Essity AB (publ)

And welcome to Essity's presentation of our Interim and Q1 report for 2020. My name is Josefin Edvall and I'm head of communications for Essity. Today, our president and CEO, Magnus Groth, will go through the highlights in the report, followed by a Q&A session where our CFO, Fredrik Rystedt, will join. So with this, Magnus, I hand over to you.

Thank you, Josefin. And for the first time, we are making this presentation from various locations, so that will be very interesting. I am making this presentation from home. So, summarizing the first quarter, we entered a year of great uncertainty with a fantastic Q1 performance. We saw a strong increase in net sales and earnings, as we have also previously reported. This is partially a consequence of the COVID-19 crisis, of course. And that's evident from the fact that we had a sharp sales increase in March of 19.7%. And that's really the first month when we saw a clear impact from the pandemic. And before that, we could see that we entered the year actually with a very strong underlying business performance. So gaining shares in more markets and categories than we've done previously and with a very strong innovation and launch program ahead of us. So we had a good start and that was further strengthened by the impact from the pandemic. This resulted in higher volumes, a better mix and cost savings in all areas. We saw lower prices in one business area, consumer tissue, but higher prices in personal care and professional hygiene. And we also had lower raw materials and energy costs in all our three business areas that had a big impact on gross margin, a positive impact. In the first quarter, we saw increased sales and marketing costs compared to last year, partly to support the ambitious launch and growth program that we have. but also due to low numbers comparatively last year. Just looking at some of the numbers here to the right, operating cash flow was twice of last year at the 4.481 billion kroners, and earnings per share almost doubled as well to 4.61 kroners per share. And even though this was an exceptional quarter and March an acceptable month, we have been on a positive trend now for some time as is evident from this slide, which shows the quarterly development over the last couple of years. Net sales increased with 10% and organic net sales with 7.8. And as you can see here, volume accounted for 5.9% of the increase. And in starting with personal care, we saw volume growth in all categories except for medical. And in consumer tissue, we had very high sales growth in Europe in that time and significantly lower sales in China with Vinda due to the fact that they are at a different phase, as you know, of the pandemic. And in professional hygiene, finally, we had higher sales in Europe, Latin, and not least in North America. And for the same reason, lower sales in China. So a very positive volume development, which also actually, we will talk about that on the next slide, has a positive fixed cost absorption with a positive impact on the margins in this quarter. Moving over to price mix. All business areas, again, had a positive price mix, and the only category with lower price is consumer tissue in Europe and China to the extent that we have previously communicated, so small negative impact there. The divestment we did last year in Turkey, a joint venture, which is part of our cure-or-kill program, And then we had a positive impact by the weakening of the Swedish krona. Moving over to adjusted EBITDA margin, we decided to present in a slightly different format this year, focusing on the impact on gross profit margin, which increased by 560 basis points. And the majority of that comes from lower raw material and energy costs, 470 basis points. And Out of those 470 basis points, a large part is pulp prices, but also recycled fiber and oil-based materials were lower in the quarter and energy. We had a very good start to the year when it comes to savings in cost of goods sold with 260 million kroners. And this is to a large extent from raw material savings and raw material rationalization. So we're happy that we can continue to work with even when our facilities are operating flat out and when they are more or less closed to different types of new projects since we are focusing on keeping the staff safe in the plants and the machines running. And as you know, our ambition for the year is to have COG savings of between 500 million to 1 billion kroners. So it's a good start and we see more opportunities going forward. Moving over then to AMP, we have a negative impact of 30 basis points. This is partly because we had a tough comparison with last year when we had very low AMP of 4.9% to sales. This year, it's more normal 5.2% and a slight positive impact from SG&A. And again, SG&A and some other parts of our costs are, of course, positively absorbed by higher sales. So the extremely high sales in this quarter has also added to margins in this picture here. Then moving over to raw material development, after a long period now of declining prices we're starting to see, as is evident from the graphs here, that price starting to level out or even increase slightly. So starting then with the usual outlook for the next quarter, quarter two, and starting with what we foresee a quarter over last year's quarter, we expect to have lower raw material costs in personal care and lower raw material costs in professional hygiene. in the second quarter compared to the same quarter last year. And in consumer tissue, we expect to see significantly lower raw material costs in the second quarter compared to the same quarter last year, even though there is a negative impact from currency in all the three business areas. Then comparing sequentially, so Q2 this year compared to Q1 that we just had behind us, we expect to see higher raw material costs in personal care and the negative currency transaction effect, even though we see slightly lower costs for oil-based materials. So this means that we expect higher fluff pulp prices. For consumer tissue, we expect higher raw material costs and also negative currency effect and the same for professional hygiene. As is also evident again from the graphs, there is a slight increase now in pulp prices, while when it comes to energy, and there's also a seasonal effect, we foresee slightly lower energy costs sequentially, but also compared to last year's second quarter. And in spite of everything that's going on, we focus on innovations and the long-term importance of hygiene and health. And of course, this is just increasing with what we are experiencing now. And here are some examples, starting to the left there with the new face of Tana, much more modern, more feminine. Here are some examples of a new black Tana liner and also a fully breathable liner that we're launching now, adding to our already very strong Inco retail portfolio. When it comes to wound care, we completely modernized our Leukoplast brand last year, and we are adding products in the skin-sensitive range, which is important, especially for older skin. And here's an example of a product that is managing or reducing the amount of bacteria. It's waterproof, but also skin-sensitive in the adhesive. Then, moving right, we have two innovations that are both focused on sustainability, and of course that remains as important as ever before. So starting with the feminine brands in the middle there, we are making new claims on PAC that all our paper-based packaging will now be based on recycled fiber, and our plastic packaging We'll have at least 50% of the plastic coming either from recycled fiber or plastic that has come from renewable sources. So that's a strong claim when it comes to sustainability. And Tempo, where we have changed the plastic that's usually in the opening of these facial boxes to paper so that the package is 100% paper going on. And then, of course, to the right, we have moved extremely quickly maybe quicker than ever before in adding a completely new category starting to produce face masks in China and now also in Sweden and eventually also in Mexico and in North America and initially we're doing this to protect our own employees but we see that there's a large demand from the healthcare sector and we believe that there could eventually also be opportunities in retail and this is something we're looking into currently. Now, moving over to the three different business areas, starting with personal care. Organic net sales increased 8.8%, a combination of volume and price mix. And as in the other business areas, a very sharp sales increase of 17%. So the stocking up or stockpiling that we saw was not only related to consumer tissue or toilet tissue, we also actually saw stockpiling in feminine, in baby care, and in incontinence care, so in all categories except medical, resulting in higher volumes, higher prices, better mix, and cost savings, with exception of medical. And as you can see down in the right-hand corner of this slide, we had around zero growth for medical solutions, and we started out very strongly the first couple of months of the year. And then, actually, this is the category that is negatively impacted by COVID-19. The reason is that we're active in three different subcategories, as you know, and two of them are adversely affected by the ongoing crisis. First of all, when it comes to compression, our customers and consumers are not able to to reach the medical device stores, the health care centers or the hospitals where they need to go to fit new compression garments. So that has a negative impact on the compression part of the business. And when it comes to orthopedic soft goods and the orthopedic part of the business, which is also approximately one third of medical, that's negatively affected by the fact that people are staying home, which means that they are not becoming injured to the extent that they normally are in sports or because of age or for other reasons, while the third part of medical solutions, wound care, is relatively stable and not influenced by the ongoing pandemic. And we expect, of course, this negative impact to continue now in the coming quarters. Lower home care costs, as I already mentioned, explained. We have that in all the three business areas and also higher distribution costs in all three areas. This is related just to added complexity of border crossings and difficulties in rush orders, for instance, to some retailers in order to cope with very high demand and managing service levels. We also have increased sales and marketing costs behind innovation and in addition to due to the medical device regulations that was supposed to come into play now in May. This is postponed by one year. We just heard this morning it really doesn't influence S&T. We were well prepared for actually managing these regulations already this year. Then on a very positive note, after a couple of years of focusing on organic growth, we acquired two very important companies, Abigo Medical that is the provider of the technology for our advanced wound care products and in itself a very successful and rapidly growing wound care company based in Sweden. And a small technology company Novioscan based in Holland, which we see as an important technology development in managing incontinence or continence. Looking maybe just one final comment on this page on Femcare, I just want to underline, you can see the growth there of 15.5%. And we have been growing share in most markets and most parts of Feminine now for a number of years. And this last quarter, we actually grew in every market where we are present. And I don't think that ever happened before. So continue to have a great momentum in Feminine Care. Moving over to Consummate Tissue. Organic net sales increased by 4%, 4.3%, which looks very strange considering the stockpiling that we've been seeing. But of course, this is explained by the completely opposite picture you see down in the right-hand corner to what we're used to, where mature markets grew by 8.9%. And this is the stock up that I mentioned, while the emerging markets had two very opposite impacts. LATAM had a fantastic quarter growing really nicely, but this was completely offset by Vinda and Asia, which declined by nearly 13%. So that explains the total growth of 4.3%. The impact on adjusted EBITDA is nearly doubling from 1 billion to over 2 billion. And again, there are some positive absorption effects here where we had Very high volumes, like in Europe, for instance. And a huge impact on EBITDA margin, also positively up to 16.9%. Of course, this was very much helped by lower raw material and energy costs. And again, partly offset by higher distribution costs. Finally, professional hygiene. And maybe this was the most... I shouldn't say confusing, but surprising development. We entered the year with a very, very strong product portfolio, great innovation, and had a good development in January and February. And then in March, sales increased by 24.5%. And so actually, it increased more. There was more stockpiling in professional hygiene than in the other business areas. And this is We believe due to the fact that distributors felt unsure if suppliers would be able to continue to supply. So we saw significant stockpiling here, which is a little bit contraintuitive and surprising. And of course, this has a huge impact positively on net sales, adjusted EBITDA and the EBITDA margin, which came in at 17.5%. I think we have the same impact I mentioned before. Higher volumes better mix higher prices and cost savings combined with lower raw material and energy costs, higher distribution costs. We also saw higher increased sales and marketing costs following low costs last year and again, ambitious launch initiatives. Going forward, we do expect lower volumes due to the fact that fewer people are going to restaurants, staying in hotels, and working from home and not working from offices, this will have a negative impact. And we saw that in China, for instance, in the first quarter, where professional hygiene had a big drop in volumes in the first quarter due to lockdowns. Moving to the right-hand bottom corner again here, the total growth of 12.2% again had a strange breakdown of mature markets growing faster than emerging markets. But again, the same explanation for the slow growth in emerging markets where Latin America grew by 23% while Asia declined by 34%. So big swings here, and that's something that... It's difficult to forecast and something we will just have to see how this works out going forward over the next couple of quarters. And before moving to the summary then, COVID-19, what are we doing? Well, first of all, of course, we are active in providing leading hygiene and health solutions. So we are currently focusing very much on providing our consumers and customers with hygiene and health solutions that can help them in fighting this pandemic and doing everything we can then to keep on producing and helping our consumers. In some areas, we have historically already made great efforts, for instance, in educating healthcare professionals and also children in the importance of hand hygiene. And we have doubled those efforts, of course. We also started manufacturing surgical and face masks in several geographies. And we are supporting different NGOs, both locally and centrally, among them the World Health Organization, which we believe are doing a very important job. And with all these fantastic efforts from our employees, I can't thank them enough. We are getting a lot of positive feedback from customers, retailers, distributors, but also end customers appreciating the support and service levels that we are providing. And we believe that this are making us winning the relative game. So even though there are huge uncertainties, we believe that we are benefiting from this in the long term compared to our competitors. Even though our focus right now, of course, is to care for our people contribute to society and thereby secure business success. So summarizing, a strong increase in net sales and earnings, which was to a large extent a consequence of COVID-19, but we do have a strong underlying business performance. We are back in acquisition mode, as visible from the acquisition of Abigo Medical and NovioScan. And we believe that even though we're living in a period of high uncertainty where safety comes first for our employees and when it comes to managing this situation, the increasing importance of hygiene and health for the long term is something that will help S&E develop and be successful also in the long term. Thank you so much for listening. And with that, I hand over to the operator to open up for questions.

Thank you, ladies and gentlemen. We will now begin the question and answer session. If you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, that's star and one if you wish to ask a question. And our first question comes from the line of Christian Koffer from Nordea. Please go ahead and ask your question.