also impacted the margin in our tissue business since we now consolidate 100% of Vinda. Without that consolidation, we would have had 11% margin in our old tissue business. Good growth in emerging market.
Even if we take away Vinda from the growth in emerging markets, we still have 9% growth, and of course with Vinda, 73%. We also left a couple of private label contracts in Europe during the quarter. Reason being that the profitability was not on a level that we accepted, and that also have a slightly negative impact on sales, but a positive impact on margin. Coming into forest operation. Still pressure on publication paper, as I said, even though we have seen some price increases in news. We have seen some price decreases in magazine paper during the quarter. Our hardwood operation is doing well. We have implemented price increases in Q1. We will implement more price increases in Q2. The announced price increase in our liner business was not possible to actually execute. We will do it.
You remember we said that we increased it with EUR 50. We will do it in smaller rates, but with still the aim to get the EUR 50 during the second half of the year. The market conditions is actually supporting an increase. For various reasons, it was difficult to do it in Q1. We also continue to manage our forest in a good way. You saw that we had a swap in forest that had an impact on the result of SEK 152 million. We had a similar one last year with an impact of SEK 121. Delta is slightly positive. If we can compare to Q4, then we had as much as SEK 455. Taking that into consideration, we actually see some good progress in our forest business.
If I try to summarize that, we do have higher sales and profit for the group, and higher profit for tissue and forest product, lower profit for personal care, mainly then driven by the few items I mentioned with the upgrades of our products, with the currency in emerging markets. The upgrade will, of course, have a positive impact going forward. We will see the first new baby Libero pants in the shelves actually during Q2. That will be rolled out during the year. We also made a similar upgrade in Southeast Asia during the quarter. Efficiency program is running as planned. We have had several launches of new innovations, and you also remember that we actually have a portfolio of innovations now waiting to be launched, which of course is very positive.
We will launch them in the markets, in categories when we find it fit to do that. Every time when you launch a new product, of course you will have some impact on inventories, not very substantial. You have an upgrade of volumes, and you have an upgrade of the profitability. This is the true way of driving profitability in our business, with new innovations all the time into the market. With that, ladies and gentlemen, I thank you, and we open up for question. Lennart, do you want to join me?
Thank you. Linus Larsson from SEB. I wonder if you could update us a bit more on the situation in Baby China. If I understood it correctly, in the fourth quarter, the year-on-year EBIT impact was in the magnitude of SEK 140 million. My question is how much of that is being reversed as we look at the first quarter? If you could maybe break that up. I understand it's partly, as you referred to, due to a loss of market share, but also you incurred high logistics costs and so forth in the fourth quarter. If you could maybe break that down a bit. Of course, as we look into the second quarter, what kind of improvement we might expect in Baby China?
Well, if we look at China, what we've been talking about all the time is the Sealer part of China, the Everbeauty part of China. If we look at the sort of old SCA brands, Libero, et cetera, we are doing very well, growing market shares. Incontinence is both in the acquired business and SCA business doing very well. It's the Sealer business in Everbeauty that we acquired. As I said, a sales increase of 26% between Q4 and Q1. We lost during the whole of last year, so it will take time before we pick it up. The machine is working now. Distribution is working. We have good control on what is on the shelves and the sales. I feel quite comfortable that we are not going to have the same hiccup as we had in between Q3 and Q4.
I don't recognize the figure. I don't think we've communicated that.
It's my own estimate.
Yeah. I guess so. I'm not going to give a comment on that since we haven't communicated.
Okay. Were there still extraordinary costs in the first quarter apart from the loss of market share in relation to Sealer?
Well, we did gain market share in Q1 compared to Q4, and we don't have the similar costs as we had in Q4 where we had to buy back the inventories and start from beginning. Now it's more in the sort of ordinary way of marketing products in China. From that perspective, the costs are lower.
Is it fair to assume that you will regain some market share in the second compared to the first quarter?
That's absolutely our intention.
Great. Thank you.
This is Simon. If you can, I would like to quantify maybe the effect of the changes in prices.
We didn't lose any volume. The introduction of new products on the market doesn't have any impact because we actually sell out before we introduce them. You have always start-up costs when you start an upgraded line. That had a small impact, but not loss of volume. The restructuring in Italy is slightly bigger because what we did there was to replace the current distributor for the whole of Italy. Which means that we had to buy back the inventories, and start the new channel. That's had a one-off in Q1. Mainly impacting sales, actually, not profitability.
Do you have any quantification on that impact?
We have, but we keep it to ourselves. We don't want to give our competitors all the knowledge.
Thanks. Also, maybe if you can comment on, you have a competitor in European tissue that say they want to raise prices by 8%. Do you have any comment on the market environment, and the possibility to work with that type of price increases there?
I think it's a very good initiative, of course. Looking at the market conditions, as I think I said in Q4 also, we still are not on the level of profitability we need, in particular in consumer tissue in Europe. We need to bring down costs, but we also need to bring up price. We will have some impact of the price increases we did last year, going forward this year. Whether or not there will be any more price increases this year is too early to say. Obviously, when our competitor is announcing 8% and they see a need for it, we will of course also see the same need.
Hi, Oskar Lindström from Danske Bank. I have four questions. Should I take them one by one or?
Take them one by one. Otherwise we forget.
First off, just the magnitude of the weather impact in North America on EBIT that we realistically should not see again in Q2 going forward. Is that something that you can quantify in terms of millions of SEK?
I can quantify the volume, and then you can calculate, and that's the 9% down Q1 to Q1. Of course, also, the U.S. business was impacted by the weak currency. Even the Canadian dollar is down 9% to U.S. dollar, which is a big business for us, but all the Latin American business is down. That also had quite a big impact on the personal care business of U.S.
All right, thanks. The second question is, if I look at your deviation table for EBIT that you publish on your website, if I recall correctly, you had a negative quarter-on-quarter price impact on tissue.
Yeah.
It's price mix as you define it, I think.
Yeah. It's a combination of price, I think.
Is there something that we should pick up on there? I think you've mentioned before that in Q4 there was some issues of potentially price erosion in North America.
I don't think that's the Of course, you have Vinda coming in here that has an impact, but Lennart maybe you have.
We had, of course, if you compare, we had the impact of what we changed prices for a couple of customers during the autumn.
In U.S.?
In U.S.
Yeah.
Yeah.
It's an effect of lower prices in North America.
Yeah. We don't have any lower prices in Europe.
It is a mixed impact.
Okay. Thank you. I don't know if you care to comment on the deterioration in operating profit in Vinda. They mentioned higher advertising and promotion expenses during the quarter due to increasing competition and increasing investments in growth. Is this something, a margin level that you think we should continue to expect or-
I think-
Or a trend even that we should continue to expect?
If you look at their comments, I think the two major parts were currency, and [inaudible] .
Depreciation.
Depreciation. Sorry.
Due to they added a lot of capacity during last year.
Right.
I think, if you look at the price power, I think they've been able to increase prices during the quarter. We of course, have to scrutinize the cost increases, and make sure that we balance the margin with any advertising efforts they have.
All right.
They have also an impact of the weakening Chinese currency.
Yeah.
They had a board meeting two o'clock this night. Lennart and I didn't participate.
Right. No, I just wondered if you were the closest at hand to ask about comment on that.
Yeah.
My final question regards the land swaps in forest products. We've had them now for a couple of quarters. Should we see that as a sort of recurring income for you for that division?
No, not really.
Is it something
There will be an end, of course, but you will see, or you may see more, but it's not forever.
Have you made any that will impact Q2?
It's too early to comment on that.
Could they ever be negative?
I don't think we'll do any negative.
No.
No.
Just a question.
No. We wouldn't do them.
Okay. Super. Thank you very much.
Mikael Joss from Kepler Cheuvreux. Could you say a couple of words on how you see the raw material costs developing going forward?
If you look overall, there will be ups and down. If you take pulp, for example, you might see some increase in long fiber, short fiber will decrease. I think all in all, it will be quite flattish on the pulp side. Personal care side may be slightly up on oil-based materials and fluff pulp, we're talking zero point something, we don't expect any. Flattish, I would say.
Okay. Thank you. The second question, could you talk a little bit about what we should expect in terms of CapEx for the year and how the sort of growth investments expectations, what should we expect?
When it comes to normal CapEx, I think we communicated, Lennart, it will be in line with what we had last year.
Yeah.
We don't see any reason to change that. Acquisition is of course, acquisition, that's a different thing.
Yeah.
Thank you. A last question. The tax rate was 26%, is that what we should expect for the full year?
Yeah, 26, 27.
Perfect. Thanks.
Okay. Any more questions from the floor? One more here.
You mentioned that you walked away from a private label contract in European tissue. Just maybe you can say if that's a significant effect on volumes?
It's not significant, but it had slightly below 2% impact.
Okay. Do you expect to get another contract to replace that, or how do you see that?
Yes, of course. That's our ambition. Since we manage our mother reel business in a slightly different way than we used, we can actually make some good margins on that business.
Thanks.
Okay, let's open up for the questions from the telephone. Operator, do we have any questions from the telephone?
Thank you. If you wish to ask a question over the phone lines, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Your first question comes from Kartik Ramanathan. Please ask your question.
Hi there, Kartik Ramanathan from Bank of America Merrill Lynch. I had two questions, if I may. The first was just to collate all the information that we've just heard on Vinda. I apologize, I couldn't quite hear exactly what questions were being asked on the ground there in Sweden. Apologies if you're repeating some of the information. If we could just understand what was driving the weakness in margin in Vinda and some level of clarity with regards to marketing spend and competition would be useful. My second reason was, I think you mentioned there were various reasons as to why the kraftliner price wasn't actually fully increasing from April the 1st, and if you could elaborate on that, please.
When it comes to Vinda, of course, it's a listed company, you would have to ask the management of Vinda of any questions going deeper than you can read from the report. If you read from the report, it was mainly depreciation and currency that reduced the margin, and still have a reasonably good growth of 9% during the quarter. That's as far as I can comment Vinda's result. When it comes to kraftliner, I think we went out as number two in the market to increase prices. The reason it didn't really stick was probably because some of the major competitors decided not to increase prices at that time. Looking at the market balance today and the inventory levels, we believe that there is a good possibility and really fair reasons to increase the price of kraftliner.
Also, of course, you always have to look at the difference between testliner and kraftliner prices, because they tend to keep together, and that's also supporting a price increase in kraftliner.
Okay, thank you. Just to follow up on the first question, you don't have any overlapping businesses with respect to FMCG that will allow you to make a comment on market conditions in China?
In what respect? I missed.
Competition. Has it increased? How is pricing faring amongst what you're seeing on the ground with respect to retailers and discounting?
Well, if you look at the growth of retail business in China, it's still in double digits. It's slightly lower than last year, but still double digits. It's actually higher growth there than you see in the GDP overall in China. Competition on the high end of products in personal care, in particular in baby side, has increased by Japanese companies. We talk the very premium products. Tissue side, I don't see any increased competition. It's the same as previously. Incontinence, the same, no increase in competition. You see a slightly increase in baby side on the very premium side.
Just one last very quick follow-up. With respect to the high-end products in personal care and your Japanese competitors kind of increasing the heat there, do you feel this is a temporary effect and something that will be absorbed within the quarter, or is this any kind of structural change in behavior?
I think it is a surprise to many of us that this super premium segment is growing as fast as it is. We are not in that segment yet in China, but normally would've guessed it would be 3%, 4%, 5%, but now it's almost up to 15%. Of course, it's becoming an interesting segment for many players. This is a segment also above Procter & Gamble and above Kimberly-Clark. You only find the Japanese player in the segment. Will it have any impact on the broad mass of consumers? No, not really. A growing interesting segment of the Chinese market. You can also see a similar situation in Russia, where the super premium is growing. Obviously, we will have a product in that segment also going forward.
Thank you.
Operator, next telephone question, please.
Thank you. Your next question comes from Iain Simpson. Please ask your question.
Thank you very much. Good morning, everyone. Just a couple of questions from me. When you say that you restructured your distribution network in Italy, if I heard you correctly, on diapers, and that hurt sales, I'm slightly puzzled as to how that could be, as I would've thought the inventory coming out of the old distributor would be offset by the inventory going into the new distributor for net no change. If there's a phasing issue, does that mean that we should expect to see stock build in Q2? Just carrying on that theme, this is the second quarter in a row, where we've had some issues around stock movements, and distribution inventory changes impacting your top line. Are you able to give us any comfort that this won't happen again next quarter, as it were? Just lastly, housekeeping.
For incontinence, can you give us an indication as to how much your incontinence lines would have grown by on a constant currency basis, ex the impact in Russia from the reduction in subsidy? Thank you very much.
When it comes to Italy, it was not only the baby, it was also incontinence and a small part of consumer business. Sorry. It's very simple. It's a phasing one-off. We took over the sales ourselves, then we took back the inventories from the distributor. This will be much more efficient to a much lower cost, and it will certainly improve the profitability and the growth of the business. It's a perfectly normal investment to improve the business. I feel quite confident that, at least in Europe, you will not see any more of this. We have done it in China already. We don't have any problem in Southeast Asia or Latin America. My forecast on that it will not happen, at least not this year.
Of course, we have to look at our business all the time to see if we can improve it. Constant growth rate, Lennart. I don't have that in my head. Do we have that? It's around five.
They have said five to seven for the personal care.
Five to seven.
The higher one on the incontinence.
Last year, we had a growth of 4% in Europe. This quarter, of course, due to Russia, and the restructuring in Italy was less. In the emerging market, overall, we had 6% growth. You would put yourself in the level of 5%-7%.
Sorry, just to clarify, that's 5%-7% for incontinence, ex Russia.
Including Russia.
What would it have been, ex Russia?
I don't have that. Russia was also once off. When they cut the subsidies by 30% overnight, of course, it didn't hit over 30%. Now the business is back on track again, and we are growing very good in Russia in all our categories.
Thank you.
Next telephone question, please, operator.
The next question comes from William Houston. Please ask your question.
Hello there. It's William Houston here from Redburn. Two questions please, if I may. The first on the Australian joint venture and the restructuring impact that you've seen there, and just on how you'd expect the associate line to develop over the next couple of quarters, please. Also, if you can make any comments on the potential plans to IPO that business. The second one, just a point of clarification on the impact of walking away from that private label contract in tissue. Was that a 2% volume impact specifically in this quarter, or was that a 2% volume impact on an ongoing basis, please?
It was less than 2% impact in volume in Europe. In the group, the volume was, or the sales was flattish. The impact on margin was actually positive since there was very low margins on this contract.
Sorry, could you just clarify, for the tissue division as a whole, what is the impact from exiting that business in terms of volume in the quarter, please?
2% in Europe of the totality. Can you calculate that, Johan?
2% in Europe for tissue.
In Europe.
About two-thirds of the business.
We have 29% in emerging markets now.
Yeah. Okay.
Yeah. What was the second?
Just on the associate line, please.
That's your home market.
Yeah, we can say if you look at the results for the first quarter this year, we had some refinancing costs that brought down our share in earnings. On EBIT level, it is quite stable, and it could develop for time being.
In terms of the associate line, how would you expect that to develop, please?
Pardon the question.
Associate.
I'll say it will come back. Of course, it was negative this quarter, but of course, it will be a positive because the EBIT portion is quite good.
Okay. Thank you.
Was there a question on the process also?
Yes, on the potential IPO process.
We are continuing that process and are still investigating the possibility to IPO the company.
Thank you.
So far, it looks quite positive.
Perfect. Thanks very much.
Any final questions from the telephone operator?
Yeah. The next question comes from Barry Dixon. Please ask your question.
I doubt that this has been asked because my line lost connection. In terms of the kraftliner price increase, has any of that gone through from April 1st? The second part of that is, have you seen any pressure from U.S. imports as being one of the reasons why that increase may not have been fully implemented? Thank you.
We did not see any impact of the price increase in Q1, as I said, we feel quite optimistic that we will have price increases Q2, Q3. Have been some volume coming from U.S., not really impacting the market in this respect.
Okay. Operator, I understand we have one final question from the telephone line.
Yes, the next question comes from Chas Menso. Please ask your question.
Yes, good morning. Okay. In your deviation analysis, the other figure is negative SEK 61 for the group, and I understand that all your sort of cost savings are put in there. Could you sort of take us through the other key variables in that part of the deviation analysis, why it has come out as a negative? The second question, and it may even be related to the first, the AMP to sales in this quarter, could you give us a sense of what has happened there? I think last time around you were saying that for the full year, you expected AMP to sales for the full year to be broadly stable. Was that the case in this quarter? If not, should we expect a decline in the quarters to come? The third question is on market growth, really, in your hygiene businesses.
Have there been any sort of slowdowns in market growth in those that we should be aware of? Perhaps comment on market share changes as well. Thank you.
If I start with the two latest, when it comes to AMP, the deviation is tens of % between the different quarters, and the same going forward. I would like to call it flattish. That is what you would expect. We do not really see any weakness of growth in emerging markets. We continue to gain market shares in part of Latin America, and also in Southeast Asia and Russia. After the dip we had now with INCO, we are back on track with the growth. We actually grew 16% in tissue in Russia during Q1. From that perspective, Russia is a good country for us to be in. On the other hand, you have the currency, which is 16% to the EUR, that is impacting it negatively. We keep our market share, we are gaining it, and still good growth in emerging markets. Lennart?
Yeah. When it comes to the cost deviation in others, we are not giving you a breakup of that. What I can mention is that, as Jan mentioned, the impact of the divestment, for example, 110 million SEK is included there as well. Minus SEK 61 is the total there as a deviation.
Okay. You have a line for currency which is quite small at SEK 24. Do we take that just to be the translation impact and there's a substantial transactional impact that's embedded in the other line?
That's true. It's only translation. Transaction is missing in that analysis. As I said, with the currency, if the Brazilian currency went down with 18%, if you buy your raw material in U.S. dollars, of course you will have a transaction impact also.
Thank you.
Okay.
Jan, any final comments before we conclude?
To summarize Q1, I think it was in line with our expectations with maybe two exceptions. One was the winter in U.S., and the other was the weakness of the currencies in some of our emerging markets. We are putting ourselves, I think, in a very good position with new products coming out in our categories, updates in most of the important parts of personal care, good competitive position in tissue in Europe. Also the sawmills is going better. We certainly will do our utmost to get the price increases in kraftliner during the rest of the year. From that perspective, I think we look slightly positive to the development. Thank you very much.