Essity AB (publ)

Okay, good morning and welcome to this webcast of S&P's quarter one financials. And during this meeting, I will also give more information on the manufacturing roadmap and I will be joined by my colleague Pablo Fuentes to give more information on the strategic acquisition of Familia in Latin America. So with that, I think to start to say that We have spent this quarter positioning S&P for profitable growth. It's been a quarter where we had maybe a quarter ago expected a quicker opening up of markets and improving market conditions. And instead, we saw, especially in Europe, tougher restrictions and tougher lockdowns that continued for longer than we had anticipated. Even so, we also see where things have started opening up, not least in China, where we see business volumes that are not only much higher than last year, but also even higher than in 2019. So business returning very much to normal. And we've also noted now at the beginning of the second quarter an improving market condition, especially in the United States. And we expect that with the now accelerating vaccine programs, In most of our important markets, we will see a gradual improvement also, step by step, in Europe. But we have not spent this time waiting for market conditions to improve. We've been very busy increasing our ownership in familia, concluding or signing an agreement to acquire AzaleoCare. We have been growing market shares in more categories and markets than ever before, so making sure that we are prepared for the gradual improvement in market conditions. E-commerce continues to become a bigger part of our business also in the first quarter. And as we get back to manufacturing roadmap, puts us on a path to continue to generate efficiency improvements, but also a better service level and higher quality products for the future. So starting then with the increased ownership in Familia. So Familia is a partner with AdCity since 1985. It's a highly innovative and very consumer oriented company. And actually we have learned a lot from this joint venture over the years. But now is the time to take full ownership. And we believe that during this, we can become the fastest growing hygiene and health company in Latin America going forward. And as you can see here on the map, it's a very, very complimentary acquisition from a geographic perspective. The transaction before the transaction, S&T owns 50%, but actually consolidate both sales and earnings fully to 100%. So the impact on our financials is on earnings per share, which will be accretive already this year. However, the bigger benefit comes from the synergies by combining the joint venture business with our existing Latin American business. And we see that this will give good opportunities going forward that Pablo will talk more about. You can see some of the numbers here. And worth noting is that Familia has a very, very attractive EBITDA margin, partly because of their mix, but also because of their very strong portfolio. and also a good growth even last year when many of Familia's markets were very severely restricted by lockdowns. So with that, I would like to hand over to the president of Business Unit Latin America, Pablo Fuentes, to describe the transaction.

Over to you, Pablo. Thank you, Magnus. As you can see on this slide, Familia represents 6% of ACT global sales, and Colombia and Ecuador are the two most important markets with 71% of the sales, but Familia also has presence in many other countries in South America. From a category perspective, as we were saying, more than 60% of the sales are in what we call personal care, which is feminine care, incontinence products, and baby care. And Familia also has sales 31% in consumer tissue and 7% in professional hygiene. When it comes to market positions, Familia has very strong market positions in the markets where it's present. In feminine care in Colombia, market share is 68%. In consumer tissue, market share is 48% with the Familia brand. And in incontinence products with a TENA brand in Colombia, market share is close to 90%. So really very strong market positions where Familia is present. Familia has a quite broad range of products in the different categories. In the case of feminine care, with the brand Nosotras, it has a portfolio focused on menstruation towels, but also on daily intimate care products with liners, washes, washable absorbent, underwear, and wipes. In consumer tissue, it also covers very different segments, including very successful premium assortment. In the case of baby care, it has open diapers and pants, covering different assortments, including successfully the premium positioning. In the case of incontinence products, it follows the successful global leading TENA brand positioning. And in the case of professional hygiene, it is a combination of torque, global products, but also very successful local products and adjacencies, including skin care. Through the ownership in familiates process, SET will have access and will serve more than 600 million people in Latin America in markets where consumption per capita is still low, and we expect as middle class grows and consumption and income per capita increases, these markets will continue to grow. It's mainly a branded region, and the go-to market is split evenly between modern trade and traditional trade. In Latin America, We have been very successful in traditional trade, where we have very strong distribution in the millions of mom and pop stores with our very strong brands. We also see a changing retail landscape with emergence of e-commerce, and we are very proactively leading into e-commerce with our digital transformation programs. As we are building a more integrated region in Latin America, our aspiration is to be the fastest growing hygiene and health company. We will do this with a faster execution across Latin America, now with the ownership of Familia, leveraging innovation capabilities, strong brand equity and entrepreneurship, accelerating on the digital transformation and increasing constantly our e-commerce sales, optimizing efficiency across the value chain, and very importantly, geographical expansion and cross-selling synergy opportunities with our medical solution business. Back to you, Magnus.

Thanks. To give you a compliment, Pablo, already the business that you are running through Familia, but also the fully owned business in Mexico and Brazil and other major geographies is developing extremely well with leading market positions and a very strong development. So thank you for that. And we're really excited about the next steps in Latin America going forward. With that, we move over to the financials. And as I mentioned at the beginning of the presentation, this quarter has been very much impacted by lockdowns and restrictions, especially in Europe. While I always want to also emphasize that we see how quickly the markets can recover when they open up again, Vinda, that also announced the results today, is a good example of that. And we also see gradually improving market conditions, for instance, in professional hygiene in North America in the beginning of April. But for the first quarter, organic net sales were down close to 10%, and approximately half of That decline is due to the tough market conditions in the first quarter, and approximately half comes from very tough comps with the first quarter last year. As you remember, this was a very high sales quarter for us due to stockpiling, panic buying in anticipation of the pandemic rolling out across the world. Adjusted EBITDA margin, very much following then lower production volumes. It was down 270 basis points to 13.1%. and adjusted return on capital employed was down to 13.5%, so very much impacted there by the margin decline. Again, we see some bright spots in all of this. Emerging markets continue to grow, and we see that the vaccination programs are now rolling out at an accelerating pace in most of our main markets, and that this should lead to gradual reopening of markets here in the next quarters. The adjusted EBITDA margin when it comes to gross profit margin was primarily impacted by lower production volumes, of course impacting fixed cost absorption, but also higher distribution costs. AMP was higher, both as a percentage of sales, but also actually in actual terms. We continue to accelerate through the curve here. We want to position ourselves for the reopenings. We continue to invest behind strong innovation, and I have some really good examples on the next couple of slides here coming up. And SG&A was lower. Of course, we are, as always, being very prudent about our costs and trying to save costs wherever. So this was lower in total, but higher as a percentage of sales as sales came down. Talking about innovation, it's a very strong quarter. And to highlight one thing here, to the left on this slide, we now have three categories where we have launched reusable products. So the first example is the Torque microfiber cleaning cloth, so a reusable product. We're also launching the washable, reusable absorbent underwear that we mentioned in the last quarter, not only in Femcare, but also in incontinence care. And we're also launching menstrual cups under the Libres brand in the Nordics. And we will see more of these examples going forward, part of our sustainability journey and very much in line with also consumer expectations and consumer needs. To give some more detail about our e-commerce growth that continue to grow year over year, it's for the first quarter accounted for 13% of group sales, which is up 14% compared to the same quarter last year. And as you can see here, it's a mix of the pure players. That's very much represented by Vinda and China and then the multi-channel players, that continue to dominate the online channels in Europe and then Latin America growing quickly from a low base. And this comparison actually has a negative impact from professional hygiene having a negative sales development in the first quarter since we have a high share of sales online in professional hygiene. So as professional hygiene comes back, this will grow even faster. I spoke about the market shares. It's so important during these volatile market conditions. Whatever happens with lockdowns, restrictions, uncertainties, are we winning the relative game against our competitors? And yes, we are. We continue to hold a very high number of number one and number two positions. And we are strengthening our market shares in more countries and in more categories and with more brands than ever before. This continues to be a key focus for us during this time. And now something about the manufacturing roadmap. And we discussed at the end of the third quarter that we would give more information about the manufacturing roadmap today. And this is a follow-up on some of the very ambitious programs we have been running over the last five, six years, not least tissue roadmap and the cure or kill program and the manufacturing roadmap is a very holistic approach to how we work with our 60 fully owned production facilities in throughout the world and it's organized in four different areas where, of course, efficiency is incredibly important, cost efficiency, but just as much as sustainability and the impact from digitalization. So just a few examples, and I've spoken about this many, many times. Optimization of footprint and production efficiency is both about having the right sized plants in the right place but also having the right assets in the plants and utilizing them to the highest possible extent. And we've done a lot of work and improvements in consumer tissue over the years and to some extent also in professional hygiene. And now we are taking this thinking also to our personal care business. taking a renewed look at our tissue businesses. Digitalization facilitates efficiency improvements. I've spoken about prescriptive maintenance based on sensor technology. We've spoken about process control based on sensor technology that not only increases efficiency, but also product quality and service level. Sustainability and breakthrough technology, it's becoming more and more clear that we need to transform how we make tissue and And the footprint that we leave, of course, by doing this. And we are involved in a number of projects in order to reduce our dependency on fresh wood pulp. And one of them, you know, it's the Columbus project that we're starting up this summer in Mannheim. It's about reducing fiber content, using alternative fibers. to an increasing extent using enzymes, replacing the highest cost fibers. And we have many initiatives going on there. And then integrated supply chains. And we are reorganizing, putting the entire supply chain from when the raw material comes into the plant until the finished product reaches the customer into one organization in order to make sure that we optimize the entire flow here from a demand and supply planning and efficiency standpoint. which will have benefits on working capital. So what will all of this bring? It will bring benefits in a number of areas. Over the last years, we have provided an estimate or an ambition level when it comes to cost savings and cost of goods sold on an annual basis. based on what we have in the pipeline. But after having done this exercise, we can now report that we can sustain this high level of annual savings for the next four or five years until 2025. So a savings rate of between 500 and 1 billion per year. We will also be able to optimize our capital expenditure by using the assets we have more efficiently. And maybe some of that capex can be saved or be invested instead in sustainability initiatives. We have set the target to reduce working capital with 1 billion by being more efficient across the entire value chain. And we have projects in place or looking at opportunities to reduce our pulp price volatility exposure by over 10% through different projects during the next five years. And all of this will also lead us to be able to achieve our ambitious science-based targets in a shorter time period. And just as an example, I will show a very short movie about what we're doing in manufacturing.

Today we are starting a large-scale test with biogas, which is one step in line with our ambition to be completely free from fossil emissions. So it's a big day today. We save about 9,000 tons of fossil CO2 emissions through this change. It is also a proof of the company's and the company's level of ambition. I am proud of the employees. It's always the most fun to be first. It also signals both an ambition and a courage, I would say, that you dare to lead in certain important issues. It does a lot for the group and for the pride and for the company. I think it's a very important thing. There's a big difference between being first and being second.

Okay, yes, I think that takeaway was clear. It's a big difference being first or being second. And of course, we aim to be first in this area as in every other area. So with that, a few slides on our three different business segments, starting with personal care, where sales were negatively impacted by restrictions and lockdowns. And of course, the tough comparisons mentioned already. A highlight here is improved underlying growth in medical solutions. And again, another quarter with positive growth in wound care. In orthopedics, we still see a very negative impact from a lost ski season, for instance, that of course has a big influence on growth. And in compression, improving but still restricted by healthcare focusing on COVID treatment in many of our big markets. Strong margins. We are preparing price increases and the vaccination programs are expected to improve the growth there. When you look at some of the negative growth numbers down there in the right hand corner, it looks quite significant. But we have to remember here that in incontinence care, for instance, last year, We grew in the same quarter with over 11%, which was to a large extent, of course, stockpiling. In feminine care, we grew over 15% and in baby over 5% last year. So very difficult comparisons. And baby, in addition, was negatively impacted by the formats where we are strong. Pharmacies primarily being impacted by lockdowns and restrictions. Moving over to consumer tissue, very much the same story. Tough comparisons due to stockpiling in Q1. Strong branded sales growth, but a quite soft growth in private label. We see high sales in emerging markets, not only in Vinda and in China, but also in Latin America. And we continue to work to improve the structural profitability and pushing very... aggressively, I would say, for price increases. And to elaborate a little bit on that, last time around in 2017 and 2018, some of you followed Essity already at the time, there was quite a delay before the tissue supplier started raising prices because of anticipation of of a softening of the pulp prices. This time that's not the case because the pulp prices are increasing faster than before. And instead of waiting a number of quarters to see what happens, we have been very active also using a press release to announce to our customers that we are going out broadly with price increases. We're seeing price increases already in Latin America and to some extent in Europe. and expect a small positive impact in the second quarter, but then primarily in the third and fourth quarters. And this time around, we believe that it will take around three quarters before we have fully recovered margins from upcoming negative impacts from raw materials. So much faster than before. And as I've stated many times, we're willing to do what it takes to increase prices and compensate as fast as possible. And there is a much stronger momentum also in the tissue industry For a number of reasons, but the main reason is that the supply and demand balance is much better than it was three or four years ago. And from an SCT perspective, we have a stronger product portfolio based more on our brands than we had three or four years ago. So we will manage this. It will always be part of our business. And we feel very confident about this cycle as well. Finally then, professional hygiene, which has had the biggest negative impact. As you can see in mature markets, minus 31.5%. Remember that most of our sales are in hotels, restaurants, catering, commercial buildings, public buildings like schools that are highly affected by lockdowns and restrictions. In previous quarters, we saw this through the pandemic. We saw this in North America, in Latin America, in other markets, but for the first time also significantly in Europe. So actually the worst quarter we've seen so far during the pandemic. But again, we're preparing for a strong comeback. This partly explains the lower cash flow we had in the quarter. We have been growing our stocks a little bit in anticipation of opening up of markets, being able then to deliver with high service levels when that happens. And also here we are preparing for price increases across the line. This is just to give some flavor of what we're seeing now in the U.S. The graph to the left there is how bookings on OpenTable.com, which is a widely used booking system in the U.S., declined compared to 2019, first in 2020, and then in the second peak year. end of last year, beginning this year, but how things are improving now in the last couple of weeks. As you can see there, the curve moving up again, getting closer to 2019 levels. and also as we are anticipating in general higher consumption per person of hygiene products here's an example from our sensor-enabled dispenser system showing that one in three people are actually today visiting washrooms public washrooms just to wash their hands which was not very common before the pandemic so priorities accelerate sales increasing prices, continuing on our long-term journey with innovation and expanding customer and consumer offerings. We continue to work on the structural profitability now with the manufacturing roadmap, digital transformation, and to continue to lead in sustainability. Thanks for listening. Let's open up for questions. And I will be joined during this Question and answer sessions by Fredrik Rustet, our CFO, but also by Pablo Fuentes for any questions you have about the Familia acquisitions.

Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the hash key and please stand by while we compile the Q&A queue. And your first question comes from the line of Celine Pannuti from JP Morgan. Please ask your question.

All right. Good morning, Magnus. Good morning, everyone. My first question is on what you just said on raw material, where you see the outlook increasing. Could you give us some guide on what to expect into the second quarter? by division, as we usually do, and, you know, maybe a guide for the remainder of the year. And my second question is going to be on pricing. You did announce these price increases, and you are talking about mid-single-digit pricing. Is this the realized price, or is it your least-priced increase? And are you able to give us a bit of... of background about how this is happening in Europe. You said that Latin America, you already see some pricing, but should we expect Europe to be a bit later on in terms of price realization? Thank you.

Yes. If I start with the pricing, maybe, Fredrik, you can jump in when it comes to raw material development. But Basically, when it comes to pricing, we are already out discussing with customers and I mean, basically, pulp prices are up around 20%. The margin impact of that is around 7% for us. It's not the margin impact, but the need for price increases from our side is around 7%. So this is what we will be going for. And then there is this delay a couple of quarters because we cannot... change prices as quickly in Europe as we can in China and Latin America, where we do it both by price increases, but also by just lower promotional pressure. So we will see a gradual impact a little bit in the second quarter, but then primarily in the third and fourth quarter. And we believe that we'll be able to be back fully compensating for the raw material price increases in Q1 next year. And doing that is going back to all customers. Typically in private label, we can change prices on shorter notice. There is a very good momentum. It's not only us, many other producers of tissue have announced price increases. And when it comes to brands, we have been able to renegotiate to have shorter contract lengths, shorter than one year, where we can also go back and discuss higher prices. Fredrik, would you like to give some guidance on raw materials? I mean, in general, what we say is... is that we see significantly higher raw materials, both when it comes to pulp, fluff pulp, and also oil-based material, and as well recycled fiber a year over last year. But when it comes to recycled fiber, not sequentially, then we only see higher prices. So it's a steeper pulp price increase than we saw in 2017, 2018, which actually gives us more momentum than last time to go out and ask for price increases. Fredrik, would you like to fill in?

I think you've pretty much said it, Magnus. Okay. There's not a lot to add. Okay.

Maybe I just can ask, on this minus 3% price mix in consumer tissues, What was the pricing environment in Europe and in China? Where did this minus 3% come from?

It came primarily from a higher promotional. There was basically no promotions in the first quarter last year. And especially in China, when also volumes were very low. Remember, China had lockdowns first quarter last year. So increased promotions from a very low level in China is the biggest part of this. And then it's partly the lower prices that we negotiated the second half of last year that we have mentioned for a couple of quarters now, the impact from them. But that's a smaller part of these 3%. Thank you.

We can add that most of the price impact is largely not coming from the sequential developments between Q4 and Q1. So it was very little price movement in Q1, mainly just spillover from what happened before. So in reality, you can say prices sequentially were largely flat.

Thanks.

Your next question from the line of Nicolas Ekman from Carnegie. Your question.

Thank you. Yes, a couple of questions, if I may. Firstly, on manufacturing roadmap, you talk about $500 million to $1 billion. Is there any of this already in 2021, or is that maybe included in the guidance you've already provided for 2021? And also, any one-off costs related to this program?

less one-off costs than we saw in tissue roadmap, so there will be less restructuring in this program. This year, we keep our guidance of 500 to 1 billion, so it's already included in that number. We had a very slow start to savings. We sometimes do in the first quarter. This is partly related to low volumes. When we don't run the plants with high efficiencies, we don't get the full benefits of the projects we run to increase machine utilizations, for instance. But we expect to recover in the remaining three quarters and stick to our guidance for this year between 501 billion kroners of the COG savings.

Very clear. Thank you. And also on the Familia acquisition, given that this is already a business that is consolidated, you know the company very well, have worked with them very closely. What is the big difference of consolidating this fully or going to close to 100% ownership? What can you achieve as a close to 100% owner compared to owning 50%?

I will let Pablo answer this. Pablo has been on the board of this joint venture company for the last couple of years and has the overview of the entire business in Latin America. Of course, number one is that we do not have a shareholder agreement with other shareholders. And what the impacts of that will be, I hand over to you, Pablo, to describe.

Yes, thank you, Magnus. I'm As we said, Familia has been a very successful company with very strong market positions in different markets in South America. And this increase in ownership will allow us to work on a more integrated, seamless way to be able to execute faster into the market, to leverage innovation in a better way, to continue investing and growing our brands in markets that are very attractive and where speed, agility, flexibility are super important and is part of our strength in Latin America. So, clearly, the seamless integration and the faster execution will be much better after this transaction.

Thank you. That's very clear. You have now increased ownership in Ataleo. You are increasing ownership in Familia. The big chunk remaining here, of course, is Vinda. Is it possible for you to increase ownership in Vinda as well, or are Chinese ownership restrictions preventing that?

There are no such restrictions, but we have no such plans. We think that the structure we have is perfect, and I hope it lasts for another 100 years, being listed on the Hong Kong Stock Exchange, very strong local presence, and then adding kind of the global knowledge from Essity. So this will remain. It works extremely well, as you can see from the first quarter also.

Very clear, thanks. And just a quick one here also. Positive raw material impact here in Q1, is that due to revaluation of inventory mainly? And can you break up that split?

Fredrik, do you want to answer that?

Yeah, this is... It's still, you can say, the remaining value of the inventory. So basically the average cost of... of the inventory is simply lower than the market price. So it's not a revaluation. It's simply that the value of the inventory, the cost of the inventory is lower than the market price.

Okay, very clear. Thanks for taking my question.

Our next question from the line, from Berenberg. Please ask your question.

Yes, good morning. Thank you for taking my question. It's relating to the marketing cost increase. You highlighted the 80 basis points, impact to margins. And I was just wondering, I know you've mentioned that you've got an innovation pipeline coming, but I was also wondering how much product mix or divisional mix, branded versus private label mix, how much that has impacted in terms of your AMP cost ratios, please?

Yeah, I don't think that has been the big impact for this quarter. Typically, our AMP has been around 5.2, 5.3, 5.1, maybe percent of sales. And now it's six. And the increase is, you know, one or two tenths of increase. And the rest is an effect of the lower overall sales for S&T. So the percentage of sales has come down.

Got it. Okay. That's very helpful. Can I then ask another one on working capital? So you announced that with the roadmap you intend to unlock $1 billion of working capital benefits. I just want to make sure I understand this right. Is that $1 billion for the duration of the program? Yes. say, you know, 2020 versus 2025? Or is that an annual improvement target that you've set?

Fredrik, I leave that to you.

That's a one-time adjustment, so to speak. So basically coming from lower, you can say, average inventory levels predominantly, not only, but predominantly. So it's a one-time adjustment, not an annual.

Okay, got it. Thank you very much for that.

Your next question is from the line of Victoria Nice from SG. Please answer your question.

Hello there. My first question is on the price increases outlined, and we just wondered if you could tell us what you're anticipating in terms of volume sensitivity. If we look back at 2018 price increases of 4%, volumes were down about 1%.

Do you expect to see similar dynamics or will there perhaps be more pressure this time as prices of almost all products seem to be going up for consumers? on professional hygiene beyond direct COVID impact. Do you feel like there is a drop We talked about the recovery through AIDS in North America. Just wondered if you could be more specific on the quantum of super recovery that you're seeing. Yeah, so price increases. I mean, during the last... the last cycle we took out a lot of capacity we closed plants and machines actually just a month ago we closed another paper machine in Finland in Nokia so this is still continuing and the consequence is that We are better balanced. We have less

capacity that you know we need to run much less than we had last time around but the entire industry tissue industry is also better balanced in europe there hasn't really been much new capacity coming in after 2018 while demand has has increased so following this logic there should be less volume impact this time we are very much relying on our strong brands our innovation and Also, if it would be necessary, we would, just as we have over the last couple of years, prioritise pricing because consumer tissue is very value-creating.

when we have a reasonable margin level which we have spoken so much about over the years so we will always the fan pricing but again we don't see this volume risk this time around because of all the actions we have taken and the better shape of the industry. developments we believe that there's very little stock throughout the the value chain right now so with distributors and with customers and what we're seeing now is partly stocking but also So, of course, that comes from increasing demand. The balance there, I don't know. I don't know if that answers your question. I think that's the word to say. Was that what you were asking about professional hygiene, Victoria? Yes, thank you. Okay. Thanks. Ian Simpson from Barclays. Please ask your question.

Thank you very much. Good morning. And two questions from me, please. Firstly, I wondered if we could dig a little bit into the pricing dynamics in consumer tissue. So you said that no one's really built new plants. But during the crisis, yourself and other manufacturers managed to sustain far higher levels of output to meet the surge in demand. So does that mean that industry output might have increased a bit, even if no one's building new factories? And then just following on from that, your margins in consumer tissue...