Earnings Call: Q2 2012

Jul 19, 2012

Afternoon, ladies and gentlemen, and welcome to the SCA Q2 Reporter Conference Call. At this time, all participants are in a listen only mode until we conduct a question and answer session and instructions will be given at that time. I'd now like to hand over to the chairperson, Mr. Jan Johansen. Please go ahead, sir, and I will be standing by. Thank you very much, and 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 have the wrong telephone number in the report, as you have discovered, but that is correct and 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 price, but still a very strong growth in the emerging markets. And 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. But looking at SCA's performance, we have growth in all our segments during the Q2. When it comes to forest, we still have the same difficult situation as we comment on in Q1. We do see volumes coming down year to date. News is down 10%, LWC is down 8% and SC is down 1%. When it comes to solid wood, the market is still weak, but we have increased the volume in our sales, and we have also increased the prices for kraft lining during Q2. Then moving on, looking at what we have been doing except operation during the quarter and as you have seen, we have closed 5 strategic deals during the quarter. We finalized the acquisition of Deutsche Pacific today on their European fish operation. And I will ask Mads Perring Krausz 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 AiryBeauty with operation in Asia coming from Taiwan and also strong position in China and increased shareholding in Vinda. And 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. And also as from the 30 June, we have divested the Packaging business and of course then excluding the 2 kraftliner mills in Sweden. Georgia Pacific will be integrated as from the 20s of this month, every beauty from the 1st June. And the divestment of Packaging is excluded from the 30th June. So 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 good morning, 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. And despite that, the Commission has addressed a few areas of concerns, which have led us to a remedy package, which I will go through. But let me first start with the good news that what the deal did not require any divestments in, And 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. And 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. And reason being, of course, SGA's soft limited soft branded position here in France. So the concerns addressed by the Commission is really divided into 3 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 retail brand business that led to some concerns. All these three blocks are also should include production capacity. So hence, we have offered for the U. K. Benelux branded business, the middle of Horace. And 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 German. So totally, this is about 100,000 tonnes and the value of approximately EUR 200,000,000 in sales, yes. Thank you. And it is mainly in line with 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. So coming back to the quarter, we 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%. And we haven't seen any down trading in Europe, and we still see very stable volume when it comes to hygiene and our sales. For this though, as I said, we see both lower volumes and lower prices. And overall, we have an increase in EBIT of 16% compared to quarter 2 last year. As you can see also on Page 5, we have improved EBIT margin from SEK 8.9 to SEK 10.4. We are improving our operational cash flow. And of course, after divesting Packaging, we are on a debt equity ratio of 0.41, and that will be after finalization of GP EUR 0.61. And as you know, we have a sort of a running target of EUR 0 point 7% for the group. Looking at the development Q1 to Q2, we also have sales increase of 4%, and we're improving the EBIT by 15%. Personal Care also substantially improving by 17%, and that's both higher volumes and maybe more importantly, improved product mix. Tissue is also higher volumes and lower energy costs, but we also see higher raw material cost in tissue, and that is mainly a currency impact. We actually have had an increase of pulp with 8% compared to Q1, and that is mainly the weaker euro since we are buying most of our movements here in Tollens. But forest is also improving EBIT compared to Q1. You remember that we had some problems with the storm that increased the cost of harvesting, and 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 percent to 12% compared to Q2 last year. A sales increase like for like of 10%. Incontinence Care is growing very subject for discussion. We now see the positive impact of all the restructuring we'll be doing in Europe, including new contracts that we also have in Europe. So that is going exactly as planned. Feminine Care is growing also. And as I said earlier, the emerging markets with a figure of 20%. We have an EBITDA increase of 41% if we exclude, among other things, the Australian business and currencies. And we have higher volumes for better products mix, but we also see the cost saving programs that we are running kicking into Personal Care and also coming in gradually into the tissue operation. We also had some lower raw material costs 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 Markets with a good 17%. We also have an increase in EBIT here of EUR 53,000,000. And if you take excluding also currency into this, it's 45% increase in EBIT. We have managed to increase prices compared to last year, and we have a better product mix, but also lower raw material cost and some of the cost saving is gradually coming into the operation. What we can see some impact of the European crisis in the very south of the European away from home, it's nothing dramatically, but we see a slower development on the market in south when it comes to maybe traveling, restaurants, etcetera. But the rest of Europe is doing fine. Back to Forests and looking at consumption on the market Q2 to Q2, we have a similar pattern as we had year to date. The news is down 10%, LW Suda is down 12% and SC is down 6% on an overall market situation. And we also have a decrease of sales and 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. Kraft line in Q2 to Q2 is both sorry, it's lower prices, but higher volume. And 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 40,000,000 and EUR 50,000 price increases and of course, we will increase our prices at the same time. But overall, an EBIT decrease of 34%, and that is lower prices and also higher raw material costs. So with that, operator, I will open up for questions. Thanks Our first question comes from Johan Sjoberg. 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? Yes. They have a positive development when it comes to volume. They have not been able to improve the margins in the 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 aggressive when it comes to pricing. The positives on that side is, of course, that now when we have it, we can do it in their operations also. So you the last time I heard anything about margins, it was the 2010 margins and then you they were lining with you 7.6%. Should we calculate that they are around about 8% right now? They are lower than ours, but higher than we communicated in 2010. So immediately day 1, when we include this in the business, there will be a slight dilution on the tissue margin, but it's also much smaller business. It will not be substantial. So you are in the right ballpark. Okay, great. Just looking at one offs coming here, how 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? [SPEAKER KARL HENRIK SUNDSTROM:] No. I think that you will probably see any substantial coming in the beginning of next year. Okay. So early 20 13, right? Yes. Nothing in Q3 anyway. Okay. And also And what we I was just going to say what we said when it comes to the synergies that that's a program that will run over 2 to 3 years. And when will we see the main impact from that one, would you say? Over the next 2 to 3 years. Okay. All right. Another question. Looking at the European tissue market also, I mean raw material costs in terms of power costs have come down. I mean, energy prices have come down. What is the current atmosphere among your currency since we are buying in dollar and we are selling in euro. And I mean, the atmosphere is it's nothing different from what we experienced every day in the past. There is always competition, but there is nothing changed due to the pulp prices in dollars since everyone is aware of that is actually more expensive in Europe. So pulp price as you see it, prices near term will be flat basically, Oren? [SPEAKER JEAN FRANCOIS LABADIE:] Well, if we continue with the current situation we have today, we do see a need for increased prices during the second half year since we are living in a euro world and not in a dollar world from this perspective. All right. And 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. Thanks very much. Thank you. Thanks, sir. Our next question comes from Oscar Lindstrom. Please go ahead. Yes. Hello. This is Oscar Lindstrom 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 is are more or less complete, Are there other factors which have been driving up your or enabling you to increase your EBIT margins in the Personal Care segment? And anything that we should expect to continue going forward? We have, of course, volume growth that is helping to improve that. But 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, we have when it comes to super absorbent and oil based products, we have a delay of 3 to 6 months when it comes to impact on the raw material. So we will continue to have increased raw material in Personal Care at least for Q3 and then it will change in Q4. Okay. And a more sort of a long term question on relating to Personal Care. There's a lot of anticipation out there about new drugs for Alzheimer's disease, which are apparently Phase 3 studies are being presented here during the second half of the year. Do you have any comment as to how this could affect your INCO business? How important is or are Alzheimer's disease patients for that part of your sales? Well, I mean, if they could it's not a cure actually, it's to reducing the impact. But if they could do that, 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 that in your earlier reply that prices are roughly stable. If I look at your quarter on quarter deviation table, which you published 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 new contract coming in all over the year. And we had 1 or 2 contracts in 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. But the impact of the contracts we have had during Q2 will of course remain for the rest of the year. So we shouldn't see a negative deviation quarter on quarter deviation figure in Q3. Is that what we how we should see it? Or I can't give that detailed forecast. All right. Thank you very much. Those were my questions. Thank you. Our next question comes from Michael Jaff. Please go ahead, sir. Yes, hello. Good afternoon, everybody. I have a question regarding the fact that we see a strengthening Swedish krona. I mean, it was around SEK 9 just a few weeks and now we're trading around SEK 8.5. And then I wonder how will this sort of affect SEA if we stay at these very strong levels versus the euro? I think for all Sweden export industry operating from Sweden exporting, it will, of course, have a negative impact in transaction. Then there will be translation impact on SSA also since we have a bulk of the sales in Europe, but not an impact on transaction. And overall, if you have a 10% weakness of the Swedish krona, it will be SEK 1,700,000,000 on a yearly basis if you take the translation impact of that. But I mean, 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. But for the production in Sweden, and that's mainly or yes, mainly the forest operation today, it will be a transaction impact also. So that's a tough situation when the Swedish kroner 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? It will be if it remains, absolutely, and that's caused 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. Kari Rinta from Handelsbanken. Few questions. Firstly, in Tissue and Personal Care, you mentioned 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? So if I start with First and 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 ankle side and even the diaper side, and we haven't seen any down trading in those areas. When it comes to Consumer Tissue, it's the same, very little down trading, but maybe more on promotion and you buy 1 and you get 2 and things like that. But and it was same in the last recession also, very little down trading, but a lot of promotion and people are buying smarter rather than different products. So I don't see any risk at all from a volume perspective in our Hygiene operation. Okay. What is the if I look at the Q2 last year and Q2 this year, what drove a historical improvement in the product mix? It's mainly new innovations coming up in our different business area and 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 commodity into value added and that is, of course, increasing the margin quite substantially. And that is ongoing even though we do have a difficult economic situation. All right. You also mentioned cost savings both in Personal Care and Tissue in the as drivers that improved earnings. Yes. That's Can you break that into these restructuring programs? And is there any element of lower promotional spending versus the Q1 when you had a high promotional spending? It's the cost program I'm referring to is the one we communicated last year that we are now implementing gradually. So it's not going to change to that. Lena, do you remember the previous year? Yes, it is. I mean, it is SEK 700,000,000 saving we announced from the inspection program in late October last year. And when it comes to promotion, we don't change we don't see any change in that neither up or down. It was only during Q1, we had a hire to offset some of the seasonality. But now we are on the normal level. Okay. And then finally, the it 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 SGA 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 2 to 3 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. And 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. But that's still so small from an overall perspective. I don't know if that was an answer to your question, but it was an attempt and a way to answer it. That was good enough. Thank you. Thank you. Our next question comes from Linus Larsson. Please go ahead. Yes. Thank you. It's SBN SKUDA. A couple of questions relating to the concessions in conjunction with the Georgia Pacific acquisition. Is there a time frame as to when you will have limited to divest these operations that you mentioned? And do you have any sort of indicative range of expected proceeds from these operations? Well, first of all, there is a process for that that the commission, the European Commission that clearly stated. So there is a 6 month time frame and we're following that. We have a lot of interested parties in this and will be trustee pointed as well for this process. So that's what we say at this point. And of course, we started the process long before we got the information from the commission since we were quite we knew quite well where the problems would be. Okay. And any very rough indicative range of the value that you expect from these operations? It's too early to say that, but in our assumptions, when we communicated the deal, we believe that it will at least not be different to that. So it will not change the assumption that you have on the business. Okay. Because the acquisition price that you're communicating, I think, is EUR 1 point 32,000,000,000. That is a gross figure, I presume? Yes. And then you say that you will give up something like EUR 200,000,000 worth of sales, should we expect that the percentage of sales that you're giving up corresponds to the percentage of value that you're giving up? Or is that being a bit harsh? It's probably quite different. Yes. Yes. Okay. And just so I get things right here on what you're actually selling, did I hear it right that you're selling what you're selling into 3 paper making units? No, it's 3 manufacturing sites. 2 of them are integrated sites with both papermaking and converting, and one is converting only. Okay. So it's only the Drammen and the Welsh operation which are papermaking units? Yes. In Bridgend and in Raman you have it. Horwich is a converting site only. Great. And it depends, of course, very much on I mean, we have interested buyers, which are industrial buyers and also private equity, financial and so forth. So the whole setup will, of course, it's too early to discuss any effects of that before we're ready. Yes. Great. And then given the on this call, we've already talked about the fast movements of the Swedish krona compared to the euro. In the end, what was the purchase price considering the hedging that you might have done? What was the purchase price in krona? And did you also hedge the expected profits from the acquired operations? We have not hedged the purchase price because you know that we need our permissions before we can do that. And we have not hedged the transaction exposure in your Checkatrade team. Good. That's great. And 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 Yes. We are in the same even if we have not seen the expected earnings distribution discipline account. But I mean, we have not changed the average. Okay. So your guidance is 29% or Yes, 28% to 29%. Okay, great. Thank you very much. Thank you. Thanks, sir. Our next question comes from Christophe 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 1,000,000,000, 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, yes. And do you have any idea how your net sales will develop over the next 5 years? I know this is a challenging question, but perhaps you have an idea. Yes. But I think it's not something we can't communicate just now. Okay. Last question from my side would be, you have made this joint venture for the Australian business of you. And I read in your web page that you have deconsolidated the sales and all the figures of that. Is this correct? That is correct, yes. How much of these how much sales have you deconsolidated? About SEK 4,000,000,000 SEK 4,000,000,000. SEK 4,000,000,000. Okay. Thank you so much and have a good day. Thank you very much. Thank you. Thanks, sir. Our next question comes from Anke Topsa. Please go ahead. Good morning. Good afternoon. It's Celine Pennuti from JPMorgan. I have a few questions as to starting with forest. There's been a quite volatile business and 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. So if you could help on that. And then same thing for margin, which again have been volatile. There was an impact in Q1 from the weather problem you had in Sweden, but 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. And 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 slightly better when it comes to slightly better when it comes to supply and demand, but still the supply is a little bit bigger than demand. So I think that will probably also be flattish for the year. And the pulp price then, as you know, is decided on a global market. So that's more difficult to have a view on. But the estimate now is that we will see pulp coming down a little bit during the rest of the year. So it's a tough situation those kind of operations today and particularly in the publication paper side. So just to follow-up on that. When you said that the margin will improve, which level are you referring? Is that because you had 7% in Q1, 9% in Q2, 12.5% last year, which level is 9% the right level, if you can deliver this year? [SPEAKER JEAN FRANCOIS LABADIE:] It's I mean, I'm not going to give a single margin comments because that will be too much of a precise forecast. But what I'm saying is, I don't 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. And that was my business, not so much it seems in Personal Care, albeit in away from home. What does this comment infer for ForEx 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 Heidlein operation overall. No, I'm just asking about forest, not hygiene at all. Not Forest, I thought you said Personal Care and Tissue. No, no. 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 shall we expect in the Forest Products division? It's a very good question, but it's also very difficult because as I said, year to date, we're down 10% on news and it's also very much dependent on the advertising side. And the advertising side is dependent on the general market development. But we don't expect any dramatic change from the situation we are today. Okay. And then I have a second question, which for the Personal Care business. Could you give us the growth in your private label? Different has been private label growth versus your own brands? In fact, both Personal Care and hygiene? When it comes to Private Label, that's mainly an operation we have in Europe. And in Personal Care, it's mainly or only in the Baby business. And 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. So that's mainly Feminine. INCO is almost 100% branded business. Tissue will change with GP. We will have fifty-fifty branded and private label, so we will grow the branded business. And the growth in Consumer Tissue in Europe today is very slow. I mean, it's not a recession, it's not going down, but the growth is very slow. Emerging Markets, it's 100% branded business. But my question refers to the down trading. You said you see no risk of down trading. So for instance, if I take tissue, is private label growing less than brand or you see no difference between the 2 markets or the 2 categories? I'm sorry, maybe I was unclear. I said that we don't see any down trading in the market so far. So the growth is similar both in private label and in branded. Does that answer your question? Yes. Yes, that's fine. And then last question, I may. Can you give us the emerging market component for both division in how much of sales now is from emerging market? And within the growth you gave us, what is volume and what is pricing? [SPEAKER JEAN FRANCOIS LABADIE:] It's in Personal Care, it's about 35% from emerging market. And in T shirts, about 18%, 19%. And the growth is 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. So the double digit like 17%, 20% growth you derive in emerging market is what 3 quarter is volume? It's volume, yes. Thank you. Thank you. We have a follow-up question from Oscar Lichtstrom. Please go ahead. Yes. I almost forgot what it was. Sorry. Should I remind you? Yes. No, no, no. You previously haven't wanted to update your CapEx forecast for the year given that you haven't closed the GP Tissue transaction. Now that you have closed that transaction, could you 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. Remember, we have been competitors until today. So now we need to sit down and walk through everything. But I hope you have seen that we that investments is going down quite substantially when it comes to reinvestment in relation to depreciation. And 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. And of course, we will copper that as fast as we can into the GP business also. Okay, excellent. Thank you. Thank you. Thank you. Operator? We have no questions at this time, sir. Okay. So then I will finalize and just conclude that we have seen in 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 holidays at least all over Europe, but that's a normal pattern that we have. So with that, I would like to thank you, everyone, and hope to see you. Thank you. Bye. Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now all disconnect your lines. And once again, thank you.