Earnings Call: Q2 2013

Jul 18, 2013

Hello, and welcome to SCA's Half Year and Second Quarter Report for 2013. Today, our CEO, Jan Johansson, will go through the report and we will, as usual, have a Q and A session with our CFO, Lennart Persson, who will attend as well. Welcome you on the telephone conference and welcome you in the room. With this, I hand over to you, Wiran. Thank you very much. And once again, welcome ladies and gentlemen. Let me just start with some macro update. And as you all know, we still are not very much helped by the growth globally. We still have a very weak European market. The expectations for this year is actually that we will have a decline in growth. U. S. Is growing a little bit below 2%. China still on a good level, 7.8%, but still of course lower than we saw before. Looking at other business areas, we still see some growth in tissue in Europe. And we also have a recently strong demand on our Personal Care side and in particular then of course in the emerging markets where we still have a very good growth. We have seen some change in the forest operation. The solid wood is much more positive than we saw from the Q1. We also have some stronger kraftliner operation, but publication paper is still quite weak. And of course, I will get back to this when I get into the different business areas. Coming into Q2 to Q2, we do have sales growth of some 18%. Of that, 13% is coming from acquisitions. If we look at the hygiene business, we have a growth of 21%. And of that, 17% is coming from acquisitions. So we still have an underlying growth in the as an organic growth in the company. Looking at the operating profit of 4%, of course, with the growth of 18%, you would expect a little bit higher growth in operating profit. But the difference is actually mainly in coming from the forest operation, where we have negative development in the forest of some EUR 183,000,000 but the Hygiene business improving by EUR €300,000,000 Q2 to Q2. Working capital is 100% coming from payables. It depends very much when we have the end of the month whether or not it will be a positive impact or a negative impact. Inventories have not been changed. It is the same lower level as we always have had. Looking at the efficiency program, it's going according to plan. If we look at the 1st program with €231,000,000 of which 141,000,000 is coming from tissue and $90,000,000 is coming from personal care. Q1 to Q1, we have an additional 179,000,000 dollars in savings. And during Q2, we had a saving of $4.28 So it's running according to plan. And as you know, the GP synergies will come a little bit later. And we will have that 100% in 2016 and the others will be in 2015 2014. Looking into the results, what we have to remember also that we still are in a transit mode, you can say, because we are divesting businesses. And in this result, we have the divestment of Ayles, Ford and Lachishan. It impacted the sales with some SEK 900,000,000. Currency is also, of course, impacting us. The sales is impacting negatively by SEK 1,000,000,000 if we look at Q2 to Q2. And of course, a negative impact on operating result. The currency is reducing the operating margin with EUR 0.3 Q2 to Q2. If we look at earnings per share, which may look a little bit strange, we have to remember that in that line, we did have packaging last year. And that's the only line we had it on. So that's why you see the difference in earnings per share. Also looking at the debt to equity ratio, we had got the sales revenue from packaging, but we hadn't paid GP at the time. That's why you see the difference in debt equity. Looking at Q1 to Q2, as you remember, we sold the remedies from the GP acquisition. We also sold L'Aquerchen during Q1, impacting all in all the sales with €1,200,000,000 and the operating result with €100,000,000 dollars So that's of course something we have to delete to see the underlying business. And if we do that, we had a sales increase 4% and the increase of operating results of some 3%. We also had quite a good quarter when it comes to growth in Away From Home. We actually grew away from home with 7% globally. And even in Europe, we had a growth around 5% in the waveform. So we are gaining market share all the time in our brand Torque. If we look at Forest, the result is improving by 9%. And having said that, we also have to remember that we had a capital gain of $121,000,000 Q1. So in spite of that, it's an improvement of 9% in profit. And we also had EUR 80,000,000 in cost for maintenance in forest during the second quarter. Then coming into Personal Care. We have some 10% growth, of which 5% is from acquisition. Incontinence is growing by 6%. In Europe, we have been growing incontinence with more than 4%. The market is growing by 2%, 2.5%. We have been growing the retail business at Inco with 9%. And we have been able to increase penetration in men Inco, so we have been growing that with 14%. So we have actually accelerated the investment in Inco during the quarter. And if you look at personal care and talk, you have to remember we have a business area with a return on capital employed above 28% here. And of course, Inco is substantially higher than that. So we are taking market shares. We are growing it and we are growing penetration. And of course both long term and short term that will be a huge benefit for the company. We also have a good growth in emerging markets of some 16% of which 10% is coming from acquisition. We have a slightly lower margin in Personal Care from 12% to 11.9%. It's actually 0.04% if you calculate it rightly. And that is mainly due to more investment in the market, but also higher raw material during the quarter. And then we, of course, have volume impacting positively and also cost saving. But since incontinence is an extremely important area for us, we are the dominant player in the world, as you know, and we're by far the dominant player in Europe. And if we can grow our market share and particularly grow the penetration, which is still below 40% in mature market, that will have a huge value for S. A. So we have accelerated very successful the penetration and the growth of Inco during the quarter. Coming into tissue, where we have a growth of 28% on of course acquisition is quite substantially since we have GP and that is 25% of the growth. The emerging market is growing by 14% and here we only 6% that is actually coming from acquisition. The rest is organic growth. And of the profit improvement of 33%, 16% is coming from acquisition. When it comes to Tissue, as we, I think, clearly communicated, Q1, we didn't see an opportunity to price increases in Q2. There will be price increases for the second half, both in Consumer Tissue and Away From Home, mainly in Europe then, which is our biggest market. We have already concluded new agreements and we are in discussions with other to increase the prices. So that's also going according to the plan as we communicated during Q1. Forest operations. As I said, very positive development in solid wood with price increases of 7%. We estimate to continue some price increases during the second half of the year, not in the level of 7%, but at least it will be more price increases. We have managed to get €15 out of the €20 in Kraftliner and it seems to be very difficult today at least to get the remaining 20 in Kraftliner. And the reason is that the difference between Test and Kraftliner is a little bit too big at the moment. So if it's getting too big, then it's difficult to get even though the balance is very strong in kraft, demand is very strong. But if the difference is too big, it tends to be more difficult to get further price increases into the market. We also had, as you know, quite a substantial negative currency impact on ForEx compared to last year with SEK 100,000,000. But we had a cost saving of SEK 110,000,000 and also some lower raw material costs. Looking at the publication paper, we do see price increases in use. And mainly our main part of the contracts are on a yearly basis, which means that the impact of that will come next year. The price increases, the level of it is difficult to say now, but let's say something between 2% to 4% in price increases. It seems to be more difficult to get price increases in LWC today. And as I said, impact on that part mainly next year. So if we summer the quarter, we do have higher sales and profit for the hygiene business. We have still very good sales in emerging markets. We are gaining market shares in all our categories. Forest is suffering, but once again sequentially, it's actually improving quite substantially in part of the business. Efficiency program is according to plan. And as we also communicated previously, there will be price increases within tissue for the second half, mainly later in the Q3, but fully impacted in the 4th quarter, in particular in Consumer Tissue. So with that ladies and gentlemen, I will open up for questions. Lena? Let's start. Yes, we have another question there. Go ahead please. Thank you. It's Lien Szaszer with SEB. Coming back to your comment about your investments in the market. If you could shed some more light on how you see A and P spend for the full year compared to last year? How you see the second half compared to the first half of this year? Well, if I look at the second half compared to the first half, at least what I see today is really be on the same level. So we're not going to increase it for the second half. And for the full year? If you take the first half and double that then you will get it to the Yes. No. I was thinking what's the just to get an illustration of the maybe competitive landscape if you are spending more in 2013 compared to 2012 on A and P in relation to sales or something like that? It's mainly not because of the competitive landscape that we are accelerating. It's actually to grow the category since it's such a profitable category for us and also to drive penetration. I mean with 40% penetration, the potential is huge if we can start to drive the penetration. But it will be if you summarize that, Sanofi, I guess it will be slightly higher than last year. I guess. Yes. Okay. And also coming back to the tissue price increases that you were referring to and I understand it's towards the latter part of Q3. Would it be possible to in any way quantify the tissue price increases that you're seeing? Is it a very marginal net impact on the broad basis of the tissue division? Or is it something more significant that you would like to describe in any way? I mean, since we are in the middle of negotiations, it's very difficult for me to comment on it. But of course, we never get enough. And what's really driving that on the tissue side? I mean you've had maybe you've had pulp prices rising over the past 2, 3 quarters, but maybe not necessarily in the season that we're now in the middle of? Well, we have as you have seen, we have had increased raw material cost in pulp. And that's at least a good argument for us to just price increases. Okay. And then also finally, one source of at least forecast volatility over the past several quarters has been the associate line. I think it was something like DKK 35,000,000 in the second quarter. And I understand that it is or has been negatively affected in some quarters by restructuring. If you could tell us a bit about what's going on there and what to expect in the second half? We have a board member here, so we'll ask you. Well, it is, as you say, we saw some increase in the Q2 compared to the Q1. I expect not lower in the second half than the fees we had in the Q2. You think the Q2 level of profitability is pretty representative going forward? Yes, at least, but lower. Okay, great. Thank you very much. Okay, Mikael. Thank you, Mikael Jovs from Kepler Cheuvreux. A couple of housekeeping questions. Should we expect the tax rate of 26% for this year? That's the first question. And then for the financial costs, they were down in the Q2. What should we expect for the remainder of the year? And then the last question would be, how should we think about the nonrecurring costs due to the restructuring for the rest of the year? Thank you. Perks? The tax rate, I mean, the 26%, you can stick to for the remaining part of the year as well. When it comes to other financial net, as you remember, we had EUR 60,000,000 in dividend received dividend in the Q2, otherwise quite stable on the interest cost net, so to say. And the 3rd question was, yes, the nonrecurring items. I mean, we have now spent some $790,000,000 just below $800,000,000 And I think we can for the second half maybe not fully that amount, but not far from. Your first question comes from Oskar Lindstrom. Please ask your question. Yes, hello. This is Oskar Lindstrom from Danske Bank. I have three questions. The first one concerns the increasing raw material costs in the Personal Care business, which you talked a bit about ahead of the report and we now saw in the Q2 numbers. Could you be a little bit more specific as to exactly what sort of items are seeing cost inflation? And perhaps if you could add something about the outlook for the cost inflation in the Personal Care business for the second half of this year? And that was my first question. Should I go on with the second one or We can take that. I mean, if you look at the raw material, we have a cost increase of about €6,000,000 to €8,000,000 or not in if I remember rightly. And if you look at the general cost inflation overall in the company, we have we are on the level of 2%, 2 point 5% overall, which is reasonably good looking at the business we have. All right. So this is not something that's driven by any specific chemicals or oil prices. It's more sort of general overall cost inflation you're saying? No, no. The raw material is of course raw materials. But you also asked of cost inflation in general. That's what I asked. I'll answer not in personal care, but generally in companies 2% to 5%. But the raw material cost is flat pulp as you know and oil based product. Okay. Going on and what do you see as sort of the outlook for the second half of this year? Should we expect continued sort of higher than average, I guess, or cost inflation or No. We think it will be quite stable going forward. Okay. And then my second question is about China. We've had reports of slowing growth and price pressure in this Chinese hygiene market. And you have invested quite heavily in this market over the past, say, 12, 18 months, an acquisition and you've increased your stake in Vinda. What's your view of what's happening in the Chinese hygiene products market? And how is your business there doing? I mean, the market is still growing quite substantially. What has been impacted when it comes to the lower growth in China is mainly the infrastructure part of it. I mean, it's slowly turning into consumer markets. And still, of course, the consumer part of the GDP is lower than the infrastructure. But the change is clear and it will continue. There has always been tough competition and we don't see any change in that. It has not increased and it has not decreased. It's in a similar level. All right. And the final question is about the so any if you could see the consequences of Kimberly Clark's decision to exit the issue and you've previously said that it's a bit too early to see exactly how that will affect you. Do you have any more on this to say now? I think I said it will certainly affect us positively, but we haven't fully decided whether or not it should be 100% private label or a combination of private label and branded. And we're still looking into that depending very much on the retailer reaction in different markets. In some markets, they want to have a second brand. In some markets, they don't want to have a second brand. And then, of course, we will choose to be the private label supplier. But would you say that you could sort of fill that gap with your existing product lineup or product portfolio? Or will you need to make investment in terms of cash out in order to fill this gap? No. We cannot feel it because we are running at 100% now, but of course we can switch some contracts to more profitable contracts. It's a living material. And the final on this one. Would you say that this sort of upside is ahead of you and that you haven't really benefited from this yet? Or have you already seen some of this perhaps? I realize it's not a sort of something that you can easily put a number on, but No, we have not seen anything of it yet. No. All right. Okay. Thank you very much. Those were my questions. Thank you. So operator, next question from the telephone lines. Thank you. The next question comes from Kartik Sarmenathan. Please ask your question. Your line is now open. Please ask your question. Hi, there. Can you hear me now? Yes. Right. Thank you. Sorry about that. Thank you for taking my question. Kartik Swaminathan calling from Bank of America Merrill Lynch. First question I had is just to approach the tissue pricing dynamic in another way. Can I ask whether you've managed to pass on the full effect of cost pressure from pulp year to date in the negotiations that have already concluded? The second question was, if you could please remind us how quickly raw material cost pressure can be passed through in the Personal Care segment and how the pricing mechanism works again? If I start with the second one, it's on the oil based materials, it will take 4 to 6 months before we have the impact in our P and L. In the first one, I think it's a little bit too early for me to comment on that since we are really in we have concluded some, but we still have some more to conclude. So I rather wouldn't like to comment on that. Okay. Thank you very much. And my final question is on pulp pricing and the momentum there. We've seen a little bit of volatility in the price indices that you can access with Bloomberg. And I was wondering if you could provide us with a little bit of market color and whether you think prices are indeed going to roll over going into summer now that we have a little bit more visibility? Or is it going to be a situation where we're probably closer to flat mining? Well, I mean, in average, we are estimating that you will have a flat second half of the year, maybe a little bit lower now during the summer period and maybe a little bit higher later on the year, but in average flat. Then of course what is even more important for us is the ratio euro dollar since we mainly produce in euro and we buy pulp in dollars. That's a very important factor to follow. Thank you very much. Thank you. So operator next question please. Thank you. Your next question comes from William Houston. Please ask your question. Hi, there. It's Will Houston here from Redburn. Three questions, please. Firstly, if we look at your EBIT deviation analysis, which you provide on your website and we look at the other line there. In for the group in Q1, it was a positive SEK 5,600,000,000 and then in Q2, it was only SEK 2, 4,600,000. I was wondering if you could just talk around the movements there, which has caused that swing please. It is of course, some of that is coming from the cost saving programs. But then we have also the acquisitions and the divestments on that line. So I think you should look at it from that point of view. And we have also the deviations in market activities, for example, in So the reason for the lower positive contribution in Q2 is down to the increased spend on A and P? Partly. Partly. Okay. And then question 2, if possible, please. In terms of the central cost that was higher in this quarter relative to Q1, can you just talk around what you expect the full year please? And maybe the balance over Q3, Q4 if possible? We did communicate in Q1 that we expect some €550,000,000 to €600,000,000 on a yearly basis on that line. And for the second half now, I think we are in €300,000,000 So we will be in sorry for the first half around €300,000,000 I guess that it will end up around €600,000,000 on the yellow base. Perfect. And then lastly please on just on the FX guidance given the moves in the spot rate so far this year especially since you issued your guidance back in March and the devaluation of krona since then. Could you just update on what you're expecting there for the full year impact, please? Well, we have a little bit more than EUR 400,000,000 for the first half year. And if nothing dramatic happens, I mean, we guided I think on €500,000,000 So with the knowledge we have today, I mean, I guess, I have to stick to that one. Okay. Thanks very much. Thank you so much. I understand this was the final question from the telephone. Is there any more questions from you here in the audience? Yes, we have one. Yes. Hi. This is Stahl Helstrom with Nordea. I just wanted to come back a little bit on the questions on raw material price increases that we saw in Q2 in Personal Care. And also if you could comment a little bit more on your possibilities to offset that with price increases? Well, we have quite a different business dynamic in tissue and in personal care. Tissue by tradition is more sort of an area where you discuss raw material with your customers and you never do that in personal care. In Personal Care, you either deal with it with cost cutting or price increases or new innovations. And since the bulk of at least of our business in private in Personal Care is a branded business, you manage it in a different way. So for some aspect, it's much easier. And others, it's more difficult depending, of course, which category you are in. But I mean, if you look at the history of the company, we have been able to do that for the past 50 years. I feel quite confident that we'll do it in the future also. Looking then a little bit more on the short term then if you can say something. I think you've talked about earlier that you think your product innovation pipeline is quite strong. And then given the raw material price increases that we've seen, I mean, how do you feel that you can compensate? I think if you look at the pipeline that we have today, we will have a lot of new features coming out on the market next year almost in all our categories. And that's, of course, a very good opportunity to improve our profitability. We also are launching relaunching completely new, could you say, product and positions in Russia as we are speaking today. And of course, that is also consuming cash and profit while you are doing it. But we feel very confident that we will improve profitability and market share once we are through it. And we have another some other countries in the world where we're also relaunching Baby in a completely new way, Sweden as an example. And while doing it with TVC, etcetera, etcetera, it has a negative impact. But then normally you get a more positive impact once you have done it. So we are in the middle of quite a big relaunch of many categories in the world during this spring. And of course, that has an impact on the short term on the margin, but still keeping a profitability above 28% return on capital employed. Any more questions or were you okay? So any more questions from the audience? And there's none from the telephone. John, do you want to make any final conclusion? Well, looking at the development as I think we have been describing, we have had a quarter with investments in the markets, in particular in incontinence, but also in other categories. We still have a very good underlying growth even in mature markets in important categories. We have a position where we will improve the profitability on tissue not only by cost cutting, but also by price increases in the second half. And we do see quite a substantial turn in forest in at least 2 of our products, the solid wood and the kraftliner. So from that perspective, I think it's a positive development and we are at least looking forward to the second half. So with that, have a nice summer and see you after the summer.