Essity AB (publ)

And welcome to Essity's third quarter interim report 2020. I'm Josefin Edvall, head of communications. And on today's call, our president and CEO, Magnus Groth, will go through the keynotes in the report, followed by a question and answer session where our CFO, Fredrik Rustet, will join. So with this, I hand over to you, Magnus.

Thank you, Josefin. And To summarize, I guess one of the highlights of this report is that we raise our target for adjusted return on capital employed from being above 15 to a new target to be above 17 by 2025 at the latest. And we will do this through a continued execution of our strategy, an acceleration of our digital transformation, and also through accelerated cost savings and efficiency improvements following a manufacturing roadmap program that we are announcing today. And of course, as previously already announced, the board of directors is proposing a dividend of 6.25 kronors per share. So that decision was taken during this fall. Moving over to the numbers, we have a number of segments affected differently. Some are positively impacted by the pandemic, some are negatively. Underlying, we see a strong business performance with improving market shares in most of our markets and category combinations combined with high cost efficiency and savings. Combined, this resulted in organic net sales 5.1% lower than the same quarter last year, but sequentially a big improvement as the impact of the pandemic has gradually eased in the third quarter compared to the second quarter. Adjusted EBITDA was down 1%. But in this, we see a big negative currency translation effect due to the strengthening of the Swedish krona. And adjusted for that, adjusted EBITDA would actually be up by 7%. Adjusted EBITDA margin improved to 14.4%, as we see one of the highest margins we have had over the last number of years. Operating cash flow was lower than third quarter last year. These are temporary impacts on working capital that we believe will gradually adjust going forward and adjust the return on capital employed close to the old target at 14.7%. The net sales bridge, organic net sales, was negative 5.1% with negative volumes in professional hygiene and personal care and positive volumes in consumer tissue. Price and mix equaled out to zero. We had positive mix everywhere in all our three segments and positive price also in professional hygiene and personal care while it was negative in consumer tissue. Moving over then to the adjusted EBITDA margin bridge, we see a significant improvement in gross profit margin of 240 basis points. Of course, this is helped by lower raw material costs. But also important cog savings that we're very happy about since we have, as you know, lower utilization in many of our production units. And still we were able to achieve 235 million kronor in the third quarter, adding up to 622 million kronors for the first nine months of this year. And these benefits were then partly offset by lower fixed cost coverage in our supply chain. AMP, slightly higher, both in absolute terms and as percent of sales. We have a lot of good innovation that we're supporting with advertising and promotion, while SG&A was lower on an absolute level, but due to the lower sales, higher as percentage of sales, but still shows that the very strict cost management that we are implementing everywhere also applies to SG&A. And we do see a positive long-term development. And I mentioned that sequentially we saw a big improvement in the third quarter compared to the second quarter. Medical, for instance, improved by 27% in the third quarter compared to the second quarter. Professional hygiene, 18%. And baby care, 14%. And this shows then in an improvement in... sales, even though it's negative, it's a move in the right direction. And we are able to retain EBITDA margins and also absolute EBITDA on historically high levels. So we're seeing a gradual improvement here going forward. And this is, of course, one of the important reasons why we have decided to raise our adjusted return on capital employed target, one of our most important financial targets, to above 17% by 2025. And the previous target was to be above 15%, which seemed like a big challenge when we set that target at the time of the split three and a half years ago. But we have concluded that over the last 12 rolling months, we have been well above 15%. And that's a very strong foundation for setting a new target. And we will talk about all of this. But basically, we see that we have a higher structural profitability level in consumer tissue. That's a good foundation for setting this higher target. Professional hygiene will of course gradually recover as the impacts of the pandemic eases and we see also improvement potential in personal care going forward and in addition the benefits from the digital transformation program and the manufacturing roadmap. With all of this combined, we feel comfortable that we will be able to move towards the new higher target of above 17%. And the other financial targets remain unchanged, where an important other target is to grow sales above 3% per year. So accelerating a digital transformation focus here is on enhancing customer and consumer value. What we see here is a big opportunity. We have invested significantly in our digital transformation over the last years. especially in e-commerce, in areas like procurement, in logistics, distribution and other areas. But we now see that to take the next step, we need to make bigger investments here in our digital platform. And with this, we expect to achieve automation in many parts of the value chain, simplification, economies of scale, that we will have access to higher quality data in real time, which gives us greater visibility and predictability to take the right decisions. And also eventually over time, and we're already implementing this in many areas, advanced analytics to improve everything from forecasting to planning to as a follow-up, of course, or a consequence of that higher service level and better customer service. We will invest 2.6 billion kroners, of which costs during 2020 to 2024, so over the next five years, but already started this year. And we will have a capital expenditure of 1.2 billion kroner. We expect to start seeing positive impact from this investment in 2022. And in the short term, we will work to offset the costs by savings in other areas. So a very important priority for us going forward. The manufacturing roadmap program, many of you remember the tissue roadmap that we initiated six years ago and that has significantly improved our tissue footprint, but also the efficiency in the individual mills. And now we're taking the next step, including also our personal care, plants and our medical plants and logistics and distribution with the aim to optimize and streamline all of our 60 wholly owned facilities with the aim of achieving world-class cost efficiency world-class quality and world-class service levels and in many areas we're already world-class but of course this is a moving targets and and we see many areas for improvement here And we believe that doing this will also contribute to our science-based targets initiative to reduce carbon emissions. We always talk about innovations and this is a quarter with a very high amount of product launches based on innovation work done over the last couple of years. And I will dig into a few of the examples here. Also on the cover of our Q3 report is the washable absorbent underwear that we're launching and have already launched in Latin America. This is very exciting. It is a product that has the same performance as a liner, but since it is then washable and reusable, the environmental performance is great, up to 77% lower environmental footprint than than a liner and of course a much lower usage of products. And we will launch this also in Europe beginning of next year in most of our key markets. Face masks, this is a new product offering as a consequence of the pandemic, something we had not contemplated nine months ago. So it's one of the fastest product development programs that we've done. We see that there There are many face masks around in most markets, but there's definitely a need both from consumers and from customers, retailers for high quality face masks supported by trusted brands. And also to... create order in this new category that is quite confused in many countries at this time. So we believe that this is an opportunity where we can build on our strong distribution, our strong retailer and customer partnerships and on our trusted brands. And an innovation that we've been working with for a long time and that I'm really excited about, Tena Smart Care, and we have been providing sensors in incontinence care products for a number of years, but quite cumbersome and expensive products that have not really been suited for for simple use but now we are launching something that's incredibly simple to use and it creates fantastic customer and consumer value and you can see there to the right 94% reduced time spent in an incontinence product nearing saturation and 86% reduction in unnecessary sleep interruptions so quite fantastic improvement opportunities here. and we believe that this removable and reusable sensor is so easy to use now with the apps that of course are linked to this that we are launching this not only in professional care but also in in home care and we believe that sometimes big innovations like this are more difficult to actually launch in a professional environment because of reimbursement systems and so on, while we do see that this will be the new normal in a few years' time, also in home care for, for instance, caretaking relatives. So we're really excited about this, and this is launching now on a broad scale, both in Europe and in the U.S. then moving over to then numbers here starting with personal care organic net sales decreased one and a half percent and as you can see there at the right hand bottom this was in all product segments except feminine care which was more or less flat and sales were negatively impacted by covid 19 and lockdowns want to underline again the significant sales improvement for medical solutions and actually behind these we see some very encouraging signs where In the quarter, the wound care part of the business actually grew compared to last year. And in one of our key markets where we've been working hard to restructure and to improve in Germany, we also saw higher sales than a year ago. So we're seeing very encouraging signs here in medical solutions and a big improvement to the previous quarter. We had lower volumes, but we had higher prices, better mix and cost savings in most areas, and also support by lower raw material costs. Sales and marketing costs were higher as percent of sales. We continue to invest, of course, behind all these categories. And part of the explanation by the lower organic net sales is in the exit of baby care in Russia, our latest cure or kill effort, and actually also in North Africa, where we were working through a joint venture since many years that we left after the end of the quarter. Consumer tissue. Organic net sales increased by 2%. Volumes were significantly higher, price mix negative. We have now been working in our consumer tissue business for quite a number of quarters here with quite low pulp prices and with high market prices. And gradually we are adapting our price levels in the... impact on price that you see here is a combination of lower prices that were already agreed in earlier quarters so there's no changes there, there are no new price negotiations and higher promotional levels partly in Europe and partly in China while we saw higher prices in Latin America following currency depreciation and as you can see up in the right hand corner there adjusted EBITDA margin remains on a historically very high level 16.3% Finally, professional hygiene, organic net sales decreased 21.4%. And I want to underline that 80% of our business in professional hygiene is very much impacted negatively by the pandemic. And these 80% consist of hotels, restaurants and catering, 39%. Commercial buildings, 26%, such as offices. Public interests, such as universities and schools. And then, of course, we have airports and other places that are also significantly impacted by lockdowns and by restrictions. So all of that said, we think that organic net sales decrease of 21.4% is, of course, a big setback, but very much a consequence of market conditions. And actually, I think that the organization is doing a fantastic job, and we'll get back to that, in mitigating this And in also managing price mix that you can see is positive here. And taking initiatives to gradually come out of this. And we saw that already in the third quarter compared to the second quarter and improvement with 18% in sales. And as you can see that... mature markets and emerging markets were almost similarly affected with big local variations during the quarter. So, a few more words about professional hygiene and the actions we are taking to recover. One is, of course, to shift our segment focus towards segments like healthcare and industrial, where there is still a high consumption and, to some extent, an increasing consumption. to drive services and solutions where we have a big competitive advantage with our sensor-enabled solutions, for instance, compared to competition. Accelerating e-commerce, there is a big shift and we are following or taking the lead in that shift. Accelerating skincare, currently 3% of sales, but we see a big opportunity here going forward. And we do see that there is a higher usage of soaps and... other skincare products and of course recovering in hotel restaurants and catering and taking the opportunity to grow market shares even further there anticipating the gradual improvement in that area. Converting air dryers, last quarter we reported that we had converted air dryers to tissue or hand towel dispensers to an annual business value of 5 million. And we achieved another 5 million in this quarter, so that adds up to 10 million so far this year. new product launches and of course very much supporting torque peak serve which grew 66% in the quarter compared to last year and cost reductions to protect margins. And I thought this slide could be interesting to show we're starting to get substantial data now from our sensor-enabled dispensers and these are just some examples so you can see an airport up there in the left hand corner and the consequence of lockdowns and reduced traveling underneath office buildings more or less empty people working from home i guess many of you listening today are are working from home you you you see this you experience this also privately, while slightly more encouraging trends there in a department store and a shopping and entertainment center. And of course, this is very, very useful data, not only for the customer, the facility management company, but also for us. And one new service that we are launching this quarter that we're excited about is automatic replenishment service. So the system sends a signal to the facility manager when it's time to replenish the professional hygiene tissue stocks. Here's some other outcome from that data. This is the consumption per visitor in thousands of dispensers that are in use then, in buildings that are actually in use. And it's interesting to see that per person there is a significantly higher consumption of skincare products, so that's hand sanitizers and soaps and also hand towels. And I guess that the reduction in toilet tissue per person is not that the individual is using less toilet tissue when needed, but that they enter the washrooms actually just to clean their hands and then to leave again. So a lot of interesting data coming out of our products now. And of course, we are working hard to continue our air dryer converting campaign. And here are some taglines, gambling with hygiene, making the safer choice, play it safe and so on, which is very much playing to the benefits of paper towels. And approximately 20% of the hand drying market today is jet air dryers and hot air dryers. So that's an opportunity of about a billion euros that we are gradually then eating into with these types of campaigns. So to summarize, We have today raised our target for adjusted return on capital employed to above 17% by 2025. That's up from the previous target to be above 15%. The other financial targets remain unchanged. We will accelerate our digital transformation with an investment in a new digital platform that will transform how we work in the company with higher automation, better data quality, all leading to an improved customer and consumer experience. We are also launching a manufacturing roadmap program looking at all our approximately 60 fully owned plants. And we do see a strong underlying business performance in a challenging environment where different categories and product areas are implemented or are affected in different ways. And of course, the dividend proposal that will be decided in an extra shareholders meeting next week on Wednesday. Thank you for listening.

Thank you, Magnus. And operator, please open up for the Q&A session.