Essity AB (publ)

Hello and welcome to Essity's conference announcing our interim report for the first quarter 2022. I am Josefina Edvall, Senior Vice President, Essity Communications. And today our CEO will go through the highlights in the report and after Magnus Groth is Finished with that, we will have a Q&A session together with our CFO, Fredrik Rystedt. So with that, I hand over to you, Magnus.

Thank you, Josephine, and welcome to this presentation of the SEC's interim report for the first quarter 2022. And to summarize and give some highlights, in the quarter we saw significant price increases helping our growth and in the coming quarters and preparing for further price increases throughout the year and into next year. Cost inflation has only increased since the last quarter. And of course, we have the war in Ukraine that's significantly impacting, especially energy in Europe, but generally. But we also see additional cost inflation in raw materials transports. So in every area. We continue with a high pace of acquisitions and in the first quarter we acquired a US professional wiping and cleaning company, Legacy Converting. We have also started work to exit Russia and With all this going on, we continue to strengthen our core brands and our strong market positions with a high pace of innovations. And we see this in continued strong market share development and online sales development, and also continue to stay as the leader in sustainability. Some more details on Russia, which accounts for approximately 2% of group sales, or 2.8 billion. In the country, we have three production facilities, 1,300 employees. We're taking an impairment of 1.4 billion kroners, but we keep a remaining 1.3 billion in trade receivables, inventories, cash and cash equivalents. And The plants are operating, the business is continuing, our employees will continue to be employed. We are looking at options to exit Russia, and of course, we have as a priority that our employees are well taken care of in this process. With that, I would like to move over to the financials. Q1, net sales increased with 24.6%. Of course, there's a big positive currency impact there. When looking at the sales growth, 14.6% organic, about half from volume and half from energy. price and mix so very very good growth and i think this shows uh how quickly we have been coming out of as we've been coming out of lockdowns and restrictions which was very much in place during the first quarter last year how quickly our different categories have have recovered we also see here a significant contribution from the acquisitions that we've done over the last year so including acquisitions the growth was 17.3 percent The severe impact from costs reduced adjusted EBITDA with 22% and adjusted EBITDA margin ended up at 8.2%. Operating cash flow from this perspective was strong and the lower adjusted EBITDA was compensated for with a strong working capital development. So similar operating cash flow as last year. And this has been a very dynamic quarter in many ways. And of course, the Russian invasion of Ukraine is impacting not only our business locally in these countries where, especially in Ukraine and in Russia, we are focusing on the health and safety of our employees, but also a big impact in Europe and also globally. And as we can see from this waterfall, compared to a year ago, raw materials, energy and distribution basically has a negative impact that is equal to more or less the margin we had last year. So massive. We've never seen anything like this before. Typically, we talk about cost increases of a few percentage points at the most. Having said that, we have been able to compensate for a large part of that with higher prices, volumes, mix, cost savings and other activities. And when it comes to the cost savings, they were 34 million. But remember that we are very hard on ourselves when we calculate cost savings in cost of goods sold. So we only look at net inflation. And since we have very high inflation like everywhere else in the business, we think that this is a good idea. We also see good underlying momentum in everything from material rationalization to higher rebates and efficiency improvements in other ways. So that work is continuing and we have high capacity utilization in most of our production assets, which also helps, of course, from a cost perspective. AMP was slightly lower compared to last year. And then, of course, also lower in relation to sales. And SG&A was higher, but lower in relation to sales. So... we have never seen a bridge like this. And this is, of course, the reason why we have been talking so much about the need for price increases to compensate. And what I think this shows is that we will be able to compensate for raw material, energy and distribution cost headwinds also this time. But of course, since they continue and because of the extent of them, it takes some time. Moving over then to innovations and the This is something where we are continuing to invest to strengthen our brands and our market shares. After the first quarter, we continue to remain very strong in our positions and we continue to increase market shares in more markets and category combinations. than the opposites of 55% of our branded sales in retail see growing market shares. And some of you might remember that this was But of course, the massive focus on price increases has some impact here in our negotiations with customers, retailers and distributors. But I think this still shows how strong our brands are and how strong our market positions are that in spite of the massive price increase pressure that we are applying now, we are still growing market share in 55% of our branded retail sales. Moving over then to our three, not new segments, but it's the first quarter where we report in these three segments, starting with health and medical, which showed a very strong organic sales growth of 9.5%, coming from volume, prices, and better mix. Actually, we also see significantly higher cost for raw material and in distribution, even in health and medical. And this applies to the incontinence care, healthcare part of the business, where we see very high price increases or cost increases for super absorbents, other oil-based derivatives that we use in our incontinence products. The impact of medical is much, much smaller, which is, of course, We really, really like this business. And we have implemented price increases. You can see 2.2% of the growth comes from price and mix. This is less than for the other two segments. The reason being that in many cases, we are working with the public sector tender contracts that have a duration of three years. And it takes longer. And also going forward, it will take longer to compensate. But we are putting as much effort into price increases in this segment as in the other segments. But it takes longer due to the reason I just mentioned. And as you can see, organic sales growth, both in mature and emerging markets and both in the incontinence products part and the medical solutions parts here. Moving over to consumer goods, where we have by far the biggest negative impact from raw materials. We also see a very strong organic sales growth from higher volumes, higher prices, better mix and cost savings. And in the bars below, again, volume contributes. And also, as I've stated many times before, we go for pricing even at the expense of volume. And this is clearly also our intent going forward. We see significantly higher costs for raw materials, energy and distribution in the quarter. And we will also do that going forward. I will give a summary on our outlook. with these three segments. And again, we are working to continue to increase prices so that we have a positive benefit from price and mix also in the coming quarters. And maybe another positive, or not maybe, a very positive sign is that we have positive mix in more or less everywhere, which of course indicates that so far we don't see any significant down trading due to higher prices. On the contrary, we see that and innovation. So this could change going forward, but so far we see improving mix in most markets and in most categories. So that's very, very positive. Looking down in the right-hand corner, it's quite amazing with the growth numbers here in incontinence products, retail, feminine care over 20%, but also baby care and consumer tissue. And This doesn't include what we think any panic buying. It actually includes quite low growth from China. What I think this shows is that how impacted even these categories were during the pandemic and the following lockdowns and restrictions. And maybe we didn't even really realize that. But of course, we see this positive impact now that most markets in the world, except for China, are opening up again. we are taking a lot of pricing and also mostly gaining market share. Finally, professional hygiene, which has by far the highest organic sales growth, 29.8%, nearly 30%. This was also the segment that was most negatively impacted by lockdowns and restrictions, so a very strong rebound. But in this growth, we also have our volumes as still adjusted, but they margin. raw materials, energy, and distribution. And specifically for professional hygiene, we have seen that recycled fibers have been going up immensely during the first quarter of this year. And we will see how that develops going forward. Again, significant price increases implemented and further increases in the pipeline and planned for the rest of the year. our outlook when it comes to some of the major costs for the quarters, we expect significantly higher costs for raw materials, all raw materials, maybe with one or two small exceptions, significantly higher energy costs, and also significantly higher transport costs in the second quarter. And this is both year over year and sequentially. So the cost inflation continues. We are showing categories when it comes to price increases. And we remain with the statement that I made after the fourth quarter that we expect to see now gradually increasing margins in the coming quarters. In the second quarter, I would say similar or slightly increasing because of the strong performance we had now in the first quarter. But still, when we see the pricing that we already have in the books for the second quarter, confident that we will be able to slightly increase margins also in the second quarter, in spite of the headwinds being significantly higher, the cost significantly higher than what we could see when we made this outlook for 2022. That was, of course, before the war in Ukraine. So summarizing the three segments and then just briefly on 2022 priorities, price increases, price increases, price increases. And again, there's inflation. This is not going to end in the near term, but our ambition is of course not only to catch up, but also to gradually step by step starting to see improving margins going forward. Cost savings continue to really add to the mix and we have a strong underlying cost savings program that is somewhat now being offset by inflation. But the underlying savings are strong. Innovation, digitalization, sustainability as important as ever. And of course, continue to grow in high return businesses and to do with value creating M&A going forward. So with that, I'm done with the presentation, and let's open up for questions. Thank you.

Open up the telephone lines.