Essity AB (publ)

And welcome to the conference for Essity's interim report for the third quarter 2021. I'm Josephine Edwell, head of communications for Essity. And today, our president and CEO, Magnus Groth, will, together with our CFO, Fredrik Rystedt, go through the highlights in the report, followed by a Q&A session. So with this, I hand over to you, Magnus.

Thanks, Josephine. So in the third quarter, SD continued with a high pace of innovations and a number of important product launches.

And this, together with increasing sales in e-commerce, resulted in the highest ever market share sales. or sales in this area.

Another highlight of the quarter is the continued momentum in medical. It's now the fifth quarter in a row when medical solutions is growing and in the quarter with over 9.7% compared to a year ago. We are continuing with our price increase programs across the business in all our categories. We have started integration of Familia and Asalio that we acquired earlier in the year, but we also concluded the deals and took over the ownership during the third quarter. We started up tissue production based on alternative fiber, which we believe can be a significant step in our efforts to reduce our dependency on fresh wood pulp going forward. And we have continued the work with creating the private label consumer tissue division. And moving over to an overview of the numbers, we have a couple of different

sales growth numbers this quarter organic sales growth that we are typically presenting was 7.4 after the pandemic but here we also show actually that for the first quarter we're also growing as a whole compared to 2019. So we're starting to leave the impacts of the pandemic behind us that for us this category was mostly negative. negative from a top line perspective. We also added another growth number is the sales growth combining organic and acquisition growth which was 9.7 percent and this is primarily due to to the fact that we now include Azalea or Acetyl Australasia as we call it in these growth numbers. Adjusted EBITDA margin was down and I will soon show a bridge explaining that while operating cash flow was very, very strong. We're happy about the development there and it's a combination of the

very good reduction of working capital, lower stock levels, and also higher payables as we continue to grow. And adjusted ROCE is very much impacted, of course, by the margin development We were compensating significantly higher costs for raw materials, energy and distribution by higher volumes, higher prices and better mix in nearly all our businesses and continued also to achieve savings in cost of goods sold on a high level. And we are now year to date at 470 million. And as you know, our target range for the year is to be between 500 million and a billion.

So already after three quarters, we're very close to that.

into that range. Looking at the EBITDA Margin Bridge there's a significant negative impact here of 370 basis points. But as you can see, The raw materials, energy, and distributions together accounted for 670 basis points. performance in terms of higher volumes higher prices better mix and cost of goods savings and in addition also positive contributions from AMP and SG&A so this is something where I'm very proud about the achievements looking forward we still continue to significantly higher proud or costs in all the areas that I just mentioned. But also a very good momentum in our efforts to continue to mitigate and compensate. With that, I'd like to move over to a couple of the news that we have announced today in the Q3 report, and we'll talk more about it. on the Capital Markets Day that's coming up on the 3rd of November. And one important change is

in how we account and present our business areas. We're moving away from a more product-oriented business area definition to a definition that's based on our consumers, our customers, our competitive environment and the rapidly changing channel shift that we see in all of our different categories and businesses. So our new three segments or business areas are health and medical. That includes what used to be our medical business, wound care, compression therapy, and orthopedics, but also our significant presence in incontinence care healthcare. And of course, there are significant synergies in this business, and this is something that we've spoken about many times, and we see that those synergies

are just growing stronger over the years and also resulting in the strong performance that you're seeing in the medical business, but also in the incontinence care healthcare business. Secondly, consumer goods. I think it's clearly defined by the name here. incontinence products retail and feminine care which are coming closer and closer together in care category we will talk more about this on the capital market today baby care and consumer tissue branded energy retail brand and in this business area we also report the new division that we're creating for our consumer to a private label in Europe and finally professional hygiene that you recognize from before Of course, emphasizing the increased focus that we're putting on not only tissue products, but also solutions that's cleaning and wiping. So it's a significant step that we believe also underpins the new growth target that we have announced today. and the new growth target is to achieve sales growth over five

Our previous target was organic sales growth over 3%, which came from the notion that we have very good underlying growth in the markets where we are present. And in addition, we aim to grow market share. And what we're adding now is that based on our strong M&A agenda, we believe that we can add up to overall a sales growth number of over 5% in the long term, of course, with variations between the different years. The other financial targets remain unchanged. They're just a rosy target of over 17% and the policies that we have for capital structure and dividend.

An update on the consumer interest to private The work is ongoing. We are slightly increasing the scope of the division. we are still focused on having this division developed and ready and split from the rest of the consumer goods business area by the end of this We've also taken not just one, but a number of steps when it comes to our sustainability journey. not least of course our target to achieve net zero emissions by 2050 and here's some examples I already mentioned, and you can see in the picture there, our new facility to use alternative fiber, which has a significantly lower lower carbon footprint than using a fresh wood pulp we've also decided to invest in a paper machine that will be fully supplied with its steam from geothermal steam in New Zealand It will be the world's first machine of that kind. And we're also increasing our efforts of research.

different types of paper products in order to increase the sourcing then of the non-fresh fiber materials and of course again to reduce our dependency on fresh wood pulp supplies. Innovations, always a big topic, and I think we have a very, very strong lineup for this quarter. Starting with, we have also now launched washable underwear, not only for women in Tenna and in the different Femcare brands, but also now for men, as one example. We're also continuing to

grow our brands with adjacent products and in the middle here you see one example with Tempo which of course a very famous tissue brand in Asia and in Central Europe we're now also adding some skincare products and finally and that's very important for us a new cleaning cloth range for the industrial sector where we have been underrepresented and under trading historically and where we are now making an effort to grow our presence And this product that you see here has 27% lower carbon emissions compared to the product that it replaces. With that, I'd like to invite Fredrik to talk about the financials for the different business areas. Welcome. Thank you, Magnus. And I'll start with personal care, and it was a good quarter with strong organic sales and market share development. And in the quarter, this was driven both by good volume growth and also price mix in the combination. It was not only good in comparison to 2020, but also versus the same period of 2020. So we grew by close to 7% also in comparison to 2019.

Our medical business for the fourth consecutive quarter strengthened considerably, and all therapy areas continued to grow at good pace, and especially so for wound care. And that growth contributed also to strengthening margins for medical. Our incontinence business, both on the healthcare side and the retail side, continued to grow and perform really well, and also there with growing or stable market shares in general. Our biggest growth category, our strongest growing category, is feminine, and we are growing much faster than the market in general terms, and especially so in Latin America.

and in Asia clearly generally markets the growth in the emerging markets have been very strong as you can see from this slide so despite a good performance in terms of volume and price and mix we have a slight decline in in margins as you can see and cost savings were good but we also have a considerable cost of inflation we have raised prices as Magnus said and that is particularly so in Latin America but we are preparing for future pricing increases as cost deflation keeps on rising. So turning to consumer tissue versus 2019, the sales in consumer tissue increased by just close to 1.5%. But if we compare to the last year when COVID related demand was really strong as you will recall our sales contracted with the is 0.6%. Now, we continue to grow our sales portion of branding.

We also improved mix pretty much everywhere in the consumer tissue business. So the decline that you see here is mainly related to the private label business. Cost inflation is the highest for all our categories here in consumer tissue. And the impact was very significant during the quarter. So price increases and of course continued cost savings as we have achieved in this quarter. Price increases will remain quite key. We have done quite a lot in Europe and in Latin America, and we continue to negotiate for further price increases as we continue in coming quarters. So as lockdowns and restrictions are now unfolding,

across the across the globe the recovery in professional hygiene is very strong so in in the quarter We achieved versus last year a growth of organic sales growth of close to 21%. But also if you just compare sequentially against the Last quarter, Q2 of 2021, our increase was actually 13%. So it keeps on growing. and the recovery is particularly strong in North America and South America. Professional hygiene. is the area that was most affected by COVID, but the recovery is very strong. and we're now only 5% behind the net sales that we had in 2019. So also with this area, cost inflation is of course very strong, but we have improved margins quite considerably. And there are many reasons for it. The higher volumes, the higher sales, brings much better cost of service. We continue to do well in terms of cost savings.

as Magnus alluded to, and we have a strong price and mix performance. Also here, we've improved in our pricing, and we will continue, as with all the other areas, those efforts as we progress in the coming quarters.

Thanks, Fredrik. So with that, summing up our priorities in the short term, quite obvious. continue to invest to fuel sales growth, price increases in all our categories, in all our geographies, strong focus on cost savings also to offset the expected continued cost inflation that we're seeing in raw materials, energy, and transports, and the creation of the consumer tissue private label division. And as we have done in the third quarter for the long term, we will also continue

with a strong emphasis on innovation, expanding our product offerings. The manufacturing roadmap that is delivering significant categories to support our new higher growth target which is the sales growth of five percent digital transformation in all areas and of course to continue to lead in sustainability, which is just getting more and more important. Thank you for listening. With that, we hand over to Q&A. Please help us open up. First question. As a reminder, if you wish to ask a question, to withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And now our first question is from the line of Celine Pinielli from J. Morgan. Thank you. Please ask your question.

I was wondering why you wanted to include M&A in your target, and is the 3% underlying still valid from the previous target? And will that as well impact your return on invested capital or return on capital employed? Are you going to include acquisition in that? Thank you. My second question is on raw material inflation, if you could give us an outlook for what you expect in the coming quarter. And then lastly, on tissue, The pricing, you said you did some pricing, though it was only up 2%, I believe. Can you comment a bit more about where you implemented pricing and when should we expect more pricing to come in this division?

Thank you. okay if i start with the growth target so the build up there yes we believe that our categories where we are present will still continue to show a good solid underlying growth and with an addition of our ambitions to continue to grow market share we do expect to be able to achieve sustainable organic growth over 3% also going forward. As we have mentioned also in the previous quarters, we have a stronger M&A and very much focused on medical or new health and medical business area but also in parts of profession and feminine and we see the opportunities to have a flow of M&A supporting the overall growth target of the five so the 3% organic is still valid and then your question how will we or return on capital employed target which is related then to

without acquisitions. And we would have to adjust depending on the type of acquisitions and also the intangibles, the goodwill that might follow with that. So that's something, as always, we will be very transparent about and show. But of course, the 17% target on return on capital employed is as important as ever before. That's unchanged. Regarding raw materials, Fredrik, if you'd like to talk to that.

I missed that question, Magnus, actually.

Okay. So, raw material inflation continues, and we expect in the fourth quarter significantly higher raw material costs actually in all areas, maybe with the exception actually of wood pulp, where we expect higher costs in the next quarter.

So, the... decline of the woodpile prices we were expecting in the fourth quarter in Europe has not happened and it's still expected because there is now an increasing surplus and stock build of wood pulp especially in China but due to the global transport situation we have not seen the decline in Europe yet but that's to be expected But in the other areas, including recycled fibers, of course, oil-based materials, also transportation and the energy which you of course hear about every day in the news read about in the newspapers we expect signal significantly higher costs in the fourth quarter and consumer tissue pricing we have achieved the price increases in all markets though to a lesser extent in China and we have F-13 plays that should show an increasing pricing component also in the fourth quarter, but especially in the first quarter. of next year since we're now entering a period where many of the negotiations are focused on pricing increases for next year and of course with

With the continued inflation of raw material, transport and energy costs, it's becoming a moving target, but we have good momentum and we feel very confident that we will continue to achieve price increases, not only in consumer tissue, but also in our other product categories.

And maybe just to add there, Celine, you mentioned a number there, but just to remind perhaps of the obvious, we measure against last year and there's still some spillover from the price concessions that we actually did when raw material levels were quite low last year. So the actual raise that we have implemented is bigger than what you see.

And of course, that impact will be more big. visible in quarters to come. So just to remember that. And there are also still differences in promotional levels. Generally, the progress is quite good in most parts of the group. Thank you so much. Just one precision. Given what you said about the post-trustee that the client has not happened, are you saying Are you seeing a rebound in consumer tissue now? As you were guided before? when we gave that guidance in q1 and q4 the expectations on pulp prices were quite different and we have not seen the decline. But I think more importantly, because the price increase program is going really really well we're seeing now also cost inflation in energy and in transportation which makes our pricing pieces. Again, very important contribution to protecting margins, which we've also seen in the quarter. But again, we are now moving towards a kind of a moving target. And I think that's a very important insight.

that it seems as if we are entering somewhat of an inflationary environment so that price increases will become a very kind of natural component of of our business going forward and we also expect to see here eventually and we're starting to see that in some areas also higher shelf prices with our customers and and price increases there which is absolutely essential thank you give us the next question please

seems that we have some technical issues but I hope it will be solved very soon so just give us a Thank you for waiting. Your next question comes from the line of Ian Simpson from From Barclays, your line is now open. You may answer your question. Thank you very much. Well, after that wait, I hope that... I hope not to disappoint with... So a couple from me, if I may. Firstly, in terms of raw matter recovery,