Essity AB (publ)

And welcome to SCT's into half year and second quarter report for 2021. I'm Josephine Edwo, Head of Communications. And on today's call, our CEO and President 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, I hand over to you, Magnus.

Thank you, Josephine, and welcome, everyone. to this half-year presentation of Essity's financial results. Finally, we are starting to see the benefits of the vaccination programs, the easing of restrictions and lockdowns throughout the world. And during the second quarter, We had a gradual improvement of our market climate and especially for those categories worst affected by the pandemic, professional hygiene and medical, but overall a very good growth throughout the group. So to summarize the financials, strong organic sales growth, clear improvement in personal care and professional hygiene. Sales increased throughout the quarter as market conditions improved. And actually, when it comes to personal care and consumer tissue, sales were even higher than the second quarter of 2019. So we have come back to normal while there's still some way to go for professional hygiene. Profitability was negatively impacted by higher costs for raw materials, energy and distribution. The adjusted EBITDA margin reduced from 13.3 to 11.8 percent with a negative impact on gross margin of 180 basis points, 190 basis points negative came from raw materials and energy. And in addition, also distribution costs increased. On the positive side, we had very good cost savings, 239 million kroners contributing. And as you can see, we continue to invest in advertising and promotion, supporting our strong brands, continuing to grow market share in more markets and categories than ever before. While SG&A with the growth in top line is on a higher level, but a smaller share of the overall sales. As you know, I prefer not to talk about raw material costs and cost increases. We are focusing on innovation, branding, developing the consumer and customer offerings. However, in the current situation, it's necessary to make it clear that we are in the middle of a situation with increasing costs across the board and here are some examples market pulp europe so it's both softwood hardwood and pulp and especially fluff pulp being on a historically high level Also, oil-based materials have increased recently and also throughout the second quarter, as well as energy prices that are also on a very, very high level, also historically, and transportation. Looking forward into the third quarter, we expect all of these cost components to continue to increase significantly, both sequentially and quarter over last year's quarter, maybe with the exception of the recycled fibers that is only growing or increasing to some extent sequentially. So this is what we're facing. It's part of our day-to-day business, but the extent is higher than we have seen before. We have been very successful in increasing prices across the company. The benefits of that will be visible in the third quarter, but we are catching up and With these increases, we are currently going out in second and third waves of price increases throughout the company. So it's an important theme for the rest of this year. Still, we are convinced that by the end of first quarter next year, we will have recovered these cost headwinds through price increases and cost savings throughout the group. So it's business as usual, but on a significant level because it's covering all of the different cost components for the group. Having said that, there are a lot of positive things going on in the company. I already mentioned the price increases that we have pushed through and that are also now being implemented and the waves that we are planning for the third quarter right now. We also started to create a separate division for our private label business in Europe, and I'll get back to that. We continue with a strong launch program, and we are also improving our external communication to support the launches and the innovations and getting a lot of positive credit for that. And of course, the most important result of all those efforts are the market shares that continue to increase. And typically, I have been saying over the last couple of years that we're growing market shares almost everywhere except in incontinence care retail. But actually, in this last quarter, that has also turned around and we are gaining market shares also in that category. E-commerce continues to increase as a part of sales. That's a very, very important channel shift that we think we can benefit from. We have new and updated sustainability targets. And during the quarter, we were able to finalize the acquisitions of Abigo and Azaleo. And we are working to finalize also the acquisition of the minority in Familia now in the next couple of months. So that's progressing according to plan. So a lot of good work ongoing in the company. So getting back to the private label division within consumer tissue within Europe, As you can see on the chart to the right, this division will account for approximately 13% of our complete consumer tissue sales, but a bigger portion of our European tissue sales. This process is expected to be finalized by the end of this year, but we announced it today because it requires quite a lot of work to finalize this process. And What we have seen during the last year and especially during the different pulp cycles is that there are synergies in consumer tissue, of course, and also with professional hygiene when it comes to purchasing production to some extent. But there are also quite big difference in how we approach the markets, how we work with the different customers. And by making this split, we aim to provide even better services to our different types of customers. And going then to consumer tissue private label Europe will include approximately 1,700 employees, seven sites and sales in four or five countries. Net sales are approximately perform a 6.7 billion. And what we have seen is with these private label contracts, we are producing to specifications provided by the customer. And we're doing this with high quality, high service levels, of course. And it's important for us to be very agile, service oriented. short lead times, effective and competitive. We are not typically that involved in category management, taking the category to the next level through innovation and other ways of developing also the go-to-market, the different channels and so on. So it's a good business that will be even more efficient and that we will develop in a separate division. The consumer tissue branded part of consumer tissue, which then also includes our businesses in China and in Latin America, employs approximately 19,200 people with sales of over 43 billion. This is characterized by strong brands, where we work very much with achieving leading market positions. We also work with a small number of partners to develop their retail brands, typically not only in tissue but also in other categories. So it's a completely different way of approaching our customers in this way and this will also be an opportunity to become even better in this type of business. With that, I move over to the innovation slide that I'm typically very proud of. And I think this really shows the pace of innovation that we have been able to continue to keep during the pandemic. And just as an example, we are seeing now digital solutions with a very, very high customer consumer benefits in all our categories. And one example in medical solutions It's the Q2Med wound navigator that we have developed in a very agile and record time. So this is an application where you take a picture of a typical wound on a patient and you immediately get a recommendation on access to a product catalog. recommendation on the size of the wound and the placement of the wound. And it's also possible to order samples. And it's also a very good way to document and follow the wound development. And we have passed early trials. We are launching this. And the reception from practitioners is incredibly positive. It's a big help in making their work easier and in improving the overall cost for treating wounds. So just an example of another digital initiative in a category where there are many, many opportunities going forward. I spoke about marketing and We have become a little bit used to winning Lions in Cannes for our marketing efforts, our campaigns, this year more than ever. Why is this important? Because there's a clear connection between winning these awards and purchase intent. And that's, I think, a big part of the explanation why we have been gaining market shares in Femcare in tissue now for a long time, because we have excellent marketing proven here and with a clear link to purchase intent from consumers. Today we announced new and updated sustainability targets and it almost seems as if this coincides with the European Union's announcement of new targets, but it is a coincidence. We were very early in signing up to the science-based target initiative at a time when ambitions levels were slightly lower than they've come to be today. We have had good progress in reducing our carbon footprint and we see the opportunity to raise the bar, speed up the ambition to reach the Paris Agreement's emission levels. So we have raised the bar on our scope one and two, greenhouse gas emission reductions from 25 percent to 35 percent by 2030. And very important. We have also committed now to setting a target to achieve net zero emissions by 2050. We are also raising the target levels in a couple of other areas that are very important, where we have had high ambitions, reached the targets, and now we're raising the bar further. This is in sustainable innovations, occupational safety and responsible sourcing. Then getting into the three different business areas, starting with personal care, we saw strong organic growth in all categories and higher sales also compared to Q2 2019. So we have kind of recovered now the slightly lower sales that we saw when consumers were in lockdown. We also have started regaining market shares in incontinence products in retails, and this is especially with an improved assortment for light incontinence in retail. Strong margin improvement, 15.3 percent adjusted EBITDA margin coming from higher volumes, higher prices, positive mix and cost savings. We do see higher costs for raw materials and distribution also here. And as you could see from a previous slide here, those raw material costs will continue to increase now in the coming quarters. Also in personal care, we are increasing prices. We have implemented some. We will have more coming now in the coming quarters. And just looking down there at the growth numbers in the right-hand corner, I think it's quite amazing numbers across the line there. Everything from incontinence products to baby and fem care. But of course, medical solutions, that's now on a very strong momentum also. with a quick pickup in margins coming from the improved fixed cost coverage, especially in the go-to-market for medical and in the supply chain for the other categories. Consumer tissue, also higher sales compared to Q2 2019, but not to 2020 when, of course, we had all the impacts of panic buying and destocking and higher consumption when people were at home and so on and so forth. Higher volumes, positive mix and cost savings, but also higher costs for raw material, energy and distribution, as I mentioned previously. What's important to note, and I think we mentioned this also last quarter, is we actually have lower prices in consumer tissue that has a noticeable negative impact in this quarter. And there are two reasons for that. One is that only a few quarters ago, in the second half of last year, we had historically very low pulp prices. And we agreed with some customers to reduce price levels at that point. And of course, that's now rolling over into this year. But another impact that's temporary is that we more or less did zero promotions in consuming tissue in Europe and in China during last year, because of the pandemic, we didn't have to. And of course, now that the promotional pressure gets back to normal, this shows up here as a negative impact on pricing in the quarter. The announced price increases had a small positive impact, but we will see more coming gradually in the third quarter and then mostly in the fourth quarter going forward. And again, we're adding additional waves of price increases on top of what has already been agreed. And very exciting, within a week or two, we will start producing pulp from wheat straw in our new facility in Mannheim. And I hope to be able to go there and see when it starts up. An important step in reducing our dependence on wood pulp for the future. Professional hygiene. This is another area... I already mentioned medical, where we really see a quick pickup in the market conditions. Less restrictions has led to a very rapid improvement, especially in North America during the quarter. As you can see, up 35 percent here. But actually, when you compare sequentially quarter two over quarter one, we see a big improvement. And even within the quarter, from month to month, sales have been growing, even if there are always a little bit of setbacks here and there with new restrictions or lockdowns and so on. Overall, a positive momentum that also carries into the third quarter. This gives a strong profitability improvement just because of the fixed cost coverage in our supply chain. Higher volumes, higher prices, positive mix in cost savings. So I think I mentioned after the first quarter that professional hygiene would be a secret weapon for the second half of the year. And what we see so far is definitely indicating that. Also here we have higher costs for raw materials, energy and distribution. we are in the same way as in the other categories, raising prices and preparing additional ways for price increases. Margins at 11.6 is not where we want them to be, of course, in professional hygiene, but a big pickup compared to the same quarter last year, as we see the improvements coming from fixed cost coverage. Here's just some data that we received recently on the topic of will people, consumers, customers keep up the good practices of improved hand hygiene also when restrictions are are coming down and we are getting back to normal life. And so far, that seems to be the case. So here are just some numbers. 84% of US workers returning to office are likely to continue the enhanced hygiene protocols they had adopted. So I think that's a good indication that we will see a higher consumption of our products also after the pandemic. So to summarize, priorities short term to continue to accelerate sales as we move away from the pandemic. Price increases continuing to the extent that's necessary. We have to assume that the raw material, energy costs, distribution costs that we see currently will remain and we just have to follow and compensate for that. And We are doing that, and I'm very confident that by the end of the first quarter next year, we will be catching up in this area. Cost savings, we are protecting our margins, so it's an incredibly important topic for us, not only in cost of goods sold, but across the business. And then, of course, now starting the work with creating the private label division within consumer tissue. And longer term, I think you recognize all the things that are creating value in the efficiency acquisitions in high margin categories, the digital transformations, and to continue to lead in sustainability. So with that, we will open up for questions. I just want to finish by welcoming all of you to ESSID's Virtual Capital Markets Day that will take place on the 3rd of November, so later this year. And with that, welcome to ask your questions.

Thank you. For questions, you may press star and number one on your telephone keypad and wait for your name to be announced. Your question comes from the line of Victoria Nice from SG. Please ask your question.