Hello, welcome to SCA's half-year and second quarter report for 2013. Today, our CEO, Jan Johansson, will go through the report. We will, as usual, have a Q&A session with our CFO, Lennart Persson, who will attend as well. Welcome you on the telephone conference. Welcome you in the room. With this, I hand over to you, Jan.
Thank you very much. Once again, welcome, ladies and gentlemen. Let me just start with some macro updates. 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 our business areas, we still see some growth in tissue in Europe. We also have a reasonably strong demand on our personal care side, and in particular, 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 first quarter.
We also have some stronger kraftliner operation, but publication paper is still quite weak. 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. We still have an underlying growth as an organic growth in the company. Looking at the operating profit of 4%, of course, with a growth of 18%, you would expect a little bit higher growth in operating profit. The difference is actually mainly coming from the forest operation, where we have a negative development in forest of some SEK 183 million, but the hygiene business improving by SEK 300 million 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 low level as we always have had. Looking at the efficiency program, it's going according to plan. If we look at the first program with SEK 231 million, of which SEK 141 is coming from tissue and SEK 90 is coming from personal care. Q1 to Q1, we have an additional SEK 179 million in savings, and during Q2, we had a saving of SEK 428. It's running according to plan. As you know, the Georgia-Pacific synergies will come a little bit later, and we will have that 100% in 2016, and the others will be in 2015 and 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. In this result, we have the divestment of Aylesford and Laakirchen. It impacted the sales with SEK 900 million. Currency is also, of course, impacting us. The sales is impacting negatively by SEK 1 billion, if we look at Q2 to Q2, and of course, a negative impact on operational result. The currency is reducing the operating margin with 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. That's why you see the difference in earnings per share.
Looking at the debt-to-equity ratio, we had got the sales revenue from packaging, we hadn't paid Georgia-Pacific at the time. That's why you see the difference in debt-to-equity. Looking at Q1 to Q2, as you remember, we sold the remedies from the Georgia-Pacific acquisition. We also sold Laakirchen during Q1, impacting all in all the sales with SEK 1.2 billion and the operating result with SEK 100 million. That's of course something we have to delete to see the underlying business. If we do that, we had a sales increase of 4% and increase of operating result of 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, even in Europe, we had a growth 5% in away from home.
We are gaining market share all the time in our brand Tork. If we look at forest, the result is improving by 9%. Having said that, we also have to remember that we had a capital gain of SEK 121 million Q1. In spite of that, it's an improvement of 9% in profit. We also had SEK 80 million in cost for maintenance in forest during the second quarter. Coming into personal care. We have 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 in Inco with 9%, and we have been able to increase penetration in men Inco. We have been growing that with 14%.
We have actually accelerated the investment in Inco during the quarter. If you look at personal care in total, you have to remember we have a business area with a return on capital employed 28% here, of course, Inco is substantially higher than that. We are taking market shares, we are growing it, and we are growing penetration. 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 16%, of which 10% is coming from acquisition. We have a slightly lower margin in personal care from 12%-11.9%. It's actually 0.04%, if you calculate it rightly. That is mainly due to more investment in the market, also higher raw material during the quarter.
We, of course, have volume impacting positively and also cost saving. 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. If we can grow our market share and particularly grow the penetration, which is still below 40% in mature markets, that will have a huge value for SCA. We have accelerated very successfully the penetration and the growth of Inco during the quarter. Coming into tissue, where we have a growth of 28%, and of course, acquisition is quite substantial since we have Georgia-Pacific, and that is 25% of the growth. The emerging market is growing by 14%, and here we only have 6%, but it's actually coming from acquisition. The rest is organic growth.
Of the profit improvement of 33%, 16% is coming from acquisition. When it comes to tissue, as we, I think, clearly communicated first quarter, 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, which is our biggest market. We have already concluded new agreements, and we are in discussions with others to increase the prices. 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 EUR 15 out of the EUR 20 in kraftliner, and it seems to be very difficult today, at least, to get the remaining EUR 20 in kraftliner. The reason is that the difference between testliner and kraftliner is a little bit too big at the moment. 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 forest compared to last year with SEK 100 million. We had a cost saving of SEK 110 million and also some lower raw material costs.
Looking at the publication paper, we do see price increases in use, and 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%-4% in price increases. Seems to be more difficult to get price increases in LWC today. As I said, impact on that part mainly next year. 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.
As we also communicated previously, there will be price increases within tissue for the second half, mainly later in the third quarter, but fully impacted in the fourth quarter, in particular in consumer tissue. With that, ladies and gentlemen, I will open up for questions. Lennart?
Let's start. Yes, we have a question there. Go ahead, please.
Thank you. It's Linus Larsson 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&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, it will be on the same level. We're not going to increase it for the second half.
For the full year?
If you take the first half and double that, then you will get it for the full year.
No, I was thinking just to get an illustration of the maybe competitive landscape, if you are spending more in 2013 compared to 2012 on A&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. Also to drive penetration. With 40% penetration, the potential is huge if we can start to drive the penetration. If you summarize that, Lennart, I guess it will be slightly higher than last year.
I guess so, yeah. Okay. Also coming back to the tissue price increases that you were referring to, I understand it's towards the latter part of the third quarter. 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?
Since we are in the middle of negotiations, it's very difficult for me to comment on it. Of course, we never get enough.
What's really driving that on the tissue side? You've had pulp prices rising over the past two, three quarters, but maybe not necessarily in the season that we're now in the middle of.
Well, as you have seen, we have had increased raw material cost in pulp. That's at least a good argument for us to just forecast price increases.
Okay. 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 SEK 35 million 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 I will ask him.
Well, it is as you say, we saw some increase in the second quarter compared to the first quarter. I expect not lower in the second half than the yield we had in the second quarter.
You think the Q2 level of profitability is pretty representative going forward?
Yeah, at least not lower.
Okay, great. Thank you very much.
Okay, Mikael.
Thank you. Mikael Jåfs from Kepler Cheuvreux. A couple of housekeeping questions. Should we expect a tax rate of 26% for this year? That's the first question. For the financial costs that were down in the second quarter, what should we expect for the remainder of the year? The last question would be, how should we think about the non-recurring costs due to the restructuring for the rest of the year? Thank you.
Lennart, you want to.
Okay, the tax rate, the 26% you can stick to for the remaining part of the year as well. When it comes to the financial net, as you remember, we had SEK 60 million in dividend, received dividend in the second quarter, otherwise quite stable on the interest cost net, so to say. The third question was the non-recurring items. We have now spent some SEK 790, just below SEK 800, and I think we can for the second half, maybe not totally that amount, but not far from.
Okay, perfect.
Any more question here from the floor? No? I got the sign we have from the telephone conference, so operator, please open up the line.
Thank you. If you wish to ask a question over the phone lines, please press star one on your telephone keypad. Your first question comes from Oskar Lindström. Please ask your question.
Yes, hello, this is Oskar Lindström 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. 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. That was my first question. Should I go on with the second one, or-
We can take that. If you look at the raw material, we have a cost increase of about SEK 6 million-8 million, Lennart, if I remember rightly. If you look at the general cost inflation overall in the company, we are on the level of 2%-2.5% overall, which is reasonably good looking at the business we have.
This is not something that's driven by any specific chemicals or oil prices. It's more general overall cost inflation, you're saying?
No. The raw material is, of course, the raw materials. You also asked of cost inflation in general. That's what I answered. Not in personal care, but generally in companies, 2%-2.5%. The raw material cost is fluff pulp, as you know, and oil-based products.
Okay. What do you see as the outlook for the second half of this year? Should we expect continued higher than average, I guess, cost inflation or?
No, we think it will be quite stable moving forward.
My second question is about China. We've had reports of slowing growth and price pressure in the Chinese hygiene market, and you have invested quite heavily in this market over the past, say, 12 to 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?
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. It's slowly turning into a consumer market. Still, of course, the consumer part of the GDP is lower than the infrastructure. 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. The final question is about the consequences of Kimberly-Clark's decision to exit the tissue and especially the baby or part of the baby market in Europe. 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. 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. Then, of course, we will choose to be the private label supplier.
would you say that you could fill that gap with your existing product lineup or product portfolio, or will you need to make investments.
No
cash out in order to fill this gap?
No, we cannot fill 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.
the final on this one, would you say that this upside is ahead of you and that you haven't really benefited from this yet, or have we already seen some of this, perhaps? I realize it's not something that you can easily put a number on.
No, we have not seen anything of it yet, no.
All right. Well, okay. Thank you very much. Those were all my questions.
Thank you.
Operator, next question from the telephone lines, please.
Thank you. The next question comes from Kartik Swaminathan. Please ask a question. Your line is now open. Please ask a question.
Hi there. Can you hear me now?
Yes.
Right. Thank you. Sorry about that. Thank you for taking my question. Karthik Swaminathan calling from Bank of America Merrill Lynch. The 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, on the oil-based materials, it will take four to six months before we have the impact in our P&L. In the first one, I think it's a little bit too early for me to comment on that since we have concluded some, but we still have some more to conclude. I'd rather wouldn't like to comment on that.
Okay. Thank you very much. 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 on 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 flatlining?
Well, in average, our estimate is that we will have a flat second half of the year, maybe a little bit lower now during the summer period or maybe a little bit higher later on the year, but in average, flat. 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.
Operator, next question, please.
Thank you. Your next question comes from William Houston. Please ask a question.
Hi there. It's Will Houston here from Redburn. Three questions, please. If we look at your EBIT deviation analysis, which you provide on your website, we look at the other line there. For the group in Q1, it was a positive 567 million SEK. In Q2, it was only 246 million SEK. I was wondering if you could just talk around the movements there, which has caused that swing, please.
Of course, some of that is coming from the cost-saving programs. We have also the acquisitions and the divestments on that line. I think you should look at it from that point of view. We have also the deviations in market activities, for example, in that.
The reason for the lower positive contribution in Q2 is down to the increased spend on A&P?
Partly.
Partly. Okay. 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 for the full year, please, and maybe the balance over Q3, Q4, if possible?
We did communicate in Q1 that we expect some SEK 550 million-SEK 600 million on a yearly base on that line. For the second half, now I think we are on SEK 300 million. Sorry, for the first half on SEK 300 million. I guess that it will end up around SEK 600 million on a yearly base.
Perfect. Then lastly, please, 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 the 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 SEK 400 million for the first half year. If nothing dramatic happens, we guide, I think on SEK 500. With the knowledge we have today, 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 indeed.
Yes. Hi, this is Stellan Hellström 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. 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. Since the bulk, at least of our business in personal care is a branded business, you manage it in a different way. For some aspect, it's much easier, and others it's more difficult, depending, of course, which category you are in. 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 talked about earlier that you think your product innovation pipeline is quite strong. Given the raw material price increases that we've seen, 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 feature coming out on the market next year almost in all our categories. That's of course a very good opportunity to improve your profitability. We also are relaunching a completely new, could you say, product and positions in Russia as we are speaking today. Of course, that is also consuming cash and profit while you are doing it. We feel very confident that we will improve profitability and market share once we are through with. We have some other countries in the world where we're also relaunching baby in a completely new way. Sweden, as an example. While doing it with TBC, et cetera, it has a negative impact, normally you get a more positive impact once you have done it.
We are in the middle of quite a big relaunch of many categories in the world during this spring. 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, You're okay? Okay. Any more questions from the audience? There is none from the telephone. Jan, do you want to make any final conclusions?
Thank you. 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. We do see quite a substantial turn in forest in at least two of our products, the solid wood and the kraftliner. From that perspective, I think it's a positive development, and we are at least looking forward to the second half. With that, have a nice summer and see you after the summer.