Essity AB (publ)

about Essity's half-year report 2020. My name is Josefin Edvall, Head of Communications for Essity. The reason for the earlier publishing date of this report is the uncertainty entailed by the ongoing COVID-19 pandemic. That's why we announced this today, July 13th. so today our president and ceo will go through the highlights in the report followed by a q a session where our cfo frederick rus that also will join so with this i hand over to you magnus thank you josephine and we are very happy about the performance

of the first six months this year. And I think it's more relevant than usual to take the first two quarters together, given the big volatility between the quarters due to the pandemic, as Josephine mentioned. And of course, sales were negatively impacted by COVID-19 and related issues. And still, in the first six months, organic net sales were down by less than 1%, while we see a significant profitability improvement thanks to better mix, significant cost savings, and of course, lower raw material and energy costs, which are offset by lower volume, higher distribution costs, and higher sales and marketing costs. And as you can see, adjusted EBITDA for the first six months increased by 32%. We also have a very strong cash flow and balance sheet after the first six months of the year, with operating cash flow improving with 50%. Moving then to the second quarter, the theme of today's press conference, we also had a strong underlying business performance in a very challenging and volatile environment. Sales were down 9.3%, impacted by COVID-19-related lockdowns, which had a bigger impact in the second quarter, and added to that also destocking and, to a smaller extent, slightly lower consumption in some categories, also of a temporary nature. So all of these are, of course, of a temporary nature. In spite of this, adjusted EBITDA improved by 170 basis points to 13.3%. And we're also happy in these volatile times to see increased market shares in many markets. It's difficult even for us to foresee and predict the growth month over month and quarter over quarter. And that makes it even more important to focus on the relative game on gaining market shares. And of course, also to be in the right and growing channels, which is very much the online channel, which is the fastest growing channel. And of course, we've seen this not only in our categories, but in many areas. Year over year, our online sales increased with 350 basis points so that they are now 14% of sales. And in spite of that certainty, we continue with our strong innovation pipeline. We have a number of launches that I will get back to in a second. And also worthwhile noting is that operating cash flow remains very strong, 4.3 billion, up 17% compared to the same quarter last year. And we have a very positive long-term development. And again, this is a reason to look at the first six months together rather than individual quarters. But even though, as you can see here, we had significantly lower sales, 9.3%, we continue to have one of the highest EBITDA margins we've had at 13.3%, significantly higher than the same quarter last year. And one of our best margins. And we'll get back to this. But of course, this is due to low raw material costs, but also a very strong cost consciousness throughout the organization and a strong price and mix. I mentioned the importance of winning in the markets in uncertain times. And some of you remember this picture from the capital markets day a few years ago. And we continue to see a positive development in the past six months and also long term. Overall, looking at our entire sales, we have number one and number two positions in around 90% of our branded sales, and that's both B2B and B2C. Moving then to retail, so B2C, we have specifically improved market shares in over 60% of these market positions in the last year. six months, and it's only really in retail or in the consumer part of our business where we can measure and follow market shares on these shorter time horizons. Looking at the entire portfolio again, we have improved our market positions in around 60% of our market positions in the past three years. And for those of you who remember this number from the Capital Markets Day a few years ago, it stated 50%. So we have improved our overall market positions. And it's also important to note that we have very strong market shares in many of these positions. Back to the numbers, the net sales waterfall, organic net sales down with 9.3%. All of this is volume, partly offset then by price and mix. And we have positive price mix everywhere except for consumer tissue where we have negative price. And volume, as we will see later, is mostly negative in professional hygiene, which was significantly impacted and also in medical, in personal care. We have a small positive contribution from the acquisition of the medical company Abigo in the first half of the year and still a small negative impact from the divestment of our Turkish joint venture. The adjusted EBITDA margin development compared to second quarter last year improved by 170 basis points. And we had a big improvement in gross margin of 320 basis points, where the largest contribution comes from improved and lower raw material and energy costs with 510 basis points. basis points. However, even in this lower volume environment that we're in currently or was in in the second quarter, we saw COG savings of 127 million, which were very happy and proud about. So altogether for the year, we're now at 387 million kroners. So getting close to the ambition that we have for the full year to be between 500 million and 1 billion kroners. So strong underlying COG savings even in these times. And the positive impacts are offset then by lower fixed cost absorption to a large extent and also higher distribution costs. AMP slightly higher as percent of sales, but actually in absolute terms, AMP is unchanged. So this is all due to the lower sales, while SG&A is actually lower in absolute terms due to cost savings or thanks to cost savings, but again, negative percentage-wise in relation to sales. Raw materials, where we always give an update on the coming quarter, and we don't expect any big swings. However, comparing then the outlook that we have for the third quarter compared to the third quarter last year, we expect personal care and consumer tissue to have to have lower costs for raw materials, while we expect stable costs for professional hygiene. Sequentially, we expect slightly higher costs for personal care and consumer tissue, and again, stable costs for professional hygiene. And even though we saw some slight improvements in several categories in June, we are still in the COVID-19 pandemic and we are sticking to our three top priorities, which we are executing in a very distributed and decentralized way because of the huge differences between different categories and markets, countries and the local circumstances. We stick to these three priorities, which have served us extremely well. And we've just finalized a big pulse survey or employee survey among our office workers, our colleagues working in sales and marketing, R&D and administration and so on. over 10,000 interviews and happy to see that our colleagues are highly engaged, highly motivated. They feel that the company is caring for them and they are very much committed to producing results also going forward, even though 80% of our white-collar colleagues are working from home currently. Moving over to securing business success, we have a number of proof points, very positive feedback from customers that appreciate our support, service and delivery reliability. Successful innovations, I'll get back to that. And of course, increased presence in the digital sales channels. And we can also see that there is a significantly increased awareness of hygiene and health that we are doing everything to benefit from. One example that you see there to the right is our ongoing efforts to replace air dryers with a more hygienic alternative, which is, of course, our dispensers and paper towel solutions. And this was a very, very strong quarter from an innovation perspective, starting with some of our big products, Tenna, where we have a new claim with higher absorption in a big part of our base assortment that is now being relaunched in the US. Torque, important launches when it comes to hand sanitizers, both freestanding, products, but also different sizes of the wall-mounted dispenser assortment. And to the right, and I'll get back to that, more launches in the torque peak serve range that are very important for the longer term for us. Then I would just like to highlight a few things more, especially JOBS, the voice expert, which is another digital tool that we're bringing to the market. And it's the first voice enabled measurement tool for measuring of the compression garments. And this is, we believe, a big support for those experts who currently need to take measurements of the body parts of the customers and patients, then move over to either putting that into a PC or a laptop or a phone or even writing it on paper. And now they can actually keep on measuring while they input the measurement data via voice. a world's first and a nice digital enhancement of our portfolio there. And then finally, of course, underlying everything that's going on in the short term, we still focus on sustainability claims. And here are some examples from consumer tissue where we are emphasizing that our moist toilet tissue is completely non-plastic and flushable. And also for the first time, we are launching a free-from or pure range in consumer tissue that you can see down there in the right-hand corner. And of course, we are adapting our messaging and our claims to the ongoing increasing awareness of hygiene and health with antibacterial products, repositioning some products to hygienic benefits. And just to mention Torque PeakServe, where we now actually can see that we will have a significant uplift in sales from replacing air dryers once markets are out of lockdown and when we see less destocking. So we are replacing many air dryers around the world. However, in many cases, in offices, in airports, in schools where there is no activity. So, of course, we're not getting the sales of tissue yet, but eventually we will see the benefits from that. And when it comes to the new launches of Torque PeakServe, We're launching a smaller model that you see there on the slide, which stands suitable for more bathrooms, but maybe even more importantly, a recessed version that's very much in demand in the U.S., where there are built-in cabinets in many washrooms. So it's a specific solution for a big demand that we see in the U.S., Moving then to the numbers again with some more detailed information starting with personal care. Organic net sales decreased by 9.4%. All of that came from volume while price mix was positive. Sales were negatively impacted by lockdowns and destocking. The big drop, as you can see down there in the right-hand corner, is medical solutions. Of course, all three segments are negatively impacted. Compression garments by the fact that it's not possible for those who require tailor-made garments to be measured. When it comes to orthopedic soft goods, the fact that people are not injured in sports or by age or other reasons while they are in lockdown. And also wound care, even though to a smaller extent due to that planned surgeries are postponed due to the COVID pandemic. So all of this had a big impact impact on medical solutions. More surprisingly maybe there was also a big negative impact on baby care that we see as completely temporary and due to the fact that a big part of our private label sales in Europe is in speciality sales channels that overall saw lower sales during lockdowns when consumers decided to go one-stop shopping in supermarkets that had full assortments. We expect this to improve quite rapidly. Overall, for all our consumer categories, we also saw a slight decline in consumption when people are at home instead of out and about, and we expect this to normalize rapidly. again, as markets move out of lockdowns. And we saw gradual improvement of sales in June in all the categories, but specifically in medical solutions. So the situation is normalizing here. And cost saving in lower raw material costs added to the margin development, offset by lower volumes and higher distribution costs. moving them to consumer tissue Very positive development, organic net sales up 4.3%, volume 4.9%, and price mix minus 0.6%. Mix is still positive on the back of innovations, while pricing is, as we have also presented earlier, slightly negative due to the price negotiations that we had late last year and beginning of this year, so in line with expectations. Higher volumes, and as you can see, a large part of that is from China and Asia that is moving out of lockdowns, but also a good development actually in Europe. And partly then the fact that people are spending more time at home, so using more consumer tissue at home, replacing professional hygiene tissue. Lower raw material and energy costs, significant contribution from that. And of course, with an adjusted EBITDA margin improvement of 750 basis points, a large part of that is lower raw materials and energy offset by higher distribution costs and slightly higher sales and marketing costs. And down in the right-hand corner, you can see the big difference between mature markets and emerging markets here. Finally, professional hygiene. where we had the biggest negative impact of the entire group with volume being down 32% offset by a very positive price mix. So we have a strong assortment and strong market positions. And the volume decline is entirely related to COVID-19 impacts, lockdowns and destocking. Breaking this down slightly more, our biggest category in professional hygiene is hotel, restaurants and catering accounting for 39% of sales. And of course, this was severely negatively impacted. And the second biggest accounting for 26% of sales is commercial buildings. Again, most offices are still empty in big parts of the world. And then the third biggest segments, public spaces, schools and so on, very much impacted by lockdowns. And in addition to that, destocking, we... communicated in the first quarter that there was a big stocking effect with our distributors in March and our distributors are still having high stocks but those are gradually decreasing. This will continue during the third quarter so also during the third quarter we will have a negative destocking impact from our distributors. Margin development, which was negative 430 basis points, could have been even more negative considering the big impact from lower fixed cost consumption. But this was offset by cost savings and lower raw material energy costs. On a positive note, we see higher sales of dispensers and skincare. And as I mentioned before, we expect this then to be positive for our sales in the longer term, even though we will have some negative impacts continuing into the third quarter. So to summarize... A strong underlying business performance in a very challenging environment, which resulted in an adjusted EBITDA margin improvement. Again, of course, the big impact from COVID-19, all of this is temporary, creating big variations between markets, between categories. and also over time. But gradually, I think we're getting out of this. We saw positive indications in June, so that over the next couple of quarters, we will step by step get back to normal. And when this happens, we will benefit from increasing market shares in many markets, the fact that we are very strong in online sales, and of course, in the longer term, just the fact that there is an increasing importance and understanding of this of hygiene and health. Thank you for listening.

Thank you, Magnus. Please, operator, open up the telephone lines for the question and answer session.