Earnings Call: Q4 2012

Jan 24, 2013

Josephine Erdevo, and I'm Head of Communication for SEA. And today's speaker is, as usual, our CEO, Jan Ljung Wangson and we have also the CFO, Leon Matt Persson joining us today. So Jan will go through the report and in the end, we will, as usual, have a question and answer session. So Jan, please go ahead. Thank you very much. I will start with some macro trend that we had last year. And to conclude, we were not very much helped by the global GDP Development 2012. Overall, we had a growth of 2.5% globally. Western Europe went down by 0.3%. And as you know, that's the bulk of our base business. U. S, slight growth of 2.2%. China, good growth, 7.7 percent, but still below the year before. But looking at some of our business area, we still saw quite a good momentum in tissue, particularly in the emerging markets with a good growth and some growth in Western Europe and a little bit higher in Eastern Europe. Personal Care in Continence has continued to develop very positive for us. We are gaining market share. We have a good growth in emerging markets. And in all our categories in Personal Care, we still have a very good growth in emerging markets. The business areas that are suffering from the weak economy is, of course, forest products. And we continue to see decline in particularly in publication paper where newsprint were down by 10%, WC was down by 9% and SC was down by 4%. Stable demand in our sawmills operation, but lower capacity in production was pressing down the prices. We did, however, see an improved market for kraftliner with a healthy balance and the price increases that we indicated have gone through. So that's the part of forest that has had a positive momentum last year. Looking at FCA, we of course had a very exciting year with a lot of changes. With divestment of packaging business and our divestment of our newsprint business in U. K, Ailsford and also signing a contract to sell our operation in Austria, Larkirchen, which is FC paper. On the other hand, we did some acquisition, Georgia Pacific Tissue Business in Europe. We went into China with Ever Beauty. We increased our shareholders 100% in Chile with PISA. We also have announced major restructuring programs, both in hygiene business and in our forest operations. We also had a major new organization within hygiene, which you didn't see so much of externally. But the purpose of that is to, of course, increase the process to the performance to our customers and consumer, but also to reduce costs. We removed 1 layer totally in the system, getting the business, the customer, consumer closings to the top management of the company. We expect Larkhissen to be closed during Q1. The priorities we have had for the last couple of years is, as you know, efficiency, innovation and growth. Efficiency, we measure in costs, in cash flow and in capital efficiency. And as you may have seen of the development in particular maybe Q4, but also the past year, this has been rather successful in terms at least of cash flow. Innovation, very important to keep profitability. Even more important to attract customers and consumers, but also to drive growth. So that is a a very important focus area for us. Growth is and will be a combination of organic and acquired growth. Looking at the efficiency that we have communicated, you know this, the CHF 300,000,000 saving in our Hygiene operation, the €125,000,000 from Unidys and GP and the €1,300,000,000 from the forest operation. The difference between these cost programs that we initiate in Hygiene and the acquisition of GP is that the bulk of it is in supply chain, which means it will take some longer time to get it into P and L than if it would be administration or sales or marketing cost. And that's also why we have communicated that you will see a slow start and then it will come gradually and with the full effect as we stated 2015 and 2016. Innovation. We have introduced a lot of new innovations on the market last year and that is in all our categories. And that's, of course, the best way of driving profitability and also driving force. And we continue to improve our performance when it comes to innovation and product development. And we have a lot of very interesting things in the pipeline that will enter into the market in the coming 1 to 2 years. Looking at growth, we had a sale growth of 11% in the group, high growth in emerging markets. Personal Care grew with 22%. Of that, 12% was acquisition. Tissue was growing by 90% of which 6% was acquisition. And then of course the acquisitions per se include all of that. All in all it's 11%. But then of course ForEx was going down during the year, so that's the negative impact of the growth figures. Looking at the summary. Sales growth, as I said, 11%. We have hygiene growth at 15% and it's volume. It's products, acquisition and also the strong growth in the emerging markets. Of the 11%, all in all, acquisition is 8%. If we take away all the adjustments, we had a negative impact of the Swedish krona of SEK 900 on sales. We still have been suffering from a stronger Swedish krone during 2012. Forest was down 8%. EBITDA increase of 2017 of which acquisition is 4.5 percent and also a very healthy development of cash flow where we did do quite well on the working capital in particular in the last quarter. Looking at these figures, one maybe should highlight the margin that we are on a yearly basis now above 10% overall in the company. We have increased the profit before tax with 21%. We have a very strong balance sheet. We have a gearing of 55%. If we take away the pension obligation, the gearing is as low as 48. And you may remember that we have a gearing target of SEK70 in the company. Coming into Q4, Q4, we have a healthy sales growth of 21%, of which 16% is acquisition. And of course, the volume is coming in there and strong growth in emerging markets. Forest went down by 9%. We had a reduction in sales in publication paper with 6% due to the stops we had last quarter. And including Aylesford, we are down by 18% in sales in publication paper. But as you remember, we took some stops in the Q4 due to the situation where we couldn't actually get the volume out on the market. EBIT increased by 16%, of which 10% is acquisition. Higher volumes, but we also have had some help from the raw material prices during 2012. And we also see cost savings actually coming into the P and L during the year. Here also margin above 10% and we have an improvement of profit before tax of 24%. If you look at the earnings per share, you also have to remember that the lower tax rates in Sweden is impacting that because that came in during Q4. So you can't really compare that with last year. If we go Q3 to Q4, we continue to grow sales growth of 6%, of which 3% is from acquisition. We improved EBIT by 6%, of which 3.5% is from acquisition. And then of course the positive thing here is that all CRE3 business areas are improving profitability compared to Q3. Going into the different business area. With the sales growth of 15%, I mean, I'd like to concentrate on the like for like because, of course, there is a lot of adjustment to this, but just to have the real comparison between the Q4 and Q4. 15% of which 9% is from acquisition. And as you can see, we have a healthy growth in all our categories compared to last year and also a very good growth in emerging markets. We also have an improvement of EBIT of 16% of which 2.5% is coming from acquisition. Higher volume, lower material cost and cost saving is impacting that. And now we are at a margin of 12.6%. Tissue, a growth of 32% and of course, Georgia Pacific is coming in here and giving 27% of the 32% in growth, but also a very good growth in consumer away from home and in particular emerging markets. So the bulk of the growth is, of course, from emerging market excluding the acquisitions we did last year. And EBITD improvements of 41% of which 20% is coming from acquisition, better volumes, lower raw material costs and cost savings. It's the same development that we've seen in Personal Care. And with a margin above 11%, 11.4%. I think we promised in the beginning of the year that we should be above 10 tissue. Then coming into forest with a sale decrease of 8%. And as I said, publication paper is impacting that. We have recently stable operation in our solid wood and kraftliner and pumps, but the hit in volume is mainly in publication and also substantial decrease in the result for last year. Lower prices, but also negative impact on currency of SEK 280,000,000. And then of course, the cost of the stops in the publication operation during Q4 is impacting this negatively. So what we also are proposing is that we should have a dividend increase of 7.1% from €4.20 to €4.50 This will then of course be decided by the AGN later this spring. Summarizing, the transformation of the company is continuing. Everything so far is going according to plan, including the efficiency program that we have launched, initiated. The new organization is in place and is actually working very well. Will help us to improve our competitiveness in the market. Good sales, good earnings in emerging markets. Of course, forest, it's by the weak economy and the stronger Swedish krone. Cash flow, very strong and we also increased our dividend. Looking forward, we do see some headwind coming up. We see raw materials going up. Pulp is coming up. Oil based material is also coming up. We will, as we always do, offset that over time, even though contractually we will get the price increases sooner than we will have the price increases as we normally have. From a market perspective, we see good demand for our hygiene products. We see still a good growth in emerging markets. When it comes to forced operation, there are unfortunately still pressure on the prices when it comes to publication paper. So our assumption today is that we will continue to see some reduction on prices on that side, but not when it comes to our sawmill operation and our kraftliner operation. But the publication still is in a very, very difficult situation. And as always, we will have the seasonality impact during Q1. So with that, ladies and gentlemen, I thank you and we open up the floor for questions and ask Lena to join me. Okay. So who wants to start? Let's take the first row here. Yes. And you have a microphone. Since we are addressing international public, we probably need to answer any question in English. And since we are now just here to comment on the report, I will focus on the questions regarding the report. Hello. This is Oscar Lindstrom Danske Bank. A couple of questions. In your Personal Care division, margins declined sequentially, while historically the seasonal pattern has been the opposite, I. E. Higher margins in Q4 versus Q3. What is the reason for this pattern or this development that we saw this year? Well, we have the 1st of all, we had as you know Christmas, New Year that with a lot of the days without work, so we had less invoicing days. I think it was 2.5% of invoicing days. But we also have increased A and P during Q4 compared to Q3. So those together are the explanation. Should we a follow-up on this. Should we expect a smaller sequential decline than usual in Q1 then? I mean, I had given my comment on Q1 and you will see a seasonal impact in Q1. Second question, the in the tissue division, it appears your raw material costs came down sequentially. So would it be fair to say that your pulp costs bottomed out during this quarter or are there other Pulp costs will increase as the pulp price is going up and we have a delay of 4 to 4 to 5 days before we get it into the P and L. But it's quite marginal, it's gone up so far. So you're not looking at trying to increase prices for tissue at this moment? We will increase prices when raw material cost is increasing. And income from associates increased to I think it was $94,000,000 again higher than what you had in Q3 and significantly higher than what you had during the first half of the year. Is this just a seasonal effect again? Or should we expect sort of positive development in earnings in these associated companies throughout? It's mainly coming from Australia, Leland, if I remember rightly. Yes. And he is in the board of that company, so maybe. So therefore it will continue potentially. No, but we had some restructuring costs during the first half of the year. So that is the reason that we have seen it during the second half. So hopefully, I mean, if the business is stable, etcetera, we will continue to see that. And in that line, we have also the sharing earnings from NIMBA. So there was nothing exceptional in the Q4 results for associates that we should expect to differ going forward. It might come up from restructuring cost again, but not so much as we saw in the first half. All right. Thank you very much. Those were my questions. Okay. Let's take a question on the second question. Thank you. It's Linus Larsson with SVB and SKUDA. You say, Jan, that you expect a slow start to the cost savings programs. Would you care to comment a bit on the near term progression if you look in Q1 versus Q4, should we expect nothing? Or is there some realized cost savings in the current quarter? Well, I mean, as we explained when we launched the program, it is program on supply chain and that means that it will take some time before we have rearranged the supply chain. So it will be rather late. If I use slow, it was wrong, because it's not slow. It's according to plan. And according to plan, it will actually come later than sooner in the plan. We do see some saving in Q4. Of the old program, we have some €105,000,000 in saving on the €700,000,000 program. And analyzed, we have €500,000,000 on that program. So that will continue to tick. On the €300,000,000 that we launched in November, it's annualized about €125,000,000 because we got started. So it's very little in Q4. And GP is still in the stage of negotiation with unions and planning for the restructuring. So we don't see anything of that in Q4. Okay. And then if I may come back for a second to the margins in Personal Care. We had this accident in Japan in Mipon Shukubai's mill in the autumn of 2012. I wonder how you look at the supply demand situation in super absorbents, any price implications? Anything any margin implications for you in the year to come? We have our contracts secured. We have a formal for price changes in that related to oil prices. So we have not been impacted by that at all. But do you think you might be impacted by that? Not as far as we can see today. Okay. And then just finally, you did highlight your strong balance sheet. I wonder on the M and A side, are you still actively looking for big acquisitions? Or are you now in a phase where you will digest and integrate rather than look for new big acquisitions? Well, we use some of it to increase dividend. But we are acquisition is part of our growth. So we are looking for growth for acquisition opportunities. Then of course, you have to define what is big and small, but we are looking at that as a possibility. Thank you. Okay. Yes, right over here in the middle And you will have a microphone. Milt Perioff from Chevreux. One question on the raw materials and then a couple of housekeeping questions. Since you were talking about or we are also seeing that pulp prices are gradually moving upwards, could you give us some color on how you view the price of pulp developing during the year? We all know it's difficult, but what is your view? I mean, if you look at the fundamental, there is no driver for pulp increases. I mean, the consumption is not really going up to justify that. We have a lot of new products coming in from South America. So as in the past 5, 6 years, everything depends on China, how they will act in terms of importing or not importing. So it's very difficult to have a very clear view on it. But it's obvious that there is resistance on the market to price increases in pulp. And I think that resistance will continue. Okay. Thank you. And then just a housekeeping question. What tax rate should we use in our models going forward now? As you could see, we saw some lower now, but I think the some 25%, 26% is quite okay. Thank you. Lars Schall, Banker, Degrees. Would you can I just comment about what you're seeing in terms of demand growth in your key markets in 2013? And also there's been some recent noise about Procter and Gamble sort of stepping up and trying to do somewhat more aggressive into the market. You mentioned increased A and P spend sequentially in Q4. Is that something you've seen continuing? Or is that happening somewhere else outside your geographies? If you look at the if you take the last question, it's mainly directed to Russia and the Nordic country. Russia because we want to grow market shares and the Nordic countries is to keep Brozil out. So from that perspective, you are right. And we've been quite successful for quite some years now. Demand on the market is I mean, if you look at the tissue demand in Pregeland away from home, it's typically growing with GDP, which means with the low GDP we have it's very low growth. But we also have an ambition to even we have the size today to grow the market shares. In our Personal Care segments, we don't see any negative impact of demand due to the financial situation we have on the market. And it's actually up to us to get new innovations out of the market so we can actually improve the profitability. Emerging markets still growing very good. And of course, the potential is enormous as long as the country or region is growing from an economic point of view. So the only business we really see real impact of the financial situation or the lack of growth is in allocation paper. And if you look back to to get some organic growth in the hygiene operations, what sort of numbers would you believe given your geographical mix? And that obviously excludes the impact from acquisitions. We have a clear target of 5% to 7% in Personal Care and 3% to 4% in tissue and we think we could continue with that. Thank you. Okay. I think we also have a question from the telephone. So operator, could we open up for that please? Is the technique working or? So maybe we have some more here. Yes. While waiting, we have another question from the floor. Here? Yes. Again here. Hi, this is Oscar Lindstrom from Danske Bank again. I just would like to come back to this topic of higher A and P spend in Q4. If I recall correctly, you had also what you described as a higher than normal A and P spend in Q1, but said that the full 2012 A and P spend level will be in line with what you'd had sort of normally. Should we expect your A and P spend to rise in 2013? Is that something you're going to boost enable to promote top line sales or? It is in line with what's expected from full year. But then of course we have also added Georgia Pacific with some consumer tissue. And even in the way from home, we do spend some A and P. So from that perspective it's been growing, but that's because we get new business into the market. But otherwise it's been in line with what we communicated in Q1. Also a little bit on this topic. Could you please comment a little bit on the competitive situation in the European high gs market? I mean, you've consolidated the market. We heard back in November that Kimberly Clark would partially pull out of the European hygiene market where it was present. Has this had any effect on how you perceive the lead level of competition? It's of course a little bit strange situation where the big American companies are leaving Europe. I mean, 1st property in consumer tissue and Kim and Klask in baby and then tissue. And that is creating opportunities for us. So there's no doubt. And we will, of course, grab those opportunities. What exactly we will do is not 100% clear yet. But I mean they are in practice just leaving U. K. For example with a substantial market share in Baby. And of course, we will do something about that for France, Germany, etcetera. So it's creating opportunities and we are becoming stronger at the same time because one big competitor is out of the market. All right. Thank you. And then let's have the mic in the middle again and you will have a microphone coming from both and it looks like. Yes. On that note and obviously, it's a one big competitor obviously exiting. Someone else is picking them up. Is that an issue we should be concerned of with private equity is coming in or other smaller private companies taking shares in the market? It's they will probably sell some of the assets, but not all in all countries, which means that it need to be refilled by something. And that's either a private label or supply with a brand. And we would not go into a country if we wouldn't have the support of the retailers to do that with our brands. But if we do get the support from the retailers, we probably would go in with our own brands. And in different countries, this will be different solutions. But either way, it's strength for us because we are in both. Now it seems like the telephone line should work. So let's try a second time. Thank you. The question comes from Johan Sjoberg from Carnegie. Please go ahead. Yes, thank you very much. Starting off with the seasonal slowness in that you'll see now in Q1 this year. I remember last year, we were very surprised by this seasonality effect. Could you and I remember you also said that you boasted top line for quite significant ASP spending during the Q1, which had a negative impact upon margins. Could you give us some more color what to put into our models here? I think we or I think I know that we are not going to do a similar exercise this year in Q1. So we'll not see the sort of surprise on the cost side and maybe the surprise positive surprise on the volume side. So it will be more similar to the previous years because I mean if you go 5, 6, 7, 10 years back in time you will always see that you have a slightly lower sales in Q1. And in the report, you can see it very clearly from the tissue and personal care that Q4 and then slightly down Q1 and then up again. Hopefully, we will this stair will continue up all the time, but still you will have a slightly lower Q1. I'm not I can't comment on anything of the level, but the normal seasonality. All right. And if you look at Personal Care during the Q4, normally you see margins coming up there on the back of higher deliveries of incontinence products. What and now you said that A and P spending increased quite significantly. Would you say that this was a normal quarter when it comes to incontinence, 4th quarter that is? Well, I mean, except that you have you had fewer invoice days that clearly impacted all the business. Okay. And in terms of GP contribution for the Q4, you stated in the Q3 release that it had an impact of SEK182,000,000 I think. You mentioned now a figure after tax. What is the EBIT for Georgia Pacific for the second half? I can comment that. We had somewhat lower EBIT in the 4th quarter, But it is also coming from that we have, what should we say, been working with acquisition balance. So now we have more finalized even if it is preliminary, we have a more finalized acquisition balance. So the depreciation level has changed between the quarters here. Okay. So what is the running quarterly figure now going into 2013? Yes. I would say that both this quarter has been a bit impacted by the start up of the Georgia Pacific. As you know, the Q1 and from the beginning, we had also these fair value market valuation of the inventory, which has also impacted it. So I will not give you an exact figure for where we are running into the Q1. But I mean it is according to plan. Another way of answering that, Johan, is that even if you exclude the synergies from GP acquisition, we are not on the level that we will be in the current business since we haven't really been able to do what we want when it comes to working capital price increase etcetera due to the union negotiations we have. Okay. Final question here. The one off during the quarter was quite high. And I know it's sluggish and it's the restructuring cost with the in force product. But even taking DDC into consideration, it's almost like €500,000,000 higher than what was communicated or guided for at least through these measures. What are those related to? No, it's like you said, and then it is like a restructuring cost related to the restructuring programs we have announced. So these are the part of the €300,000,000 program, right? Part is from that and part is from the forest program and also part from the program we announced in October 2011. And how much of that program is now being realized? Of the €80,000,000 €700,000,000 Yes, of €80,000,000 program. Annualized €500,000,000 in the sorry, you have the same. And on the P and L Q 425,000,000. So 125,000,000. And how much okay. So in 2012, how much have these been impacting the result I mean, you mentioned annualized figure and that what is the impact on the income statement this year or last year? Of what? The SEK 700,000,000 program. We haven't actually split it up to and then communicated. That's the figure we are giving. Okay, cool. Thank you. Thank you. We had one more question from the telephone. Thank you. Thank you. Next question is from Celine Pannuti from JPM. Yes. Good afternoon. I wanted my first question to follow-up on the different programs and trying to understand what you try to mean by your comments on how long it will take for them to be realized. So if we just on the €700,000,000 you just mentioned, am I correct in understanding that this will be completely finalized by the end of 2013? Yes. Good. Then on GP, I understand that you are right now in the negotiation. At which point do you think we can start to you will be able to start doing what you want to do and start the plan for the savings, the synergies? The full impact will still be as we communicated we required it and that is 2016. Exactly when it will start to run-in depends on how fast we can finalize the negotiations with the union. But you should start this year, this Q1, Q2? I can't say, yes. And then can you you made a comment on the €300,000,000 savings. You said you already started something in the Q4. Can you as well give more I didn't quite understand what you meant there and what we should expect for 2013? What I said that we have started it and we have an annualized impact of SEK 195. But on the Q4 isolated, it's very small. It's less than SEK 50. Okay. And then the forest program that you just announced in December, have you already started working on it? And will we have an impact already in 2013? We have started to work on it, and there will be a positive impact already 2013. We haven't communicated on how much it is, but it is a slightly different program from the others. So you have some low hanging fruit that will come in a little bit faster. It's not all in supply chain. Okay. Good. Now I have another second question on the growth rate. So could you give us the growth rate in emerging market for the 2 divisions, Personal Care and Tissue? And also I saw that tissue growth accelerated nicely in volume terms in the Q4. Was this all emerging market driven or is there something else behind that? It's some growth in the mature market, but not very much. So the bulk we noticed is in emerging market. And the growth in Personal Care is 22% in emerging markets and in tissue 19%, as I said of which 12% is acquisition in Personal Care and 6% in tissue. 12% 6% you said? Yes. The acquisition. Yes. And then, Romeo, I know there has been some questions already on pulp prices. But if we try to gather everything together, so pulp prices, oil base, energy cost, how should we try to model your raw material inflation for this year in terms of the magnitude of it and as well the timing of it? H1 versus H2 for instance. Well, what we have seen so far it's the increase in pulp deferment rights in Ireland is 2% something like that 2.3%, 2.4%, which of course is not very much. And we don't see any major drivers for price increases. Oil based has gone up a little bit more following the increase in oil prices earlier last year since we have a 6 to 6 months delay of the prices. So when you look at that you have to look at oil price 6 months ago and then you see what will hit us now. Energy very difficult to say because it varies so much depending on the temperature etcetera, etcetera. But we don't expect any major increases in energy. It's mainly oil based and pulp. And pulp so far not very much. All right. So pricing, you said there's no reason to increase pricing. We've seen a slight deceleration in pricing in tissue. Do you think we could get to negative number? Or are you comfortable with flattish to slightly up? I couldn't hear you clearly, but what I said is absolutely necessary to increase prices. Okay. Perfect. Thank you so much. Thank you. Okay. We have one more from the telephone. So when it's open, let's take the next one. Thank you. Your question comes from Karri Winter from SHB. Please go ahead. Yes. Thank you. Karri Winter, Anders Pankel. A follow-up on the previous question. If you look at the deviation analysis that you provide every quarter and if you look at the year on year trends in pricemix category, you see that in both in tissue and personal care, there was a slight year on year decline in this. Is this still small enough to be typical variation minus down 1 quarter maybe up next quarter? Or is this are there any pricing pressures out there? I think the price increases was made the year before and compensating for the price increases in raw material. And this year, we haven't had any price increases, as you know, or rather price decrease raw material. And I think as we said in Q2 or Q3, I think it was Q2 that we had a few contracts that we needed to take down the prices in the market, but nothing substantial. So I wouldn't be worried about it. All right. Then also in the same as deviation analysis in the other segment both in tissue and personal care there is quite sizable negative number. Is this all A and P or is there something else there as well? It's A and P, but it's also referring back to what Lennart said when it comes to depreciation between after acquisition and Georgia Pacific that's also included in the other. Okay. Thanks. That's helpful. That was helpful. Thank you. Okay. Apparently, those are the last questions. So let's take the last question from the phone. Thank you. Last question is from Peter Ester from One Investment. Hi. Thank you very much. I just had 3 short questions, Steve. One is on the Georgia Pacific negotiation with the unions. I was wondering if you could give us some color as to what the obstacle was so we understand the issue better. It's absolutely no obstacle whatsoever. It's just the time it takes to follow the rules. So there are no obstacles. We just need to play the quality rules and that takes some time. Okay. You would regard this as within plan? Absolutely. Okay. And then on the Capital Markets Day cost savings plan, do you think that you mentioned earlier sort of $125,000,000 in a year steps taken. Do you think by the end of 2013, that's the sort of run rate you'll be at? Well, if I remember rightly, we communicated in that meeting that we would have a run rate around €500,000,000 by the end of next year on the €300,000,000 program. End of 2013 or the Yes, the run rate. Yes, run rate, yes. Okay. And you're not changing that view? No. Okay. And the last question was just on the European business in the customer Care area where we talked earlier about the people withdrawing. Can you give some sort of sense as to whether you think the shelf space, which is going free, is it half 1 twenty thirteen or half 2 twenty thirteen opportunity? Well, I mean, once you have the clear that you're going to leave a market, you have left it. So my guess is that it will be sooner than later. Okay. And can you give a sense as to what sort of traction you're seeing in your discussions? Not really. Okay. All right. Thanks very much. Thank you. So with that, do we have any more questions from the audience? No? Seems like we are done. Okay. Thank you very much. Thank you very much. And then we conclude this.