Svenska Cellulosa AB Earnings Call Nuggets: Personal Care Division Margins and Seasonal Effects
Svenska Cellulosa AB (SVCBY) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Personal Care Division Margins
Jan Johansson – President and CEO: Well, 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.
Oskar Lindstrom – Danske Markets Equities: Hello. This is Oskar 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?
Jan Johansson – President and CEO: First of all, we had, as you know, Christmas, New Year that – with a lot of days without works. We had less invoicing days. I think it was 2.5% less invoicing days, but we have also increased (A&P) during Q4 compared to Q3. So those two together are the explanation.
Oskar Lindstrom – Danske Markets Equities: Should we – a follow-up on that, should we expect a smaller sequential decline than usual in Q1 then?
Jan Johansson – President and CEO: I mean I have given my comments on Q1 and you will see a seasonal impact in Q1.
Oskar Lindstrom – Danske Markets Equities: Second question; in the Tissue division, it appears your raw material costs came down sequentially. So would it be fair to say that your pulp costs brought them down during this quarter or are there other…?
Jan Johansson – President and CEO: Pulp costs really increased since the pulp price is going up, and we have a delay of 40, 45 days before we get it into the P&L, but it’s quite marginal, it has gone up so far I assume.
Oskar Lindstrom – Danske Markets Equities: So you are not looking at trying to increase prices for Tissue at this moment?
Jan Johansson – President and CEO: We will increase prices when raw material cost is increasing.
Oskar Lindstrom – Danske Markets Equities: Income from associates increased to, I think, it was SEK94 million, 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…
Jan Johansson – President and CEO: It’s mainly coming from Australia, largely if I remember rightly?
Lennart Persson – EVP, CFO, Head of Finance: Yes it is.
Jan Johansson – President and CEO: He is in the Board of that company, so maybe…
Lennart Persson – EVP, CFO, Head of Finance: So therefore it will continue to increase. We had some restructuring costs during the first half of the year. So that is the reason that you haven’t seen it during the second half. So hopeful I mean, if business is stable et cetera, we will continue to see that. In that line, we have also the share in earnings from (Zewa).
Oskar Lindstrom – Danske Markets Equities: So there was nothing exceptional in the Q4 results for associates that we should expect to differ going forward?
Lennart Persson – EVP, CFO, Head of Finance: It might come up some restructuring cost again, but not so much less we saw in the first half.
Linus Larsson – SEB Enskilda: It’s Linus Larsson with SEB Enskilda. 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 that you look in Q1 versus Q4, should expect nothing or is there some realized cost savings in the current quarter?
Jan Johansson – President and CEO: As we explain when we launched a program, it is a program on supply chain and that means that it will take some time before we have rearranged the supply chain. So, it will be a rather late, if you 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 all program we have some 105 million in saving on the 700 million program and analyze, we have 500 million of that program. So that will continue to tick. On the 300 launched in November, it’s annualized about 125 because we have 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.
Linus Larsson – SEB Enskilda: If I may come back for a second to the margins in Personal Care, we have this accident in Japan in Nippon Shokubai’s mill in the autumn of 2012, I wonder how you look at the supply/demand situation in super-absorbents, any price implications, any margin implication for you in the year to come?
Jan Johansson – President and CEO: We have our contract secured and we have a form for price changes and that related to oil prices, so we have not been impacted by the at all.
Linus Larsson – SEB Enskilda: But do you think you might be impacted.
Jan Johansson – President and CEO: Not as far as we can see today
Linus Larsson – SEB Enskilda: The just finally you did highlight your strong balance sheet. I wonder on the M&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.
Jan Johansson – President and CEO: We use some of it to increase dividend, but we are — acquisition is part of our growth, so we are looking for acquisition opportunities. Then, of course, you have to define what is big and small, but we are looking at that. That’s a possibility.
Josephine Edwall-Bjorklund – SVP, Corporate Communications: Right over here in the middle, and you will have a microphone.
Mikael Jafs – Cheuvreux: Mikael Jafs from Cheuvreux. One question on the raw materials and then couple of housekeeping questions. Since you were talking about or we are all 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?
Jan Johansson – President and CEO: If you look at the fundamentals, there is no driveway 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 five, six years everything depends on China, how they will act in terms of the 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 on pulp, and I think that resistance will continue.
Mikael Jafs – Cheuvreux: Then just a housekeeping question, what tax rate should we use in our models going forward now?
Lennart Persson – EVP, CFO, Head of Finance: As you could see, we saw some lower number, but I think some 25, 26 is quite okay.
Lars Kjellberg – Credit Suisse: Lars Kjellberg, Credit Suisse. Would you care to comment about what you’re seeing in terms of demand growth in your key markets in 2013? Also, there has been some recent noise about Procter & Gamble sort of stepping up and trying to be somewhat more aggressive into the market. You mentioned increased A&P spend sequentially in Q4, is that something you’re seeing continuing or is that happening somewhere else outside your geographies?
Jan Johansson – President and CEO: If we 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 Nordic countries is to keep pulp plant, so sort of in that perspective you are right. We’ve been quite successful for quite some years now. Demand on the market is, if you look at the Tissue demand, in particular in the away-from-home is typically growing with the 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 to 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 a region is growing from an economic point of view. So the only business we really see a real impact of the financial situation or the lack of growth is in Publication Paper.
Lars Kjellberg – Credit Suisse: If you working to add to take a guess on organic growth in the hygiene operations, what sort of number would you believe given your geographic al mix and that obviously excludes some impact from acquisitions.
Jan Johansson – President and CEO: Well 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.
Josephine Edwall-Bjorklund – SVP, Corporate Communications: Okay, I think we also have questions from the telephone, so operator could we open up for that please.is the technique working or…
Jan Johansson – President and CEO: So maybe we’ll have some…
Josephine Edwall-Bjorklund – SVP, Corporate Communications: Yeah while waiting, we have another questions from the floor. Yes, again here.
Oskar Lindstrom – Danske Markets Equities: This is Oskar Lindstrom from Danske Bank again. Just would like to come back to this topic of higher A&P spend in Q4. If I recall correctly, you had also what you described as a higher than normal A&P spend in Q1, but said that the full 2012 A&P spend level would be in line with what you’d had sort of normally. Should we expect your A&P spend to rise in 2013? Is that something you’re going to boost and able to promote top line sales or …?
Jan Johansson – President and CEO: It is in line with what we expected for the full year, but then of course we have also added Georgia-Pacific with some Consumer Tissue and even in away-from-home we do spend some A&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 what we communicated in Q1.
Oskar Lindstrom – Danske Markets Equities: Also a little bit on this topic, could you please comment a little bit on the competitive situation in the European hygiene market. You’ve consolidated the market, we heard back in – I guess, it was November that Kimberly-Clark would partially pullout of the European hygiene market, where it was present. Has this has any effect on how you perceive the level of competition?
Jan Johansson – President and CEO: It’s, of course, a little bit strange situation where the big American companies are leaving Europe. I mean Procter in Consumer Tissue and now Kimberly-Clark in baby and then tissue, and that is creating opportunity for us. Well, there is 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 France, Germany, et cetera. So it’s creating opportunities and we are becoming stronger at the same time because one big competitor is out of the market.
Josephine Edwall-Bjorklund – SVP, Corporate Communications: Then let’s have the mic in the middle again, and you will have a microphone coming from both ends it looks like.
Oskar Lindstrom – Danske Markets Equities: Yeah, on that note and obviously, you say one big competitor obviously exiting. Someone else is picking them up. Is that an issue we should be concerned of where private equities coming in or are the smaller private companies taking shares in the market?
Jan Johansson – President and CEO: They will probably sell some of their assets, but not all in all countries. So which means that it need to be refilled by something and that’s either a private label or supply with the 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. In different countries, this will be different solutions. But either way, it’s a strength for us because we are in both.
Josephine Edwall-Bjorklund – SVP, Corporate Communications: Now, it seems like the telephone line should work. So let’s try second time.
Johan Sjoberg – Carnegie: Starting off with the seasonal slowness that you’ll see now in Q1 this year, I remember last year we were very surprised by this seasonality effect. I remember you also said that you (boosted) top line for quite significant ASP spending during the first quarter which had a negative impact upon margins. Could you give us some more color what to put into our model here?
Jan Johansson – President and CEO: I think or I know that we are not going to do a similar exercise this year in Q1. So you will not see that sort of price on the cost side and maybe positive surprise on the volume side. So it will be more similar to the previous years because I mean if you five, six, seven, ten years back in time, you will always see that you have slightly lower sales in Q1. In report you can see it very clearly from Tissue and Personal Care that Q4 then slightly down Q1 and then up again. Hopefully, this stair will continue up all the time, but still you will have a slightly lower Q1. I can’t comment on anything of the level, but the normal seasonality.
Johan Sjoberg – Carnegie: If you look at Personal Care during the fourth quarter, you normally will see margins coming up though on the back of higher deliveries of incontinence product and now you said that AMP spending increased quite significantly. Would you say that this was a normal quarter when it comes to incontinence, fourth quarter that is?
Jan Johansson – President and CEO: Well, I mean except that you had fewer invoice days that clearly impacted all the business.
Johan Sjoberg – Carnegie: In terms of GP contribution for the fourth quarter you stated in the third quarter release that it had an impact of 182 million I think, you mentioned now a figure of their tax what is the EBIT for Georgia-Pacific for the second half.
Lennart Persson – EVP, CFO, Head of Finance: I can’t comment that. We had somewhat lower EBIT in the fourth quarter, but it is also coming from that we have and what should we say, it’s been working with acquisition balance, so now we have a more finalized even if it is (preliminary), we have a more finalized acquisition balance. So the depreciation level has changed between the quarters here.
Johan Sjoberg – Carnegie: So what is the running quarterly figure now going into 2013?
Lennart Persson – EVP, CFO, Head of Finance: We say that both, this quarter has been a bit impacted by the startup of the Georgia-Pacific. So now for the first quarter and from the beginning we had also this fair value market valuation of the inventories which has also impacted it. I will not give you an exact figure for where we are running into the first quarter, but I mean it is according to plan.
Jan Johansson – President and CEO: Another way of answering that is that even if you exclude 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 et cetera due to the union negotiations we have.
Johan Sjoberg – Carnegie: Final question here, the one-off during the quarter was quite high and I know it’s (flattish) and it’s the restructuring cost within Forest Product, but even taking this into consideration, so almost like SEK0.5 billion higher than what was communicated or guided for at least through these measures. What are those related to?