Earnings Call: Q1 2013

Apr 29, 2013

Hello, and welcome to SCA's First Quarter Results for 2013. My name is Josephine Edwell, Head of Communication for SCA. And today, as usual, our CEO and President, Jan Johansson, will go through the highlights from the report. And we will have a Q and A session together with our CFO, Leonhard Persson, in the end. So with this, I hand over to Johan. Thank you very much. To start with some macro updates and as I think everyone is well aware of now, we still continue to have weak development in Europe, in particular if you look at the domestic consumption in different countries. And of course, the increased unemployment in Spain etcetera is putting a lot of pressure into the system. We do see some stronger development in U. S. And particularly in our hardwood businesses. It seems like the construction in the building industry is picking up. Emerging markets still growth in a very good level from a market perspective, but also internally for SCA. If we look at tissue, we still see some growth in Europe even we have the difficult situation and continued strong growth in the emerging markets. Personal Care, incontinence product is continued to grow. I will come back to that when I get into that business area. And we see a stable demand both when it comes to Baby and Feminine. And also emerging market has continued to grow quite well. The challenge we have is mainly within our forest operations where we saw prices coming down in Q1 and volumes coming down. Volume is down on the European level on some 4% to 5%. Compared to Q4, it's actually down around 11%. On kraftliner, very good balance on the market. On hardwood, the balance is improving. So coming into the results. We had a sales growth of 20%. Of course, acquisition is driving that, but we also have an organic growth. So if we take away the acquisition, it stands for about 19% of the growth. We also have in forest, as I said, lower prices, which is impacting the sales and profitability. The EBIT increase of 25 percent of that some 18% is coming from acquisitions. Cost saving program is coming in. I'll get back to that also in a moment. And we also have lower raw material costs compared to Q1 last year. Cash flow is continuing to improve. If we look at the efficiency program, we have tried to explain it in the different programs that we have running now. The SEK 300,000,000 program we have achieved in Q1 160,000,000 and annualized we are now up to SEK 75,000,000. If we look at the Otero Pacific, we have SEK 54,000,000 in Q1 and analyzed SEK 25,000,000 of the SEK 5 25,000,000. And as we have explained since bulk of the savings is in the supply chain and in the production, it will be rather later than earlier in the process. In forest, of the EUR 1,300,000,000 we have achieved EUR 35,000,000 in the quarter and analyzed SEK 140,000,000. Looking at the Q1 result, the Swedish currency continue to, of course, have a negative impact on the businesses, mainly in terms of translation except for ForEx where you also have the negative impact of transaction. But from a translation and transaction point of view, we are negatively impacted by €900,000,000 in sales Q1 to Q1 and some €205,000,000 in EBIT currency impact. If we look at earnings per share, we have to remember that Packaging was included Q1 last year. It's not including now. It's about SEK 0.38 impact in earnings per share. On the other hand, we have Georgia Pacific in and that is offsetting that SEK 0.38. On top of that, we have higher restructuring costs Q1 this year compared to Q1 last year, which is in the number of SEK0.38. So taking that in consideration, even the earnings per share is going up. Debt gearing is continued to improve. We are now down to €0.51,000,000 If we exclude the pension debts, it's actually down to EUR 0.45. Q3 to Q4. And as we clearly communicated last time, we do have a seasonality impact in between Q4 and Q1 and you can obviously see that on the Hygiene business. We also had increased raw material cost of some SEK 138,000,000 mainly in tissue and forest. Looking at the forest production, we have increased prices in all our countries outside Sweden, in Europe. In dollar, we have all time high. In prices, we have higher prices in Japan, in China, in North Africa. But of course, translating them back to Swedish krona and producing the Swedish krona, you will see a small impact of that in the real operation. Personal Care, very good development of the sales growth of 11%, some 7% is coming from acquisition. We had a little bit more than 5 percent growth in Inco Europe. We are gaining market shares. We have increasing penetration mainly in the men's segment. The income men is increasing by 13% compared to the last year. So very positive development. Baby also continued to increase the same as Feminine Care. In Emerging market, it's growing with some 18% and 5% from that is coming from acquisition. Substantial improvements in EBIT. Of the 27%, 7% is coming from acquisition. If we look at the cost saving, we have all in all some cost saving on SEK 102,000,000 in Personal Care. And then I include the program we presented 2011 also. And of the SEK 300,000,000 program, down 47 €1,000,000 is included already in the Q1 figures. Coming into tissue, also with the substantial sales growth where, of course, bulk of that is coming from the acquisition of the 30 3%, some 30% is coming from acquisition. Looking at the emerging markets, the 17% growth of that 7% is coming from acquisitions. So we still have a good underlying organic growth and that goes, of course, the same for Personal Care. Of the EBIT increase, some 30% is coming from acquisition. In cost saving, if I include the old programs with the new program, we have some €132,000,000 included in the results for Q1, of which €113,000,000 is coming from the EUR 300,000,000 program and Georgia Pacific. Forest's operation, we still had, as I think we anticipated also further price decreases in Q1 with some 3% to 4%. We have divested Ayles Ford which has an impact of 11% on sales. But as I said, solid wood is going stronger and in particular outside Sweden. We will increase prices in kraftliner in 2 steps, EUR 20 plus EUR 20 or EUR 20 that will be implemented in May and EUR 20 implemented in June. The balance is very good in the kraftliner, so the possibility to increase prices should absolutely be there. We also will increase prices in our hardwood operations during the Q2. There is an absolute need to increase prices even in publication paper. I can't really foresee that you will see any impact of that in Q2. But hopefully, we manage to increase prices so we can see some impact in the second half of the year. The currency impact Q1 is as much as SEK 110 100 and 1,000,000 in forest and that's then including transaction. We also have a capital gain not cash flow impacted by SEK SEK101 1,000,000 and that's because we have swapped some forest land that have had that impact on our business. So if we summarize, we have good sales growth. We have higher earnings for the Hygiene business. The currency is putting pressure on the Swedish operations. Of course, Efficiency programs are running as planned, and we will achieve what we have communicated to the markets. We have now got all the approvals by the divestments we had to do to acquire GeoStar Pacific. And the impact on the result for Q1 of the divested businesses was SEK 67 1,000,000. We have also finalized the divestment of Lakishan and the impact in Q1 on the resulting forest from that operation was SEK 34,000,000. We will also have some maintenance stops in the forest during Q2 in Rotviken, Ostrand and in our Kraft Line operation. And they estimate now is that, that will have a negative impact of somewhere around SEK 70,000,000 for Q2. So with that, ladies and gentlemen, we open up the floor for questions. So then we start here on the front row. Thank you. Johan Kjellberg from Carnegie. Could you say something about the efficiency programs going into the Q2? The sheet rate that you achieved now in Q1, is that a level which one should expect now for the coming quarters? Well, I mean, what we have communicated is the impact in Q1 and the run rate. And that's as far as I can go today. So what you could expect is that at least what we had at the run rate. And in terms of Q1, normally it's a seasonally weak quarter for your hygiene operations. Was it some was it like as planned, would you say, now in Q1? Or was there something else impacting your underlying earnings apart from the seasonal weakness and of course the currency? I think if you go back 3 years in time, I think we have seen we have been able to reduce the seasonality slightly every year. I think 2011 it was €500,000,000 then less. So it is an impact, but it's less than it was last year. I don't know if that's an answer to your question, but a little bit lower impact than maybe we anticipate. Can you quantify the seasonal weakness in Q1 quarter over quarter? I mean the negative impact you see in Q1 compared to Q4 is mainly seasonality. And then of course what I said also about the raw material, but the rest is seasonality. And can you say or can you put a figure on the seasonal weakness? How big of an impact did it have during Q1 versus the Q4? No, I don't have that figure in the totality. I mean then you have to mix all the different categories also. But in general, you could say if you take the difference between Q4 and Q1, you have the seasonality. All right. Thank you. Next question we have on the 3rd row. Yes. It's Lin Slas with SEB continuing on the tissue profitability and the sequential development. You had talked about seasonality and the volume impact. I'm just a bit curious about the price effect. It appears that pricing, mix price had a negative impact as well in Q1 versus Q4. Could you talk a bit about that? What's the explanation for that? And is there any price pressure that you are seeing in any markets or segments within tissues? If you look compare Q4 to Q1, it's not in a particular from a price point that has happened. Q1 to Q1, we had some minor price decreases during last year that impacted that comparison, but not between Q4 and Q1. I mean, there's always a price pressure. There's always a tough competition. That's something we live with day to day. But on the other hand, as you can see in our raw material prices are coming out in particularly pulp and also the euro dollar is changing. So from my point of view the incentive is rather to increase prices than to decrease prices. It's not a concern that we should have Europe maintaining or maybe even increasing tissue prices as of now? It's always a concern, but the ambition is to offset the increased cost that we get. Okay. And then also on the cost side, if you could talk a bit about the associate line, which came off in the Q1 versus the Q4 and talk a bit about the restructuring that I suspect is at least part of the explanation and what kind of restructuring costs we should expect in Australasia in the quarters ahead? Lena? Yes. It is fluctuating a bit as you say. It is from Australia, New Zealand. Linda is quite stable. We have had some restructuring costs in the Q1. I expect less in the Q2. Otherwise, you can say in general, Australia and New Zealand is actually doing a very good job. It's improving excluding the items Leonard mentioned now. For how long do you expect to be seeing restructuring costs in that region? It will take this year, but the main part of the restructuring is taken already. Thank you. So another question? Yes. Karri in the Handelsbanken. Few clarifications. Firstly, this EUR 160,000,000 in cost savings, does that include the Georgia Pacific synergies? The $160,000,000 is the $300,000,000 program. And then on top of that you have the Euro Pacific. Yes. Okay. Thanks. Then these divested units, is it now so that those will be now excluded from April 19 onwards? They will be excluded in Q2, yes. All right. Thanks. Okay. We see any more questions from the floor? Then we open up operator for questions on the telephone. So do we have any questions? Of course. Thank you. You have a question from Celine Pannuti. Please go ahead. Yes. Good morning. I have a few questions. First of all, you talk about the raw material environment. Can you please give us a bit of an outlook of what we should be expecting for the year? I think in the previous call, you mentioned something like 2%, 3% raw mat increase, but if you can confirm that. 2nd and that there was a question earlier on pricing. Should we expect therefore pricing to pick up in the second half of the year on your Hygiene divisions? 2nd question would be on the you mentioned that you were you had higher marketing spend in Personal Care in this quarter. Can you tell us what is this regarding? Because I think you already had some high spend last year. So I was a bit surprised that you had even higher spend this quarter. And then finally on FX, I think in March in the conference call you told us that the impact for the year from the Swedish krona should be €500,000,000 on EBIT. As of today, could you give us an update of what could that be for the year? Thank you. Okay. Thank you. If we look at the raw material situation, the increase in raw material we have seen is mainly on the pulp side impacting the tissue operations. In Personal Care, we actually have seen raw materials coming down a little bit during the quarter. Looking at the fundamental there is not really any driving forces for further increase in material prices. There are some expectations on some small increases in pulp. Also I believe very much influenced by the dollar development since there is a negative correlation between dollar and pulp. Pal. The main challenge may not really be the price changes in dollar, but rather how will euro dollar move since we produce the bulk of it in euro and we buy it in dollar. And that's of course a very difficult question to answer. When it comes to our market activities, we do continue to invest in particularly in our incontinence care business to gain market share and increase penetration because that hat rates in the little bit longer run an incredible potential. As I said, we grow the TNF from N by 13% and the penetration is extremely low in that segment. So if we can increase that, that would absolutely benefit the profit and the growth going forward. So that's the one reason why you see slightly increased cost on that side. Was the third question? It was on FX. Sorry? FX. Well, I mean, recently the Swedish krona has weakened a little bit. So but it's I mean, it's too early to say that it will have a major impact for the year. So I think at least for time being we should stick with assumption we had at that core. Okay. And just to go back on raw material, if I understood well, you think you will have a balance between oil based raw materials, which are coming down and pulp prices, which are coming up? Is that what you're saying? Yeah. I mean you could maybe put it like that even though the pulp is of course in volume and value much higher than the oil base. But on the other hand, it's something we need to offset in some way or another either by higher prices or even further reduction of costs. We're not going to accept over time that it will have negative impact on the margin. But as you know, we always have a difference in timing. We have 4 to 4 to 5 days impact of the pulp increases or decreases. Then we have a longer time period to get it out to our customers. But it will be offset in one way or another, as I think we also have proved the past 2, 3 years. Very good. Thank you. So operator, then we can take the second question from the telephone. Certainly. Your next question is from Peter Testa. Please ask your question. Yes. Thank you very much. Maybe just following on from that question on pricing. You declared in tissue that it was your ambition to get the price increases. Have you started to initiate these steps in tissue so far? Yes, we have. Okay. Thank you. And then on the Personal Care business, there was also a in the deviation table price mix effect and negative price mix effect. I was wondering if you could help us understand what that's from please? It's mainly coming from a major contract growth in volume in Europe with a slightly lower price than we had in average, but still giving an extremely good return. Okay. Would this be reflecting any of the possible impacts of competitive withdrawing in the baby sector, which is a strong segment? Sorry, I missed that question. Would this point you just made be reflecting any competitor withdrawal in the baby sector in Europe? Yes. That is of course something we're still working on that Georgia Pacific is leaving a big part of Europe in Baby and also in Tissue actually. But you don't see any impact of that in Q1. And you will not see any impact in Q2 either because we haven't really decided how we should move on that. Right. Okay. And then just a question on the cost savings plans. Just could you give a general sense as whether you think you're running ahead or behind your previously viewed schedule? I think we are in line. Okay. On both on all three sorry? Yes. Okay. Fine. And then just lastly on raw material and Personal Care. You described pulp is more it was a bigger part of the business. It relates more to tissue. In the Personal Care and Isolation, do you think the raw material view is relatively favorable now for Q2 at least? I would say stable or slightly down. That's great. Thank you very much for the answers. Thank you. So operator, then we take the final question from the telephone. And your final question is from Oskar Lindstrom. Please ask your question. Yes, good morning. A couple of questions. The this is Oskar from Danske Bank by the way, sorry. The first one is coming back to this issue of tissue and rising raw material costs and potential price increases. In this quarter, we saw price mix negative both year on year and quarter on quarter. And you've previously talked a little bit about that you had initiated price talks with some clients on the tissue side. Could you say a little bit more about that, how those are going? I mean, we have a negative raw material impact of €40,000,000 So it's not particularly substantial. And I'm not going to comment on our discussions with our customers. Okay. Second question is, if I understand and remember correctly, you previously warned about how higher oil prices could lead to increased raw material costs in the Personal Care divisions. Am I understanding you correctly that you now no longer seeing that as a threat going forward? I mean, it's the oil prices are coming down and that will have an impact on the oil based materials, but with a delay of 4 to 6 months. And I guess the anticipation globally with the shale gas etcetera is putting a pressure on the oil price. All right. And then more sort of long term question. Your debt level is now coming down fairly quickly. And do you see the focus going forward being on strengthening your balance sheet, M and A or dividends? Which direction are you leaning? Well, I mean, we have a policy of gearing of 0.7 and now we are down to 0.5. So that of course gives us some space to look at some acquisition. But also of course, if we don't see anything good to do with the money, there's always a decision for the AGM to decide whether or not it should be given back to the shareholders. So we don't have any intention to build some cash mountain in the company. Cash should work. Okay. So I just want to come back to this issue of tissue pricing. I mean, because it is correct that you had previously mentioned that you had initiated talks with clients about raising prices on tissue. Yes? Yes. But now you don't want to sort of say what the status of those talks is or? Right. Okay. Well, those were my questions. Thank you. Thank you. Okay. So any final questions from the floor before we end? No. So that makes the finalization of today. Thank you so much for attending and have a good day.