Earnings Call: Q1 2014

Apr 29, 2014

Head of Communications for SCA. Today, our CEO, Jan Ljung Wangson, will go through the report. And afterwards, we will have a Q and A session, where our CFO, Lemmer Persson, also will join. So 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 market both for tissue and personal care. Forest, we still see demand coming down from publication paper, but the stronger market for our solid woods and also strong market for our kraftliners. 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 it to Q4. Then we also had, as you all know, a very severe winter in U. S. That impacted the away from home sales in U. S. We have some divestments. We have Larkersen that's been divested. We have the remedies from Georgia Pacific. They have impacted the sale with SEK 1,200,000,000 and the operating result with SEK 110,000,000. 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 the deviation when we compare year to date figures. Efficiency program is running according to plan. We had a saving in the EUR 300,000,000 program with SEK 490,000,000 in Q1, Georgia Pacific, EUR 136,000,000 and Forest, EUR 245,000,000. And 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 Binda, 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 U. S. And Europe. U. S. Mainly then due to the winter where the sales was not as expected. And Europe because of some update and restructuring of almost our complete baby and Inco production facilities and businesses. I will comment a little bit on that later. So 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 the gearing at debt equity level of $50,000,000 And as a comment on the operating cash flow, the receivables, of course, is not a problem. And inventory levels will be brought on the one that went up with EUR 255,000,000 in Q1 will be brought on going forward during this year. Just a few comments on Q4 to Q1. Seasonality, of course, as we always have. And if we look at away from home U. S, the sales was down with as much as 12%, partly seasonality, but 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. And Forest, with a profit decrease of 36%, of that 33% was the swap of Forest assets because of course we had a higher swap during Q4 than we had in Q1. Then coming into Personal Care and looking at the growth figures and incontinence increased by only 1%, but that was also then impacted by the restructuring in Italy. And also as we communicated in Q4 that the subsidies in Russia was brought down by 30% overnight. So we had actually negative growth in Russia with 8% in inko. And if we look at the emerging markets, 6% growth overall as high as 20% growth in incontinence in Latin America and 10% impact Q2. That means that, that will come back during Q2. Very big weakness of currencies in emerging markets. I think in average in Latin America, it's around 12%, 13%. In Russia, euro to ruble is 16%. And that had a negative impact from a transaction point of view with 1 percentage point of the margin in Personal Care. So we report the transaction impact to you, but not the transaction translation, but not the transaction. But transaction is as much as 1 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, this will be around 140,000,000 pieces and then maybe it will increase going forward. China, we focused a lot in China last quarter. And if we compare Q1 to Q1 on the sealer sales, the local brand in China that we acquired, we are down by 21%. But if we look Q4 to Q1, we are up with 26%. And I also communicated in Q4 that it will take time before we are back on track. But obviously, 26% growth from Q4 to Q1 is showing that what we are doing is actually working in China, which, of course, is very positive. And 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. And here we can clearly see the impact of the weather in U. S. And you've probably seen a report from a lot of companies that when things are being closed, people are not working outside, of course, they can't use our products in restaurants, in hotels, etcetera, etcetera. So the sales in North America is down 9% Q1 to Q1, and we have not lost any market share in Away From Home. And North America is 30 3% of the global away from homes. 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 of 9%, but maybe a little bit weaker margins that we expected. And that, of course, also impacted the margin in our tissue business since we now consolidate 100% of Vinda. So without that consolidation, we would have had 11% margin in our sort of old tissue business. Good growth in the margin market. Even if we take away Vinda from the growth in emerging markets, we still have 9 percent growth. And of course, with Vinda 73%. And 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. So coming into forest operation. Still pressure on publication paper, as I said, even though we have seen some price increases in use. We have seen some price decreases in magazine paper during the quarter. Our hardwoods 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. So we will do it. You remember, we said that we increased it €50. So we will do it in smaller rates, but we'll still aim to get the €50 during the second half of the year. The market conditions is actually supporting an increase. But 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 swap in forest that had an impact on the result of SEK 152,000,000. We had a similar one last year with an impact of SEK121,000,000. So delta is slightly positive. And if we 21,000,000. So delta is slightly positive. And if we can compare to Q4, then we had as much as SEK 4.50 5%. So taking that thing 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 Products, lower profit for Personal Care, mainly then driven by the few items I mentioned with upgrades of our products, with the currency in emerging markets. And the upgrade will, of course, have a positive impact going forward. We will see the first new Baby L'Amino pants in the shelves actually during Q2. And then 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 communicated that we actually have a portfolio of innovations now waiting to be launched, which of course is very positive. And then we will launch, I mean, in the markets, in categories when we find it fit to do with that. But every time when you launch a new product, of course, you will have some impact on inventories not very substantial, but then you have an upgrade of volumes and you have an upgrade of profitability. This is the true way of driving profitability in our business with new innovations all the time into the market. So with that, ladies and gentlemen, I thank you, and we open up for questions. Lena, do you want to join me? Thank you. Linus Glassen 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 Q4, the year on year EBIT impact was in the magnitude of SEK 140,000,000. And my question is, how much of that is being reversed as we look at the Q1? And also if you could maybe break that up, I understand, it's partly as you referred to due to a loss market share, but also you incurred high logistics costs and so forth in the Q4. So if you could maybe break that down a bit. And also, 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 ever beauty part of China. If we look at the sort of old SA brands, Libro, etcetera, we are doing very well growing market shares. Incontinence is both in the acquired business and SA business is doing very well. So it's a sealer business in every beauty that we acquired. And as I said, growth in sales increase of 26% between Q4 and Q1, but 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 on the shelves and the sales. But I feel quite comfortable that we are not going to have the same hiccup as we had in between and Q4. I don't recognize the figure. I don't think we've communicated that. So Yes, yes, yes. So I'm not going to give a comment on that since we haven't communicated. Okay. But were there still extraordinary costs in the Q1 apart from the loss of market share in relation to SINA? Well, I mean, we did gain market share in Q1 compared to Q4. And we don't have the same cost similar cost as we had in Q4 where we had to buy back the inventories and start from beginning. So now it's more in the sort of ordinary way marketing products in China. So from that perspective, the costs are lower. And is it fair to assume that you will regain some market share in the second compared to the Q1? That's absolutely our intention. Great. Thank you. We didn't lose any volume. But I mean the introduction of new products on the market doesn't have any impact because we actually sell out before we introduce them. But then you have always start up costs when you start an upgraded line. So 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 bring to buy back the inventories and start the new channel. So that had a big and that's a one off in Q1, mainly impacting sales actually, not profitability. And do you have any quantification on that impact? We have, but we keep it ourselves. So 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 they want to raise prices by 8%. Do you have any comment on the market environment and the possibility to look for that type of price increases there? I think it's a very good initiative, of course. And looking at the market conditions and as I think I said in Q4 also and now we still are not on the level of profitability we need, in particular, in Consumer Tissue in Europe. So we need to bring down costs, but we also need to bring up price. And we have some we will have some impact of the price increases we did last year going forward this year. And whether or not there will be any more price increases this year is too early to say. But obviously, when our competitor is announcing 8% and they see a need for it, we will, of course, also see the same need. Need. Oscar Lindstrom from Danske Bank. I have four questions. Should I take them 1 by 1 or Take them 1 by 1, otherwise we forget. Yes. Well, 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 1,000,000 of krona? I can quantify the volume and then you can calculate that. And that's the 9% down Q1 to Q1. Then 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. So 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 published on your website, if I recall correctly, you had a negative quarter on quarter price impact on tissue? Yes. Is price mix as you define it, I think? Yes. So it's a combination of price mix. 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 of course, you have Vinda coming in here that an impact. But Leon, maybe you have But 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. Yes. Okay. So it's a effect of lower prices in North America. Yes. We don't have any lower prices in Europe. Then it is a mix impact. Okay. Thank you. The I don't know if you care to comment on the deterioration in operating profit in Vinda. I mean, they mentioned higher advertising and promotion expenses during the quarter due to increasing competition and increasing through investments in growth. Is this something I mean, a margin level that you think we should continue to expect or a trend even that we should continue to expect. If you look at the comments, I think the 2 major parts were currency and Depreciation. Depreciation. Depreciation. You added a lot of capacity during last year, But I think I mean, 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 an advertising effort they have. They have also an impact of the weakening Chinese currency. Yes. Yes. They had a board meeting at 2 this night, so Lena and I didn't participate. Right. No, no. I just wondered if you had you were the closest at hand to ask about comment on that. And 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. So 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. Just a question. Then we wouldn't do them. Okay. Super. Thank you very Nick Alios from Kepler Cheuvreux. Could you say a couple of words on how you see raw material costs developing going forward? We if you look overall, there will be ups and down. If you take pulp, for example, you might see some increase in long fiber, but then short fiber will decrease. So I think we'll know that it will be quite flattish on the pulp side. Personal Care side, maybe slightly up on oil based materials and fluff pulp, but it's I mean, we are talking 0 point something. So we don't expect any flattish, I would say. Okay. Thank you. And then 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 investment sort of acquisitions, what should we expect? When it comes to normal CapEx, I think we communicated that it will be in line with what we had last year, and we don't see any reason to change that. And acquisition is, of course, acquisition, and that's a different thing. Yes. Thank you. And then the last question, the tax rate was 26%. Is that what we should expect for the full year? Yes, 26%, 27%. Perfect. Thanks. Okay. Any more questions from the floor? One more here, Salaam. Just a follow-up on the you mentioned that you walked away from label contract in European Tissue. And 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. And do you expect to get another contract to replace that? Or how do you see that? Yes, of course. That's our ambition. Or since we manage our Mother Reel business in a slightly different way than we use, 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 Your first question comes from Kartik from Inattam. Please ask your question. Hi, there. Kartik Sraminathan 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, but I couldn't quite hear exactly what questions were being asked on the ground there in Sweden. So apologies if you're repeating some of the information. But if we could just understand what was driving the weakness in margin in Binder and some level of clarity with regards to marketing spend and competition will be useful. And then 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 1. And if you could elaborate on that, please? When it comes to Vinda, of course, it's a listed company. So you would have to ask the management of Vinda of any questions going deeper than you can read from the report. But 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. So that's as far as I can comment Vinda's results. When it comes to kraftliner, I think we went out as number 2 in the market to increase prices. And the reason it didn't really stick was probably because some of the major competitors decided not to increase prices at that time. But looking at the market balance today and the inventory levels, we believe that it that there is a good possibility and really fair reasons to increase the price of kraftliner. And also of course you always have to look at the difference between testliner and kraftliner prices because they tend to keep together that's also supporting price increase in kraftliner. Okay. Thank you. And just to follow-up on the first question. You don't have any overlapping businesses with respect to EBITDA that will allow you to make a comment on market conditions in China? In what respect? I missed the Competition. Has it increased? How is pricing faring amongst 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 digit. 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 sickling baby side has increased by Japanese companies. Then we talked the very premium products. Tissue side, I don't see any increased competition. It's same as previously. In confidence, the same, no increase in competition. But 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 super premium segment is growing as fast as it is. We are not in that segment yet in China. But normally, I would have guessed it would be 3%, 4%, 5%, but now it's almost up to 15%. So of course, it's becoming an interesting segment for many players. And this is a segment also above Proxel and above cumulative clocks. So you only find the Chinese player in the segment. Will it have any impact on the broad mass of consumers? No, not really, but a growing interesting segment of the Chinese market. And can also see a similar situation in Russia where the super premium is growing. So obviously, we will have a product in that segment also going forward. Thank you. So operator, next telephone question please. Thank you. Your next question comes from Ian Simpson. Please ask your question. Thank you very much. Good morning, everyone. Just a couple of questions for 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 have thought the inventory coming out of the sort of old distributor would be offset by the inventory going into the new distributor? So for net no change. Or if there's a sort of phasing issue, does that mean that we should expect to see stock builds in Q2? And then just sort of carrying on that theme, this is the 2nd quarter in a row where we've had some issues around sort of stock movements and distribution inventory changes impacting your top line. Are you able to sort of give us any comfort that this won't sort of happen again next quarter as it were? And then just lastly, sort of 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 on the baby. It was also incontinence and small part of consumer business. Sorry, and it's very simple. It's a phasing one off. We took over the sales ourselves, and then we took back the inventories from the distributor. And this will be much more efficient to a much lower cost and it will certainly improve the profitability and the growth of the business. So it's a perfectly normal investment to improve the business. And I feel quite confident that at least in Europe, you will never you will not see any more of this and we have done it in China already. We don't have any problem in Southeast Asia or Latin America. So my forecast on that that it will not happen at least not this year. Then of course we have to look at our business all the time to see if we can improve it. Constant growth rate, Leonard, I don't have that in my head. Do we have that? It's around 5%. We have said 5% to 7%, 5% to 5% and the higher one on the income. Last year, we had a growth of 4% in Europe. And this quarter, of course, it was due to Russia, it was and the restructuring in Italy was less. And the emerging markets, overall, we had 6% growth. So I would you would put yourself in the level of 5% to 7%. Sorry, just to clarify, that's 5% to 7% foreign continents ex Russia? Including Russia. And what would it have been ex Russia? I don't have that. I mean Russia was also one soft when they cut the subsidies by 30% overnight, of course, it didn't hit us with 30%. But now the business is back on track again, and we are growing very good in Russia in all our categories. Thank you. And next telephone question please operator. The next question comes from William Houston. Please ask your question. Hello there. It's Will Houston here from Redburn. Quick two comments sorry, 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. And also if you can make any comments on the potential plans to IPO that business? And 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, it's the volume was so the sales was flattish. The impact on margin was actually positive since it was very low margins on this contract. So 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 for the totality. Can you calculate that Q1? So 2% in Europe for this year? And Europe is About 2 thirds of the business. We have 29% in emerging markets now. Yeah. Okay. Yeah. What was the second? Just on the associate line please. Your core markets. We can say if you look at the results for the Q1 this year, we had some refinancing costs that brought down our share in earnings. On EBIT level, it is quite stable and good development for time being. And so in terms of the associate line, how would you expect that to develop, please? Pardon? The question? Associates. Okay. I mean 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. And was there a question on the process also? Yes, on the potential IPA process. We are continuing that process and are still investigating the possibility to IPO the company. So far it looks quite positive. Perfect. Thanks very much. Any final questions from the telephone operator? Yes. The next question comes from Barry Dixon. Please ask your question. I'm sorry if this has been asked because my line lost connection. In terms of the kraftliner price increase, has any of that gone through from April 1? And 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. But as I said, we feel quite optimistic that we will have price increases Q2, Q3. Have been some volume coming from U. S, but not really impacting the market in this respect. Okay. So operator, I understand we have one final question from the telephone line. Yes. The next question comes from Thijs Menza. Please ask your question. Yes. Good morning. Okay. In your deviation analysis, the other figure is negative EUR 61 for the group. And I understand that all your cost savings are put in there. Could you take us through the other key variables in that part of the deviation analysis why it's come out as a negative? The second question and it may even be related to the first. The A and P to sales in this quarter, you give us a sense of what's happened there? I think last time around you were saying that for the full year you expected A and P to sales for the full year to be broadly stable. Was that the case in this quarter? And if not, should we expect a decline in the quarters to come? And then 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? And perhaps comment on market share changes as well? Thank you. If I start with the to latest, when it comes to A and P, the deviation is 10ths of a percentage between the different quarters and the same going forward. So I would like to call it flattish. Any any weakness of growth in emerging markets. And we continue to gain market shares in part of Latin America and also in Southeast Asia and Russia. After the dip we have now with the ink, we are back on track with the growth. We actually grew 16% in tissue and in Russia during Q1. So from that perspective, Russia is a good country for us to be. And on the other hand, you have the currency, which is 16% to the euro that is impacting it negatively. So we keep our market share. We are gaining it and still good growth in emerging markets. Lennart? Yes. When it comes to the cost deviation in others, we are not giving you a breakup of that. But what I can mention is that, as Jan mentioned, the impact of the divestment, for example, SEK 110,000,000 is included there as well. So minus SEK 61,000,000 is the total there That's a deviation. Okay. But did you have a line for currency, which is quite small at €24,000,000 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 on a translation. So transaction is missing in that analyze. And as I said, with the currency, if I think the Brazilian currency went down with 18% and if you buy your raw material in dollar, then of course, you will have a transaction impact also. Thank you. Okay. So Jan, any final comments before we conclude? To summarize Q1, I think it was in line with our expectations with maybe 2 exceptions. 1 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. And also the sawmills is going better. And we certainly will do our utmost to get the price increases in Kraftheine during the rest of the year. So from that perspective,