Svenska Cellulosa AB B SCA B
Q1 2013 Earnings Call Transcript
Transcript Call Date 04/29/2013

Josephine Edwall-Bjorklund - SVP, Corporate Communications: Hello, and welcome to SCA's First Quarter Result for 2013. My name is Josephine Edwall, Head of Communications for SCA. Today, as usual, our CEO and President, Jan Johansson will go through the highlights from the report and we will have a Q&A session together our CFO, Lennart Persson, in the end.

So with this, I hand over to Jan.

Jan Johansson - President and CEO: Thank you very much. To start with, some macro updates, and as I think everyone is well aware of now, we still continue to have weak development in Europe, and particularly if you look at the domestic consumption in different countries, and of course, the increased unemployment in Spain, et cetera, is putting a lot of pressure into the system.

We do see some stronger development in U.S. and particularly in our hardwood businesses. So, it seems like the construction and the building industry is picking up. Emerging market, still growth in a very good level from a market perspective, but also internally for SCA.

If we look at Tissue, we still see some growth in Europe, even we have the difficult situation and continued strong growth in emerging market. Personal Care, incontinence product has continued to grow. I will come back to that when I get into that business area. We see a stable demand, both when it comes to baby and feminine; and also emerging market has continued to grow quite well.

The challenge we have is mainly within our Forest operations where we saw prices coming down in Q1 and volumes coming down. Volume is down on European level on some 4% to 5%. Compared to Q4, it's actually down around 11%.

On Kraftliner, very good balance on the markets. On hardwood, the balance is improving.

So coming into the results; we had a sales growth of 20%. Of course, acquisition is driving that, but we also have an organic growth. So if we take away the acquisition, it stands for about 19% of the growth. We also have in the Forest, as I said, lower prices, which is impacting the sales and profitability.

The EBIT increase of 25%, of that some 18% is coming from acquisitions.

Cost saving program is coming in. I'll get back to that also in a moment. We also have lower raw material cost compared to Q1 last year.

Cash flow is continuing to improve.

If we look at the efficiency program, we've tried to explain it in the different programs that we have running now, the EUR300 million program we have achieved in Q1, SEK160 million, and annualized we are now up to EUR75 million.

If we look at Georgia-Pacific, we have SEK54 million in Q1 and annualized EUR25 million of the EUR125 million. As we have explained since bulk of the savings is in supply chain and in the production, it will be rather later than earlier in the process.

In Forest, of the SEK1.3 billion, we have achieved SEK35 million in the quarter and annualized SEK140 million.

Looking at the Q1 results, the Swedish currency continued to, of course, have a negative impact on the businesses mainly in terms of the translation except for Forest where you also have the negative impact of transaction, but from a translation and transaction point of view, we are negatively impacted by SEK900 million in sales Q1 to Q1 and some SEK205 million in EBIT’s currency impact.

If you look at earnings per share, we have to remember that packaging was included Q1 last year, is not including now it's about SEK0.38 the impact in earnings per share. On the other hand we have Georgia-Pacific in that is offsetting that SEK0.38. On top of that, we have higher restructuring cost Q1 this year compared to Q1 last year, which is in the number of SEK0.38 also. So taking that in consideration, even the earnings per share is going up.

Debt gearing is continued to improve. We are now down to 0.51, if we exclude the pension debts, it’s actually down to 0.45.

Q3 to Q4 and as we clearly communicated last time, we do have a seasonality impact in between Q4 and Q1 and you can obviously see that on the hygiene business. We also had increased the raw material cost of some SEK138 million mainly in Tissue and Forest.

Looking at Forest production, we have increased prices in all our countries outside Sweden, in euro, in dollar we have all-time high, in prices we have higher prices in Japan, in China, in North Africa, but, but of course, translating them back to Swedish Krona and producing a Swedish Krona you will see a small impact of that in the real operation.

Personal Care very good development of the sales growth of 11%, some 7% coming from acquisition. We had little bit more than 5% growth in Inco Europe. We are gaining market shares. We are increasing penetration mainly in the men segment, the Inco men is increasing by 13%, compared to the last year, so very positive development.

Baby also continued to increase the same as feminine care, and emerging markets is growing with some 18% and 5% from that is coming from acquisition.

Substantial improvement in EBIT, of the 27%, 7% is coming from acquisition. If we look at the cost saving, we have all-in-all some cost saving on SEK102 million in Personal Care and then I include the program we've presented in 2011 also and of the SEK300 million program some SEK47 million is included already in the Q1 figures.

Coming into Tissue, also with substantial sales growth where of course, bulk of that is coming from the acquisition, of the 33%, some 30% is coming from acquisition. Looking at emerging markets, the 17% growth of that 7% is coming from acquisitions, so we still have a very good underlying organic growth and that goes of course the same for Personal Care.

Of the EBIT increase, some 30% is coming from acquisition. In cost saving, if I include the old programs with the new program, we have some SEK132 million included in the result for Q1 of which SEK113 million is coming from the SEK300 million program and Georgia-Pacific.

Forests operation, we still had, as I think we anticipated also further price decreases in Q1 with some 3% to 4%. We have divested Aylesford, which has an impact of 11% on sales, but as I said, solid wood is growing stronger, and in particular outside Sweden. We will increase prices in Kraftliner – in two steps EUR20, plus EUR20. EUR20 will be implemented in May and another EUR20 implemented in June. The balance is very good in Kraftliner, so the possibility to increase prices should absolute be there.

We also will increase prices in our hardwood operations during the second quarter. There is an absolute need to increase prices even in publication paper. I can't really foresee that you will see an impact of that in Q2, but hopefully, we'll manage to increase prices so we can see some impact in the second half of the year. The currency impact Q1 is as much as SEK110 in Forest and that's then including transaction.

We also have a capital gain not cash flow impacted by SEK101 million and that's because we have swapped some forest land that have that impact on our business.

So if we summarize, we have the good sales growth, we have higher earnings for the hygiene business. The currency is putting pressure on the Swedish operations of course. Efficiency programs are running as planned and we will achieve what we have communicated to the market. We have now got all approvals by the divestment we had to do to acquire Georgia-Pacific and the impact on the results for Q1 of the divested businesses was SEK6 million to SEK7 million. We have also finalized the divestments of Laakirchen and the impact in Q1 on the result on Forest from that operation was SEK34 million.

We will also have some maintenance stops in the Forest during Q2 in Ortviken, Ostrand and in our Kraftliner operation and the estimate now is that that will have a negative impact of somewhere around SEK70 million for Q2.

So with that, ladies and gentlemen, we open up the floor for questions.

Transcript Call Date 04/29/2013

Johan Sjoberg - Carnegie: Johan Sjoberg from Carnegie. Could you say something about the efficiency programs going into the second quarter? Is the (exchange rate) that you achieved now in Q1? Is that a level, which one should expect now for the coming quarters?

Jan Johansson - President and CEO: Well, I mean what we have communicated is the impact in Q1 in the run rate, and that's far I can go today. So what you could expect is at least what we have as a run rate.

Johan Sjoberg - Carnegie: In terms of Q1 normally is the seasoned and weak quarter for your hygiene operations. Was it like as planned would you say now in Q1 or was there something else impacting your underlying earnings apart from the seasonal weakness and of course the currency?

Jan Johansson - President and CEO: I think if you go back three years in time. I think we have seen – we have been able to reduce seasonality slightly every year. I think 2011, it was 500 million than less. So it is an impact, but it’s less than it was last year. I don’t know if that’s an answer your question, but little bit lower impact than maybe we anticipated.

Johan Sjoberg - Carnegie: Can you quantify the seasonal weakness in Q1, quarter-over-quarter?

Jan Johansson - President and CEO: I mean the negative impact you see in Q1 compared to Q4 is mainly seasonality and then, of course, what I said also about the raw material, but the rest is seasonality.

Johan Sjoberg - Carnegie: Can you put a figure on the seasonal weakness. How big of an impact it had during Q1 versus the fourth quarter?

Jan Johansson - President and CEO: No, I don’t have that figure in the totality. I mean then you have mix all the different categories also. But in general you could say, if you take the difference between Q4 and Q1, you have the seasonality.

Linus Larsson - SEB Enskilda: Linus Larsson with SEB. Continuing on the tissue profitability and sequential development. You had talked about seasonality and the volume impact. I am just a bit curious about the price effect. It appears that pricing mix price had a negative impact as well in Q1 versus Q4, could you talk a bit about that? What’s the explanation for that? Is there any price pressure that you are seeing in any markets or segments within Tissue?

Jan Johansson - President and CEO: If you look, compare Q4 to Q1, it's not any particular from a price point that has happened. Q1 to Q1, we had have some minor price decreases during last year that impacted that comparison, but not between Q4 and Q1. I mean there is always a price pressure; there is always tough competition. That’s something we live with day to day, but on the other hand, as you can see, the raw material prices are (coming up) in particularly pulp and also the euro dollars is changing. So from my point of view, the incentive is rather to increase prices than to decrease prices.

Linus Larsson - SEB Enskilda: It is not the concern that we should have here on maintaining or maybe even increasing tissue prices as of now?

Jan Johansson - President and CEO: It's always a concern, but the ambition is to offset the increased cost that we get.

Linus Larsson - SEB Enskilda: Then also, on the cost side, if you could talk a bit about the associate line which came off in the first quarter versus the fourth quarter and talk a bit about the restructuring that I suspect is at least part of the explanation? What kind of restructuring cost we should expect in Australasia in the quarters ahead?

Jan Johansson - President and CEO: Lennart?

Lennart Persson - EVP, and CFO, Head of Finance: It's fluctuating a bit as you say. It is from Australia, New Zealand (I mean) those quite stable. We have had some restructuring costs in first quarter. I expect less in the second quarter.

Jan Johansson - President and CEO: Otherwise you can say, in general, Australia and New Zealand is actually – they're doing a very good job, it is improving, excluding the items Lennart mentioned.

Linus Larsson - SEB Enskilda: For how long do you expect to be seeing restructuring costs in that region?

Jan Johansson - President and CEO: It will take this year, but the main part of the restructuring has taken already.

Karri Rinta - Handelsbanken: Yes, Karri Rinta, Handelsbanken. Few clarifications. Firstly, this SEK160 million in cost savings, does that include the Georgia-Pacific synergies?

Jan Johansson - President and CEO: The SEK160 million is a EUR300 million program.

Karri Rinta - Handelsbanken: Then on top of that you have the (indiscernible). Then these divested units, is it now so that those will be now excluded from April 19 onwards?

Jan Johansson - President and CEO: They will be excluded in Q2, yes.

Operator: Celine Pannuti, JPMorgan.

Celine Pannuti - JPMorgan: A few questions. First of all, you talk about the raw material environment. Can you please give us a bit of an outlook of what we should be expecting for the year? I think in the previous conference call, you've mentioned something like 2%, 3% raw material increase, but if you can confirm that? Second, and that there was a question earlier on pricing; should we expect therefore pricing to pick up in the second half of the year on your (indiscernible) divisions? Second question would be on – you mentioned that where you had higher marketing spend in Personal Care in this quarter. Can you tell us what is this regarding, because I think you already had some high spend last year? So I was a bit surprised that you had even higher spend this quarter. Then, finally, on FX, I think in March, in the conference call, you told us that the impact for the (euro) from the Swedish krona should be SEK500 million on EBIT. As of today, could you give us an update on what could that be for the (euro)?

Jan Johansson - President and CEO: If we look at the raw material situation, the increase in raw material we've seen is mainly on the pulp side, impacting the Tissue operations. In Personal Care, we actually have seen the raw materials coming down a little bit during the quarter. Looking at the fundament, there is not real any driving forces for further increase in raw material prices. There are some expectations on some small increases in pulp also, I believe very much influenced by the dollar development since there is a negative correlation between dollar and pulp. The main challenge may not really be the price changes in dollar, but rather how will euro/dollar move since we produce the bulk of it in euro and buy it in dollar and that's of course a very difficult question to answer. When it comes to our market activities, we do continue to invest, in particularly, in our incontinence care business to gain market share and increase penetration, because that has in the little bit longer run an incredible potential. As I said, we grow the TENA for men by 13% and the penetration is extremely low in that segment. So if we can increase that that would absolutely benefit the profit and the growth going forward. So that's one reason why you'll see slightly increased cost on that side. What was your third question?

Celine Pannuti - JPMorgan: It was on FX?

Jan Johansson - President and CEO: Sorry.

Lennart Persson - EVP, and CFO, Head of Finance: FX.

Celine Pannuti - JPMorgan: FX.

Jan Johansson - President and CEO: Well, I mean recently the Swedish Krona has weakened a little bit. So but it’s – I mean it’s too early to say that it will have a major impact for the year. So I think at least for time being we should stick with assumption we had at that call.

Celine Pannuti - JPMorgan: Just to go back on raw material, if I understood well, you think you will have a balance between oil-based raw material which are coming down and pulp prices which are coming up. Is that what you’re saying?

Jan Johansson - President and CEO: Yeah, I mean you could maybe put it like that. You mean all the pulp is, of course, in volume and value much higher than the oil-based, but on the other hand, it's something we need to offset in some way or another either by higher prices or even further reduction. Of course, we are not going to accept all the time that it will have negative impact on the margin, but as you know we always have a difference in timing. We have four to five days impact of the pulp increases or decreases then we have a longer time period to get it through our customers, but it will be offsetting one way or another, as I think we also have proved the past two, three years.

Josephine Edwall-Bjorklund - SVP, Corporate Communications: So, Operator, then we can take the second question from the telephone.

Operator: Peter Testa, One Investment.

Peter Testa - One Investment: May be just following on from that question on pricing. You declared in Tissue that it was your ambition to get the price increases. Have you started to initiate these steps in Tissue so far?

Jan Johansson - President and CEO: Yes, we have.

Peter Testa - One Investment: Then on the Personal Care business. So it was also in the deviation table price/mix effects, a negative price/mix effect. I was wondering if you could help us understand what that's from please?

Jan Johansson - President and CEO: It's mainly coming from – (made) a contract growth in volume in Europe with a slightly lower price than that we had in average, but still giving an extremely good return.

Peter Testa - One Investment: Would this be reflecting any of the possible impacts from competitor withdrawing in the Baby sector, which is also strong segment?

Jan Johansson - President and CEO: Sorry, I missed that question. What was it?

Peter Testa - One Investment: Would this point you just made be reflecting any competitor withdrawal in the Baby sector in Europe?

Jan Johansson - President and CEO: Yeah, that is, of course, something we are still working on that Georgia-Pacific is leaving big part of Europe in Baby and also in Tissue actually, but you don't see any impact of that in Q1 and you will not see any impact in Q2 either, because we haven't really decided to how we should move on that.

Peter Testa - One Investment: Then just a question on the cost savings plans, just could you give a general sense for what do you think you're running sort of ahead or behind your previous reviewed schedule?

Jan Johansson - President and CEO: I think we are in line.

Peter Testa - One Investment: Okay, on both – on all three, sorry?

Jan Johansson - President and CEO: Yes.

Peter Testa - One Investment: Then just lastly in raw material in Personal Care, you described pulp is more bigger part of business, it relates more to Tissue in the Personal Care in (isolation), do you think the raw material we view is relatively favorable now for Q2 at least?

Jan Johansson - President and CEO: I would say stable or slightly down.

Josephine Edwall-Bjorklund - SVP, Corporate Communications: So, Operator, then we take the final question from the telephone.

Operator: Oskar Lindstrom, Danske Bank.

Oskar Lindstrom - Danske Bank: A couple of questions. The first one is coming back to this issue of Tissue and rising raw material costs and potential price increases. In this quarter, we saw price/mix negative both year-on-year and quarter-on-quarter and you've previously talked a little bit about you have initiated price talks with some clients on the Tissue side. Could you say a little bit more about that, how those are going?

Jan Johansson - President and CEO: We have negative raw material impact of SEK40 million, so it’s not particularly substantial. I am not going to comment on our discussions with our customers.

Oskar Lindstrom - Danske Bank: Second question, if I remember correctly, you previously warned about how higher oil prices could lead to increased raw material cost in the Personal Care division. Am I understanding you correctly that you now no longer seeing that as a threat going forward?

Jan Johansson - President and CEO: I mean it's -- the oil prices are coming down and that will have an impact on the oil base material, but with the delay to four to six months and I guess the anticipation are globally with the Shale gas et cetera is putting a pressure on the oil price.

Oskar Lindstrom - Danske Bank: More sort of long-term question, your debt level is now coming down fairly quickly. Do you see the focus going forward being on strengthening your balance sheet, M&A or dividends, in which direction you're leaning?

Jan Johansson - President and CEO: You know we have a policy of gearing on 0.7 and now we head on to 0.5. So that of course gives us some space to look at some acquisition, but also of course, if we don’t say anything good to do with the money, there is always decision for the AGM to decide whether or not it should be given back to the shareholder. So we don’t have any intention to build some cash mountain in the Company, cash should work.

Oskar Lindstrom - Danske Bank: So I just want to come back to this issue of Tissue pricing. It mean – could you just correct that you had previously mentioned that you had initiated talks with clients about rising – raising prices on Tissue?

Jan Johansson - President and CEO: Yes.

Oskar Lindstrom - Danske Bank: But now you don’t want to sort of say what the status of those talks is, or…

Jan Johansson - President and CEO: That’s right.

Josephine Edwall-Bjorklund - SVP, Corporate Communications: Okay, so any final questions from the floor before we end. No. So that makes the finalization of today. Thank you so much for attending and have a good day.

Jan Johansson - President and CEO: Thank you very much.