Earnings Call: Q2 2012

Jul 19, 2012

Good afternoon, ladies and gentlemen. Welcome to the SCA Q2 report conference call. At this time, all participants are in a listen-only mode until we conduct a question and answer session. Instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero on your telephone. I'd now like to hand over to the chairperson, Mr. Jan Johansson. Please go ahead, sir. I will be standing by. Thank you very much. Welcome to all of you to this Q2 report. First of all, I have to apologize for the problem we had by delaying the telephone conference. It was a very simple mistake. We had the wrong telephone number in the report, as you have discovered. That is corrected now. I hope everyone is on board. To start with the general market conditions, I'm not going to spend too much time on this because I'm sure all of you have a very good view of it also. We do see a slower European market, of course, due to the debt crisis, but still a very strong growth in emerging markets. When it comes to the hygiene products, we also still have a good growth in emerging markets. Maybe a little bit slower in Europe and in the Western world. Looking at SCA's performance, we have growth in all our segments during the second quarter. When it comes to forest, we still have the same difficult situation as we commented on in Q1. We do see volumes coming down. Year-to-date, newsprint is down 10%, LWC is down 8%. SC is down 1%. When it comes to solid wood, the market is still weak. We have increased volume in our sales. We have also increased the prices for kraftliner during Q2. Moving on, looking at what we have been doing except operation during the quarter, as you have seen, we have closed five strategic deals during the quarter. We finalized the acquisition of Georgia-Pacific today on their European tissue operation. I will ask Mats Berencreutz just in a moment to explain to you what we have done in terms of divestments or what we will divest in that business. We also concluded Everbeauty with operation in Asia, coming from Taiwan. Also a strong position in China. Increased shareholding in Vinda. Both of those, of course, is giving us now a very good position to continue to grow in Southeast Asia and maybe also in China in particular. We also increased our position in Latin America by buying the remaining 50% of PISA in Chile. Also as from the 30th of June, we have divested the packaging business and, of course, then excluding the two kraftliner mills in Sweden. Georgia-Pacific will be integrated as from the 20th of this month, Everbeauty from the 1st of June, and the divestment of packaging is excluded from the 30th of June. Mats, could you please tell us a little bit on how the process was finalized when it comes to the Commission? Absolutely. I'll be happy to, Jan, and everyone. First, let me just say that it's seldom that you see such a good strategic fit when it comes to deals of this size. Despite that, the Commission has addressed a few areas of concerns, which have led us to a remedy package, which I'll go through. Let me first start with the good newsprint that what the deal did not require any divestments in. That is the whole away-from-home, where we have an exceptionally good fit, where the Georgia-Pacific operations are very strong in geographical areas where we are less strong. Also on the consumer side, we have the French consumer market, where we have the brand Lotus, which you can consider as an icon brand. The reason being, of course, SCA's relative soft branded position here in France. The concerns addressed by the Commission was really divided into three different blocks. When it comes to the consumer tissue branded business, it was in U.K., a small part in Holland, and also a minor part in Belgium. When it comes to the retailer brand business, also in U.K., and also when it comes to Scandinavia, it was a retail brand business that led to some concerns. All these three blocks also should include production capacity. Hence, we have offered for the U.K., Benelux branded business, the mill of Horwich. For the retail business, we have a site in South Wales in Bridgend, and in Scandinavia, we have also linked that to one of our mills that we have in Norway in Drammen. Totally, this is about 100,000 tons and a value of approximately EUR 200 million. In sales. Thank you. It is mainly in line what we had expected when we concluded the deal with Georgia-Pacific, and it will not have any negative impact on the synergies that we have communicated. Coming back to the quarter, compared Q2 to Q2, we have a sales increase overall in the company, and we have in hygiene business, higher volume and higher prices, and a very good growth in emerging markets. Personal care is growing by 20% and tissue by 17%. We haven't seen any down trading in Europe, and we still see very stable volume when it comes to hygiene and our sales. Forest, though, as I said, we see both lower volumes and lower prices. Overall, we have an increase in EBIT of 16% compared to Q2 last year. As you can see also on page five, we have improved the EBIT margin from 8.9% to 10.4%. We are improving our operational cash flow. Of course, after divesting packaging, we are on a debt-to-equity ratio of 0.41, and that will be after finalization of Georgia-Pacific, 0.61. As you know, we have a running target of 0.7 for the group. Looking at the development Q1 to Q2, we also have a sales increase of 4%, and we are improving the EBIT by 15%. Personal care also substantially improving by 17%, and that is both higher volumes and maybe more importantly, improved product mix. Tissue is also higher volumes and lower energy costs. We also see higher raw material cost in tissue, and that is mainly currency impact. We actually have had an increase of pulp with 8% compared to Q1. That is mainly the weaker EUR since we are buying most of our raw material in USD. Forest is also improving EBIT compared to Q1. You remember that we had some problems with the storm that increased the cost of harvesting. That has now been mostly taken care of, and we are more in a normal operational situation in the forest operation. Going into personal care, we are improving the margin from 9.5% to 12% compared to Q2 last year. A sales increase like-for-like of 10%. Incontinence care is growing very nicely by 9%. Also baby, as being a subject for discussion, we now see the positive impact of all the structuring we have been doing in Europe, including new contracts that we also have in Europe. That is going exactly as planned. Feminine care is growing also. As I said earlier, the emerging markets with a figure of 20%. We have an EBIT increase of 41% if we exclude, among other things, the Australian business and currencies. We have higher volumes from better products mix. We also see the cost-saving programs that we are running are kicking into personal care and also coming in gradually into the tissue operation. We also had some lower raw material cost compared to Q2 last year. Tissue, we have improved the margin from 7% to 10.8%. We have like-for-like a sales increase of 4%. Consumer tissue is growing by 5%, away-from-home by 2%, and emerging market with good 17%. We also have an increase in EBIT here of 53%. If you take excluding also currency into this, it is 45% increase in EBIT. We have managed to increase prices compared to last year. We have a better product mix. Also a lower raw material cost. Some of the cost saving is gradually coming in to the operation. What we can see some impact of the European crisis in the very south of Europe, being away-from-home. It is nothing dramatically. We see a slower development on the market itself when it comes to maybe traveling, restaurants, et cetera. The rest of Europe is doing fine. Back to Forest, looking at the consumption on the market Q2 to Q2, we have a similar pattern as we had year-to-date. News is down 10%, LWC is down 12%, and SC is down 6% on an overall market situation. We also have a decrease of sales and a slightly lower volume. We had a record production, if you remember Q2 last year, and it's difficult to have a record production every quarter. Solid wood is flat. We see higher volume, but still pressure on prices mainly due to an overproduction. kraftliner in Q2 to Q2 is lower prices, but higher volume. As I said, Q1 to Q2, we have increased the kraftliner prices, and there will be more increases coming through during the year. It has been announced from our competitors, both EUR 40 and EUR 50 price increases, and of course we will increase our prices at the same time. Overall, an EBIT increase of 34%, and that is lower prices and also higher raw material costs. With that, operator, I will open up for questions. Thanks, sir. Ladies and gentlemen, if you do have a question at this time, please press star followed by one on your telephone keypads and the hash or pound key to cancel. Once again, that's star followed by one to register a question and the hash or pound key to cancel. There'll be a short silence while participants register for questions. Our first question comes from Johan Söderberg. Please go ahead. Thank you very much. Just coming back also to the Georgia-Pacific acquisition. Can you say something about margins in Georgia-Pacific, how that has been developing since you announced the deal in November last year? Yeah. They have a positive development when it comes to volume. They have not been able to improve the margins in the same way as we have improved in SCA. They are on a similar or slightly higher than when we communicated the deal, and it's not a surprise when you have an operation for sales for such a long time, that you may see maybe less aggressivity when it comes to pricing. The positive of that side is, of course, that now when we have it, we can do it in their operations also. The last time I heard anything about margins, it was the 2010 margins, and then they were lining with you 7.6%. Should we calculate that they are around about 8% right now? They are lower than ours, higher than we communicated 2010. Immediately day one when we include this in the business, there will be a slight dilution on the tissue margin. It's also much smaller business. It will not be substantial. Okay. You are in the right ballpark. Okay, great. Just looking at the one-offs coming here, when will you see the one-offs kicking in from this acquisition? Will it already come in Q3, and how long will it continue, would you say? No, I think that you will probably see a substantial coming in the beginning of next year. Okay, early 2013, right? Yeah. Nothing in Q3 anyway. Okay. Also. I was just going to say, what we said when it comes to the synergies, that's a program that will run over two to three years. When will we see the main impact from that one, would you say? Over the next two to three years. Okay. All right, thanks. Another question. Looking at the European tissue market also, raw material costs in terms of pulp costs have come down, energy prices have come down. What is the current atmosphere among your customers? How much are they pushing for price decreases right now? Sorry, Johan, pulp prices has actually come up with 8% due to the currency since we are buying in USD and we are selling in EUR. The atmosphere, it's nothing different from what we've experienced every day in the past. There is always competition, but there is nothing changed due to the pulp prices in USD, since everyone is aware of that it's actually more expensive in EUR. Pulp, as you see it, prices near term will be flat, basically, or? Well, if we continue with the current situation we have today, we do see a need for increased prices during the second half year. All right. Since we are living in a euro world and not in a dollar world from this perspective. All right. Also just looking at the personal care business, is the full effect from the baby diaper restructuring now in your figures, or do you see more positive impact from that during the second half? It's mainly in the figures now, yes. Okay, great. Thank you very much. Thank you. Thanks, sir. Next question comes from Oskar Lindström. Please go ahead. Yes, hello, this is Oskar Lindström at Danske Bank. Just a follow-up question on personal care, where your margins have been trending upwards over the past year or so. In addition to the baby diaper restructuring, which you now say the benefits from are more or less complete, are there other factors which are enabling you to increase your EBIT margins in the personal care segment, and anything that we should expect to continue going forward? Well, we have, of course, volume growth that is helping to improve that. Also the product mix. We always try to improve our products and get new innovation out in the market, and those should always improve the margin compared to the old ones But as you know, when it comes to superabsorbent and oil-based products, we have a delay of three to six months when it comes to impact on the raw materials. We will continue to have increased raw material in personal care, at least for Q3, and then it will change in Q4. Okay. A more sort of long-term question relating to personal care. There's a lot of anticipation out there about new drugs for Alzheimer's disease, which are apparently phase III studies are being presented here during the second half of the year. Do you have any comment as to how this could affect your incontinence business? How important are Alzheimer's disease patients for that part of your sales? Well, it's not a cure, actually, it's to reduce any impact. If they could do that's of course extremely positive. The impact it will have is a delay when you enter into our products, but you will sooner or later enter into it anyway. All right. Thanks. A final question on your tissue pricing. You're saying here in your earlier reply that prices are roughly stable. If I look at your quarter-over-quarter deviation table, which you publish on your website, it seems that there is a negative price mix effect on the tissue earnings this quarter compared to the previous quarter. Could you provide some more detail on that, please? Well, my comment was going forward, in Q3, Q4, and not in Q2. As always, we have contracts renegotiated or a new contract coming in all over the year, and we have had one or two contracts Q2 that was on a lower level than the average of the contracts. Is that something that you expect could continue as other older contracts are renegotiated? No, my expectation now when we see increased costs in pulp is that we will have to increase prices rather than decrease them. The impact of the contracts we have had during Q2 will of course remain for the rest of the year also. We shouldn't see a negative quarter-on-quarter deviation figure in Q3. Is that how we should see it? I can't give that detailed forecast. All right. Thank you very much. Those were my questions. Thanks. Thank you. Our next question comes from Michael Jass. Please go ahead, sir. Yes, hello. Good afternoon, everybody. I have a question regarding the fact that we see a strengthening SEK. It was around SEK 9 just a few weeks, now we're trading around SEK 8.5. Then I wonder, how will this sort of affect SCA if we stay at these very strong levels versus the EUR? I think for all Sweden export industry operating from Sweden exporting, it will of course have a negative impact in transaction. There will be translation impact on SCA also since we have a bulk of the sales in EUR, but not an impact on transaction. Overall, if you have a 10% weakness of the SEK, it will be SEK 1.7 billion on a yearly basis if you take the translation impact of that. In reality, we don't bring the cash back to Sweden. We reinvest it, so it doesn't have a real impact. It's more a translation. For the production in Sweden, and that's mainly the forest operation today, it will be a transaction impact also. That's a tough situation when the SEK is as strong as it is today. Is it fair to say that that would sort of increase the need for additional cost actions in the Swedish operations then? If it remains, absolutely, and that goes for the whole industry in Sweden. Okay. Many thanks. Thank you. Thanks, sir. Our next question comes from Karri Rinta. Please go ahead. Yes, thank you. Karri Rinta from Handelsbanken. A few questions. Firstly, in tissue and personal care, you mentioned in the year-on-year comparisons, improved product mix. What is driving this given the sort of the uncertain macro environment, and how sustainable is this also going forward? If I start with personal care, it will take a lot before anyone is trading down in products that they are confident in. If you take the feminine side or if you take the incontinence side and even the diaper side, we haven't seen any downtrading in those areas. When it comes to consumer tissue, it's the same. Very little downtrading, but maybe more on promotion, and you buy one and you get two, and things like that. It was same in the last recession also. Very little downtrading, but a lot of promotion, and people are buying smarter rather than different products. I don't see any risk at all from a volume perspective in our hygiene operation. Okay. What if I look at the second quarter last year and second quarter this year, what drove the historical improvement in the product mix? It's mainly new innovations coming up in our different business area, in away-from-home also that we have more added value sales. We have an incredible development in the U.S. where we're transforming a commodity into value added, that is of course increasing the margin quite substantially. That is ongoing even though we do have a difficult economic situation. All right, thanks. You also mentioned cost savings both in personal care and tissue as drivers that improved earnings. Yes, absolutely. Can you break that into these restructuring programs, is there any element of lower promotional spending versus the first quarter when you had a high promotional spending? The cost program I'm referring to is the one we communicated last year, that we are now implementing gradually. It's not any change to that. Lennart, do you remember the figures? Yes. It is SEK 700 million saving we announced from the restructuring program in late October last year. When it comes to promotion, we don't see any change in that, neither up or down. It was only during Q1 we had a higher to offset some of the seasonality. Now we are on the normal level. Okay, thanks. Then finally, seems to be that there's a growing discrepancy or gap between the growth numbers when it comes to emerging markets and mature markets. How should we factor this into our margin expectations for SCA as a whole, that bigger and bigger part of your growth comes from the emerging markets now in the, let's say, for the next two to three years? Is it diluting or improving margins? It's of course, very positive that we grow in emerging markets, but still it's a very small part of our sales, which we have to remember, particularly in the tissue side. Where we are established, like in Latin America, I can't see that the growth will have a negative impact on the margin. When we enter new markets like China, it will, in the beginning, have a negative impact on the margin. That's still so small from an overall perspective. Right. I don't know if that was an answer to the question, but it was an attempt, in a way, to answer it. It was good enough. Thank you. Thank you. Our next question comes from Linus Larsson. Please go ahead. Yes. Thank you. It's SEB Enskilda. A couple of questions relating to the concessions in conjunction with the Georgia-Pacific acquisition. Is there a timeframe as to when you will have limited to divest these operations that you mentioned? Do you have any sort of indicative range of expected proceeds from these operations? Well, first of all, there is a process for that the European Commission has clearly stated. There is a six-month timeframe, and we're following that. We have a lot of interested parties in this, and there will be trustee appointed as well for this process. That's what we can say at this point. Of course, we started the process long before we got the information from the commission, since we knew quite well where the problems would be. Okay. Any very rough indicative range of the value that you expect from these operations? It is too early to say that, in our assumptions when we communicated the deal, we believe that it will at least not be different to that. It will not change the assumption that you have of the business. Okay. The acquisition price that you are communicating, I think is EUR 1.32 billion. That is a gross figure, I presume? Yes. You say that you will give up something like EUR 200 million worth of sales. Should we expect that the percentage of sales that you are giving up corresponds to the percentage of value that you are giving up, or is that being a bit harsh? It is probably quite different. Yep. Yeah. Okay. Just so I get things right here on what you're actually selling. Did I hear it right that what you're selling includes three paper-making units? No, it's three manufacturing sites. Two of them are integrated sites with both paper-making and converting, and one is converting only. Okay. It's only the Drammen and the Welsh operation which are paper-making units? Yes. In Bridgend and in Drammen you have it. Horwich is a converting site only. Great. It depends, of course, very much on. We have interested buyers which are industrial buyers and then also private equity, financial, and so forth. The whole setup will of course, it's too early to discuss any effects of that before we- Yeah. We're ready. Great. Given on this call we've already talked about the fast movements of the Swedish krona compared to the EUR. In the end, what was the purchase price, considering the hedging that you might have done? What was the purchase price in SEK, and did you also hedge the expected profits from the acquired operations? We have not hedged the purchase price. Okay. You know that we need all permissions before we can do that. Okay. We have not hedged the transaction exposure in Georgia-Pacific deal. Good. That's great. Just one final question now, with the Georgia-Pacific deal closed, what's the tax rate that we should expect going forward for the group? Sorry, I missed, what is the? The tax rate. Tax rate. It will not change. It's still what we have communicated, 29. Yeah, we are in the same, even if we have not seen expected earnings distribution between the countries. We have not changed the average. Okay. Your guidance is 29% or? Yeah, 28%-29%. Okay, great. Thank you very much. Thank you. Thanks, sir. Our next question comes from Christoph Wagner. Please go ahead. Good afternoon to everyone. Just one question from my side is, in your presentation with the Deutsche Bank conference, you forecasted a total revenue or net sales of SEK 12 billion. Will this be changed because of the sales, which you have to divest, or will this remain on the same level? It will be on the same level. Yeah. Do you have any ideas how your net sales will develop over the next five years? I know this is a challenging question, but perhaps you have an idea. Yeah, I think it's not something we can communicate just now. Okay. Last question from my side would be, you have made this joint venture for the Australasian business of you. I read in your webpage that you have deconsolidated the sales and all the figures of that. Is this correct? That is correct, yes. How much sales have you deconsolidated? About SEK four. SEK 4 billion. SEK 4 billion. Okay. Thank you so much, and have a good day. Thank you very much. Thank you. Thanks, sir. Our next question comes from Anke Rauterkus. Please go ahead. Good afternoon. It's Celine Pannuti from JPMorgan. I have a few questions as to starting with Forest. There's been a quite a volatile business. Could you try to help us figure out how we should look forward in terms of your growth, in the next couple of quarters, and what would be the potential impact of whether we should look at volume or pricing? You've said that pricing are going up, but at the same time, the price realization in some of your business are weak. If you could help on that. Same thing for margin, which again, have been volatile. There was an impact in Q1 from the weather problem you had in Sweden. It would be helpful if we can have a view of the level of margin going forward. That's my first question. I think when it comes to Forest, we don't have the same growth ambitions as we have in hygiene. We have said that we want to grow in line with the market. The situation when it comes, in particular the publication paper in Europe today is very depressed. I don't see any margin improvements in Forest going forward for this year, if nothing dramatic happens. When it comes to our sawmill operation, it looks slightly better when it comes to supply and demand. Still, the supply is a little bit bigger than demand. I think that will probably also be flattish for the year. The pulp price then, as you know, is decided on a global market, so that's more difficult to have a view on. The estimate now is that we will see pulp coming down a little bit during the rest of the year. It's a tough situation for those kind of operations today, and particularly in the publication paper side. Just to follow up on that. When you said that the margin will not improve, which level are you referring? Because you had 7% in Q1, 9% in Q2, 12.5 last year. Which level? Is 9% the right level you think you can deliver this year? I'm not going to give a single margin comments, because that will be too much of a precise forecast. What I'm saying is I can't see an improvement from where we are now, when it comes to publication. We do see prices still coming down, and we don't see any improvement in consumption. Okay. That was my second follow-up. You have been saying in your beginning remarks that you start to see a slowdown in the business, not so much it seems in personal care, a bit in away-from-home. What does this comment infer for Forest going forward in terms of the performance? Should we expect that it could worsen? I also said that I'm very optimistic when it comes to volume. I don't see any risk in our volumes in the hygiene operation overall. I'm interested about Forest, not Hygiene at all. I thought you said Personal Care and Tissue. I'm saying is that you've made some comments about worsening trend, but nevertheless, it seems that Personal Care is okay, and it's a bit away-from-home in Southern Europe that has worsened. My question is what kind of worsening trend should we expect in the Forest division? It's a very good question, it's also very difficult because as I said, year-to-date, we're down 10% on use, and it's also very much dependent on the advertising side. The advertising side is dependent on the general market development. We don't expect any dramatic change from the situation we are today. Okay. Then I have a second question, which for the personal care business, could you give us the growth in your private label? How different has been private label growth versus your own brand, in fact, both personal care and hygiene? When it comes to private label, that's mainly an operation we have in Europe. Yeah. In personal care, it's mainly or only in the baby business. The growth you have seen in baby now is coming from the restructuring of the private label business in Europe, and the improvement of profitability in private label. That's mainly feminine increase is almost 100% branded business. Tissue will change with GP. We will have 50/50 branded and private label, so we will grow the branded business. The growth in consumer tissue in Europe today is very slow. It's not a recession, it's not going down, but the growth is very slow. Emerging markets is 100% branded business. My question refers to the downtrading. You said you see no risk of downtrading. For instance, if I take tissue, is private label growing less than brand, or you see no difference between the two markets or the two categories? I'm sorry, maybe I was unclear. I said that we don't see any downtrading in the market so far. The growth is similar, both in private label and in branded. Okay. Does that answer your question? Yeah. Yeah. That's fine. Last question, can you give us the emerging market component for both division, in how much of sales now is from emerging market? Within the growth you gave us, what is volume and what is pricing? Personal care, it's about 35% from emerging market, and in tissue it's about 18%-19%. The growth in emerging market is mainly on the volume side, and the growth in mature market is mainly on the pricing side and innovation with new products. The double digit, like 17%, 20% growth you derive in emerging market is what? Three quarter is volume? It's volume, yes. Thank you. Thank you. We have a follow-up question from Oskar Lindström. Please go ahead. Yes. I almost forgot what it was. Sorry. Should I remind you? Yes. No. You previously haven't wanted to update your CapEx forecast for the year, given that you hadn't closed the GP tissue transaction. Now that you have closed that transaction, are you in a position to give us a more detailed forecast of where the CapEx level should be, say, this year and preferably also next year? You have to give us some time now to dig into the GP business, where remember, we have been competitors until today. Now we need to sit down and walk through everything. I hope you have seen that investments is going down quite substantially when it comes to reinvestment in relation to depreciation. That is mainly due to the huge restructuring program we have now where we use the capital much more efficient than we used to do. Of course, we will copy that as fast as we can into the GP business also. Okay. Excellent. Thank you. Thank you. Thank you. Once again, just to remind participants, that star followed by one to register a question and the hash or pound key to cancel. Operator? We have no questions at this time, sir. I will finalize and just conclude that we have seen, at least in our view, a very strong quarter, a very strong development in the hygiene business. Still a difficult situation in Forest, even though it's improved from Q1. We don't see any risk on the volume side in our hygiene operation, neither in mature markets or emerging markets. We are going in, as we always do at this time of the year, in a seasonality weaker period with the holidays, at least all over Europe, but that's a normal pattern that we have. With that, I would like to thank you everyone, and hope to see you. Thank you. Bye. Thank you. Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now all disconnect your lines. Once again, thank you.