Essity AB (publ)

Welcome to Essity's conference about our half-year report 2022. I'm Josephine Edwell, head of communications for Essity, and I will be your moderator today. Today's presenters will be, of course, our CEO and President Magnus Groth and our CFO and Executive Vice President Fredrik Rystedt. And then we are happy to have Joanna Griffith here, the founder and CEO of Nix. After the presentations, we will have a Q&A session. So with this, I hand over to you, Magnus.

Thanks, Josefin. Welcome, everyone. And I'm pleased to report the strongest sales growth quarter that we have ever seen. And a large part of this is price increases also, the highest price increases that we've ever seen in a quarter by far. And this has resulted in a sequential EBITDA improvement, even though it's small, but still an improvement. We see that the price increases that we have achieved are significantly higher than we had expected, but also the cost inflation that has continued to accelerate throughout the quarter. Looking forward, we continue to invest in our brands, in our market positions. This is what makes it possible for us now to work on improving our profits and our margins. Important also for the future is that online sales increased with 25% in the second quarter to 1%. 15% of sales. And of course, I also want to welcome Joanna to this presentation. It's a very, very significant and strategically important acquisition of Nix as well as Modibodi. And it's not only strategic, it's also very profitable and high-growing business that puts us in the lead in intimate hygiene. And I'll talk more about this in a second. Some financial highlights, the growth over 20% in total and acquisition growth over 2%, which is above our target, I think worth mentioning. And we'll get into the details, but when it comes to the organic 17.5%. 0.8%, 12.5% was purely attributed to price. Looking at cash flow was strong, I would say, and adjusted EBITDA was slightly lower than the same quarter last year, but sequentially an improvement. The EBITDA bridge, as you can see, again, severe cost inflation, 1280 basis points, as you can see there down below the red box. And this is not all of it, because this is the cost inflation that we measure to global indices. And that's obvious kind of in comparison to market prices same quarter a year ago. But in addition to this, we also have inflation on a number of areas. It could be pallets, it could be sea freight, it could be other areas. Salary inflation, of course, also that actually adds to the cost pressure even further. But as mentioned, with significant price increases, better mix and better volumes in more or less all our categories and all our geographies, I'm very, very proud about the achievements of the organization in this quarter. And we have a very strong momentum going forward when it comes to continuing to achieve growth through a combination of price mix and volume. AMP is slightly lower in the quarter compared to a year ago and also contributes to margin, while SG&A is higher but lower in relation to sales. And the reason why it's higher is that we're seeing a normalization compared to previous years dominated by COVID, which means that we are seeing some salary inflation, but also accruals for bonuses that we haven't had in quite some time. And also, for instance, travel increases, but still in relation to sales and in relation then to the EBITDA margin contributing positively here. As always, innovation is what drives this company, and it's another quarter with a number of very, very strong product launches. All of these examples here are in personal care. And maybe worthwhile noting, it's not obvious from the picture, is down in the right-hand corner, our completely new feminine care product platform that will replace our very, very successful secure fit a platform that we've been using for the last 15 years. And as you know, we've been growing market shares and improving our market positions here for years and years and years. And this is an important, not only upgrade, but actually a completely new product platform that we're launching with very positive customer and consumer response. Productivity, as you can see from the numbers, are COGS savings that we normally see as being behind between half to one billion kroners per year we're negative in the quarter this is not because we're saving this actually we're saving more than last year and at a very high frequency but this is offset by inflationary pressure in a number of areas so we are seeing substantial savings in everything from operational efficiency improvements digitalizations very much in the supply chain overall, material rationalization, sourcing savings, and the negative impacts by inflation or inflation in areas, as I mentioned before. I think this is a beautiful picture of... Investments that we're doing, that's not only good for the company and for our long-term return and profitability, but also for the planet. So these are solar panels on our tissue plant in Kostheim in Germany. With that, I would like to hand over to Fredrik. Over to you.

Thanks Magnus and let me just give a few comments relating to the business areas and starting with health and medical as can be seen from this slide we continue to do well in terms of organic growth and that's both for incontinence and for medical and within the medical part especially wound care and orthopedics continue to grow at very very healthy rates. You can see that The emerging market growth was really strong, and this is particularly in Latin America, both for incontinence and medical, and, of course, also Eastern Europe. Now, generally, price and mix was strong in most markets, actually. And if you look at the price mix component here of 4%, as it's stated here, the absolute majority is related to price increases. Now, if you look at health and medical, it's typically the business area with the least affected by raw material. But in essence, if we look at the last couple of quarters, this is actually where prices cost inflation has been the greatest. So quite unusual from that perspective. And it's related to materials such as fluff pulp, it's sap and generally plastic products. And of course, this is mainly within continents, so much less in medical, so mainly in continents. Now, we have compensated quite some with price, as I mentioned, but the contract structure within health and medical is such that pricing changes are much, much slower. So longer contracts, lengths, listings, etc. So therefore, compensation or price increases is a much longer process. So we have ventured into that. We have raised prices quite significantly also sequentially in this quarter, and we will continue to do so going forward. We expect raw material to significantly increase also for Q3 sequentially and versus last year. So turning to consumer goods, this was a quarter with very, very significant increases in all categories and in all geographies. So in average, price increased with nearly 15%. compared to one year ago, and also within this quarter, very significant increases. And together with a good mix, the organic sales growth, as you can see on the slide, was close to 18%. Now, volume is, in the context of the other business areas, slightly lower, and particularly so for babies. So there are basically two reasons for this. One is that we have taken the decision to exit our diaper production in Colombia or diaper business in Colombia. And this has had a negative volume impact. We will see that negative volume impact also going forward as we exit gradually. If one takes away that impact, maybe we would have had roughly about twice the growth of Colombia. of what you see here. So roughly about 4%. And the other reason why volume is slightly lower is due to Russia with much, much lower sales volume in the quarter. So here you can see that the impact from raw material is the highest of our business area. So 14.5% margin impact if you compare to Russia. to one year ago and we will see also here in this area significant cost increases sequentially and compared to last year as we go forward. We have executed on a lot of price increases and we'll see additional benefits from the already agreed price increases as we go forward now into Q3 and we will continue of course the journey on increasing prices as we go forward. And as Magnus also said, of course, obviously cost control, pricing is a very, very, or both very key focuses of the group at this point of time, but we continue to execute on our more long-term agenda, so performance management with the exit of diapers in Colombia, as an example, and of course the acquisitions, which you will hear more about, of Nix and Modibodi. Turning to professional hygiene, really strong growth. And of course, here we're still benefiting, you can say, from the recovery from the COVID restrictions that were present during last year and to a much less extent. This year, so we are having a strong volume development and together with a really good mix and very significant pricing to the extent of a bit over 13% in professional hygiene. Then, of course, organic growth was added. a bit over 26%, as you can see. Now, here is the area where mature markets is actually growing more than emerging markets. And there are basically two areas which is impacting this. The first one is China. You all know that the COVID restrictions in China have not been lifted. So the volume development there is quite weak. And the other area contributing to this, to the relatively weaker growth in emerging markets, is Russia. So we have practically no business left there when it comes to professional hygiene. So no different, of course, to the other business areas. The raw material impact is very significant, 10.6% as a negative margin impact compared to last year. And also here, We have compensated with price and we will continue to do so as we go forward with further price increases in Q3. Thank you.

Okay, so let's have a closer look at how we are taking the lead in leak-proof apparel. And we're using the term leak-proof apparel and washable absorbent underwear somewhat side by side. And of course, the acquisitions of NYX and Modibodi are a key to taking the lead here. But just to give a background, we define feminine care and incontinence care together as intimate care. And what we have experienced over the last number of years is that these two categories are becoming more and more interlinked. And that from a consumer perspective, it's all the same. And it's perceived from a consumer perspective as an overall intimate hygiene issue. category and period care daily intimate care is how we define feminine care while we split incontinence care into women and men and relative size of these two altogether intimate hygiene is approximately 11% of our sales and incontinence care slightly higher portion of that than feminine care. Leak-proof apparel. Why is it so exciting? It's so exciting because it's by far the fastest growing category in intimate hygiene. We expect it to grow by 20% per year for at least for the next five years. It's also a category, and Joanna will talk more about this, that's really attractive for younger people. It's today 7% of the intimate hygiene market. We expect it will be 15% in five years. And this is the overall reasons why consumers are shifting. It's a more sustainable option. It's comfortable. It's discreet. It's reliable. And not least through direct-to-consumer sales, its availability is higher and also awareness. So with that introduction, I would like to introduce the founder and CEO of Nixware, Joanna Griffith. Over to you.

Thanks so much. It's wonderful to be here today with all of you. I'd like to tell you a little bit about NYX. And we really are an interesting organization. We sit at the intersection of intimate hygiene, which we've just heard about, intimate apparel, and active. And our mission is to inspire our customers to be unapologetically free and truly to improve their lives through product and authentic storytelling. When you think about NYX, there really are a couple of things that I wanted to point out to you. So the first is that we are category creators. We helped invent the leak-proof apparel category. This is a very exciting category. It's one that the better part of 10 years ago really didn't exist. When you look at this category today, at least from an American perspective, over 54% of people are aware of leak-proof underwear. and the interest in trial is growing rapidly. Secondly, we're product innovators. So within this category, we strive to make the best possible product. A couple of accolades that we received last year were the number one rated leak-proof underwear brand by both Consumer Reports as well as Good Housekeeping, and this applied to both NYX and our team brand KT by NYX, which I'll touch on later. Finally, we are a movement brand, We have been pioneers within a lot of the trends that you're seeing more broadly within marketing today, including body positivity, inclusivity, and diversity, and really using our brand and platform to break down taboos and stereotypes, which is something that we share with Essity. Next, I will talk a little bit about NYX as a whole. So as I mentioned, we're a leading player in the leak-proof period and incontinence wear category. We have a wide variety and assortment of functional intimate apparel and active wear, which I'll speak to momentarily. We're a bold innovator. We love to use our platform to innovate and to build trust within our current super base. And perhaps most interestingly for this call is we have best-in-class digital capabilities. So we are a direct-to-consumer brand. 98% of our sales come online through our own websites. We do not currently sell through any third-party sites. So all of the success that you've seen to date has been exclusively through our own channels. And this has led us to have about a 30% market share in North America. These sales are split almost equally between Canada and the United States. And then finally, we have high gross margins in our capital light business, which has allowed us to scale to date very effectively. When you think about this category, there's sort of three key buckets that are really important to consider where customers are looking for worry-free protection. So the first is for period protection and period underwear. About 80% of people experience leaks during their period, so this is a great option for backup protection. About two years ago, we brought products to market that completely replaced the need for disposable products, so consumers are using it for both of those reasons. The second is incontinence underwear, which, again, there's a high need case within women specifically, especially during the postpartum period or for very active people, where we see about one in three women experience what we call stress incontinence. And then the third, and this might be surprising to folks, is everyday use. So people are actually coming to leak-proof underwear for worry-free protection against sweat, discharge, odor, all of those different things. And over 50% of NYX customers are wearing leak-proof underwear every single day, which is very exciting and a trend that we're seeing within intimate hygiene more broadly speaking as well. When we speak to intimate apparel and leak-proof apparel more broadly, what we've done at NYX over the past several years is we've taken our leak-proof intellectual property and we've rolled it out. We started in underwear. We then took our leak-proof IP and rolled it into maternity wear, launching products such as leak-proof nursing bras as an example. More recently, we've launched leak-proof swim. which has been met with terrific response. It's a wonderful alternative for people who wear exclusively pads and who are looking for protection while they swim. And then we really see the next frontier for leak proof existing in active. It's when people are sweating. It's when they are having the most challenges with traditional products, and it's also where there is high incidences of stress incontinence. And so we're very, very excited about our foray into activewear that we began last year. And then finally, we offer traditional reusable pads. One thing that Essity and NYX share are that we're really there for consumers through every single stage of life. In 2017, we launched our teen brand, KT by NYX, and this really had the insight to be there from first period onwards to help normalize periods and to help give peace of mind and confidence for young girls as they are first approaching their periods. From there, we take that consumer and they can live with us through being a young adult into the maternity and postpartum phase where we have specific products for them, and then through menopause as well as later in life. Next, we pride ourselves on having customers that are shopping for their mother, they're shopping for their teen daughter, their sisters, and we really are a multi-generational brand. Part of the way that we've been able to achieve this so successfully where others haven't is that We really approach our customer by storytelling first and selling second. We put our customers at the epicenter of everything that we do as a brand. They are our models. As an example, we've worked with over 1,000 of our customers. We do casting calls through our social media channels. Our most recent one, I think we had over 16,000 people apply to be a model for NYX, if that gives you any indication of sort of the interest level in the brand. They're our inspiration for new products. We have a very close direct relationship with our customers thanks to being a direct-to-consumer brand. And so we get lots of great ideas from them and actually credit the customers on our packaging. And then finally, they're our ambassadors. So they really are speaking on behalf of the brand, sharing their experiences. And we use our platform of over 800,000 social media followers to share their incredible life-changing stories and to inspire others around them. I'll now pass it to Frederick, who will give some more details about the transaction.

Yeah, thanks, Joanna. The purchase price for Nix, the agreed price was $320 million, roughly about $3.3 billion. And this is for 80% on a debt and cash-free basis. So, of course, Joanna will remain as a 20% owner. Now, as Joanna, you already mentioned this, but Nix is a very high-growth, high-gross-margin company. but also with very, very significant investment into growth. And of course, despite that, the EBIT margin is quite attractive. So we expect to finalize the acquisition in the second half of this year after customary regulatory approvals that we expect to have sometime in the next few months. So turning to another acquisition of Modibodi, as Magnus mentioned, and this agreement was signed actually the day before we signed the agreement relating to Nix. And Modibodi is also a leading leak-proof apparel. with strong market positions in Australia, New Zealand and in the UK. And just looking at Australia alone, the market share is approximately about 40%. And exactly as Nix, Modibodi is a high growth company, has very, very attractive gross margins and of course also EBIT margins, but of course impacted by significant growth investments and growth is a major theme also for Modibodi. So the purchase price amounts to slightly less than a billion sec or 140 million Australian dollars on a cash and debt free basis. And we expect also these acquisitions to be completed sometime during the second half of this year.

To summarize, we are building the fastest growing company in intimate hygiene and taking the global lead in leak-proof apparel. And just to say that with Nick's Modibodi and the leak-proof products that we have launched over the last couple of years under our own brands like Tenna, Tom Organic and our Femcare brands. We are really in the pole position in the fastest growing part of intimate hygiene. Very exciting. And also very exciting. Joanna will continue to lead NYX and both NYX and Modibodi will be operated completely independently from the rest of Essity. And then, of course, we hope to learn by the success that these two companies are enjoying at this point in time. To summarize then, this is the same slide that I started with. We've seen strong sales growth, significant price increases, high volumes, a sequential EBITDA improvement, And as mentioned now several times, significantly higher costs actually from all areas. So materials, energy distribution, but also inflationary cost impacts. We continue to invest for the long term. To finalize, looking to the extent that we can into the third quarter, I would say that uncertainty is higher than ever And it will be a very challenging quarter again. And this is due to the accelerating costs that we have already mentioned now a number of times that will continue also into the third quarter. We continue relentlessly to raise prices. We see that we will have significant price increases, especially in the fourth quarter. And this is then something that we will be working very, very hard to achieve, if possible, similar margins in the third quarter as in the second quarter. And this will depend. Again, huge uncertainty, so it will depend on the development of the costs. We know that our price increase momentum is very, very strong and it's now also increasing, especially in personal care. And to the extent we will balance that in the third or the fourth quarter, I think we will have to see. So with that, let's open up for questions.

Ladies and gentlemen, please press star one to ask questions. We'll now take the first question from our Charles Eden from UBS. Please go ahead. Your line is open.

Hi. Good morning. Thanks for taking my question. I've got a couple. Firstly, on the 10.8% price mix at the group level in Q2, could you split out how much of this is list price increases versus mix? And also, If you did get the energy surcharge pricing in consumer tissue and professional hygiene you were talking about at Q1, could you also quantify how much this contributed to the pricing in the quarter, please? Equally, if you could also help with the breakdown of the 21.6% consumer tissue organic sales growth between price and volume, that would be helpful. And then if I can just squeeze in a second question, it's just on German manufacturing, specifically focused on your consumer tissue and professional hygiene businesses, given the energy intensity there, but I believe you have four sites in Germany, which is about 12.5% of your global capacity in tissue and professional hygiene. Can you just talk about the excess capacity in some of your other sites in Europe or globally, and whether any potential limitations to production in the German sites could be offset elsewhere? Thank you.

Do you want to start, Fredrik? And I will talk about how we're preparing for any eventual gas shortages in Germany, which I guess you're referring to. So starting out.

Yeah, I think the first question, if I remember, Charles, you said how much of the total price mix was related to price. Was that your question?

Yes, please. And then if there was energy surcharge contribution, if you could split that out.

I cannot actually strip that out because you can say energy surcharges is just another price increase, you can say. So it's more of a tactical and faster way of increasing prices. So we don't specifically split exactly how much that was. But if you take the total price increase for the group, It was roughly about 12.5%. And the rest of the price mix, obviously, then 1.5% was relating to mix. And I think I mentioned before the different areas. So the majority of the 4% in health and medical was related to price. When you come to consumer goods, it's roughly about 15 or just short of 15. And when you come to professional hygiene, a bit north of 13. So this is basically the different price increases that we have had. Let's see the second question.

The growth in consumer tissue, 21.6%. Yeah, so if you take the total growth of volume was 1.6%.

If you look at the mix, approximately a couple of percent. And then finally, the price increase, roughly about 18 percent.

And coming into this is again Russia, which has a negative impact on volumes.

Exactly. So the volume is a bit lower than for the other areas. And of course, Russia is a very, very big part of that. So, yeah, those are the numbers.

Okay, so over to Germany and our sites in Germany where we are preparing to manage any situation from an energy perspective and especially as relates to natural gas. So what we're doing very practically is that we are preparing our German plants to be fueled by gas. So to be able to supply them with fuel by trucks, replacing them pipeline gas. So that's one thing that we're doing. We're also, in some cases, able to run production with electrical drying. So we have some examples of that. We are also, of course, working with our stock levels so that we could manage a couple of weeks, even if certain paper machines would be down for a period, and continue to convert and supply to our customers. And as you stated, it's around 11-12% of our production capacity so we have capacity in other parts of europe that could support it to some extent so we have a very comprehensive program that considers both investments the financial hedging as well then as supplying from from factories in other countries and believe that with this we will be able to manage supply throughout even very challenging conditions thank you

We'll now take our next question from Lin Usnarsson from SEB Bank. Please go ahead. Your line is open. Linus, are you there? Your line is open.

Yes. Sorry about that. Thank you very much. Thanks for taking my questions. First, I just wanted to clarify, did I hear you right, that you are guiding for group-adjusted EBITDA margin similar Q3 on Q2? Just to clarify whether I got that right early in the call.

Hi, Linus. First, I thought it was an Icelandic person calling in Lin Usnarsson, as it says here on the screen. I've been looking too much at football, I think, and the Icelandic team there. Hi, Linus. I'm not guiding. This is just an estimate and big uncertainties. So we expect to see very good price changes. increases also in the third quarter, even more in the fourth quarter. This is just how it kind of plays out in the negotiations that we have, while we expect to see sequentially and year over year significantly higher input costs in all areas. So this is an estimate, and it's very difficult to say.

Sure, sure.

And to reiterate, the margins in line with Q2.

Right, right.

And that's more important here, I think, is what's more important. What I want to underline is that we have fantastic price momentum and nothing goes to the sky here in terms of costs. And we are seeing continued momentum also going forward. And as I mentioned, also increasingly, this has come slower, but in personal care. So we are very, very confident that we are doing everything we can, and again, really, really leveraging and stretching the strength of our brand, our market positions, at the same time as we're also very focused on productivity, cost savings, and eventually we will see the impact of that, of course, also then in the numbers. So overall, good momentum in the business.

Absolutely. Basically, your message is that you're expecting to keep up with cost inflation in the third quarter, but not overcompensate quite yet. That may come at the later stage.

The cost inflation continues to be very high and we expect significantly higher costs in all areas, both sequentially and year-over-year, also in the third quarter, which is typically the outlook that we have.

Maybe, Linus, if I can add just maybe something we talked about many times before is that it's incredibly complicated. I mean, it's a time-consuming process regardless of which business area we're in to increase prices. It's a time-consuming thing. So it's not a one-day issue. And of course, so you have the cost increases, you negotiate on the price, and then gradually the price increases are executed. So if the cost increases are continuing to rise all the time, then of course it's difficult to kind of get ahead really because the cost increases that we have now, they are the ones that we will negotiate price for and get kind of additional compensation for a bit later. So I think the reason When you say we cannot compensate, I think we are definitely compensating, perhaps even more than the cost increases. But those are for the cost increases that occurred previously. So as Magnus already said, and we've said here a couple of times, is that we will have to continue to increase prices and we will do that. And with this price momentum that we have, we see all the possibilities of doing exactly that in all our business areas. It's just a time consuming process.

Absolutely. No, that's very helpful. Thank you very much. I think it's very clear that you are successfully compensating, but my question was more relating to at what stage you will kind of get ahead of the curve. But maybe on a somewhat different note, looking at health and medical aspects, There are other costs, it seems, 180 million krona increase year on year. Could you please shed some color on those costs? What are those? Are they, to an extent, one-off, maybe relating to Russia, Colombia, or anything else?

You said medical there. What exactly did you mean there with medical, Linus?

In the health and medical business area, there were other costs increasing, $180 million year on year.

Right. Okay. So I think Magnus said that if you look at market kind of movements that we track specifically on indices, those are within those marketing, but we also have inflation pretty much everywhere. So those other costs are mainly related to inflation and the factors that Magnus mentioned that we also have in the other areas. So no specific there.

Okay, nothing one-offish in that number.

Not really, no.

Before we continue the Q&A session here, I just want to remind everyone that Joanna is also on the line and happy to answer any questions.

Just one final question, if I may, on the leak-proof category. You've made two acquisitions now recently. Do you intend to make more acquisitions or should we from now on more view this as a primarily organically driven business?

Primarily organic driven business.

That's very clear. Thank you very much.

Thank you. We'll now take the next question from Behemvik from Credit Suisse. Please go ahead. Your line is open.

Hi, guys. Thank you for the call and taking my questions. I have three, if I could, relatively quick ones, I hope. Am I right in suggesting that pricing sequentially will step up from what was recorded in Q2? And related to that, historically, you have suggested that in order to compensate for the input cost inflation, you need about 25% pricing. I just want to know, to what we see today, what would that pricing number need to be in order to fully pass on the cost? Secondly, with regards to some of the moving parts in terms of cost inflation, are you able to break out the transactional element of the increase in your raw materials, because I think that was the biggest drag rather than the increase in USD terms. That would be helpful. And the final question, could I just discuss vendor and China? Q2 actually came out from a top-line perspective. better than expected, but I'm sure you'll agree we still need more pricing there. Could you highlight some of the dynamics in terms of the prices being passed through, how competition is reacting to that, because I know in Q1 competition was not following vendor, and how that is impacting the market share dynamics. Sorry for the long list.

You want to start, Fredrik? I'll talk about it.

Yeah, I think when it comes to pricing in Q3, we don't want to provide any specific numbers. So the increase now in Q2 sequentially was very, very strong. So roughly about 6% just in the isolated quarter. So it was a fantastic pricing quarter from that perspective. Of course, very much needed, but nevertheless. So I think Magnus mentioned it earlier that we will see more pricing in Q4, but there will be pricing also in Q3, partly from what we have already agreed on. And of course, new price increases that we will put in place in the near term. But giving an exact forecast on exactly how Q3 pricing will turn out, this is not possible to do. I can continue with the 25% because I think that's more of a statement that related to a specific category rather than the group as a whole. I think you get a a bit of a lead when you look at the margin and our financial targets so clearly if you look at margin and much more important rosy in in where we are at this point of time we have a significant you can say journey to travel to get to the 17 or more than 17 percent in a few years from now And obviously, that needs to come to a very large degree, not only but to a large degree from margin impact and, of course, a significant portion of that in pricing. So I think looking at the margin is perhaps a more relevant picture. Exactly how much we need will be dependent on, of course, the development of cost inflation as we go forward because we don't know that yet. I think it's fair to say that cost for Q2 has become much bigger than we anticipated. Pricing has also become bigger than we estimated. So from that perspective, all fine. Q3, clearly higher costs than we originally thought. And it's very, very difficult to say. So it's not that meaningful to give an exact number on the 25%, I think. But we will continue to increase prices and we will reach our financial target that we have set out.

Magnus, transactional impact, you want to talk about? Yeah, what was that? Currency, I guess.

Yeah, good question. It's roughly about 500 million. So it is actually quite a big component, but the absolute majority, of course, is related to pure price increases. But the dollar strengthening is actually not very beneficial at this point of time. So it's roughly about 500 million dollars The majority in business area consumer goods, but there is also some in the others. I can give you the exact numbers if you need, but roughly that.

And finally, Vinda. Vinda has the same strategy as the rest of the group to build very, very strong brands, market positions, leading go-to-market. And again, their online sales increased significantly. they are pushing very hard for price increases and how that will play out in the second half of the year. I don't know, but this is definitely the ambition of Vinda. This is what they're aiming for, as we are in all parts of the group.

Thanks, Michael.

Thank you. We'll now take the next question from John Anise from Goldman Sachs. Please go ahead. Your line is open.

Hello, everyone. My first question is on the health and medical pricing outlook and margin outlook, I suppose. I guess it's naturally going to be an area where it takes longer to get pricing through just by nature of the duration of contracts, which you spoke about earlier. But I guess on that basis, are you expecting the margin weakness here to be a bit more prolonged? Or do you have other initiatives to help in recovering margin if pricing is going to be slower than the other segments? And I guess also, do energy surcharges work in this component of the business? That's my first question on health and medical. And then I had a couple of quick clarification questions The first was on the energy surcharges more broadly. I guess, do they disappear when energy prices normalize? Or in your opinion, is it effectively the same as a regular price increase? And then my other clarification on the other cost component, is that all of the transaction effects falling here, or does some of that actually fall within the raw material line? And are you capturing rebates or discounts within that line item? And have they evolved, which helps explain

the negative movement year on year thank you okay i'll leave the other costs to you fred it sounds like your speciality here and i will talk about health and medical and i mean there are basically four things we can do in the health and medical we can make sure that the approximately one third of the contract volume that we renegotiate every year of course that we not only come out with better margins and higher prices, but also with new and improved contract terms, which means shorter contract duration and also with clauses and indices that gives the opportunity to compensate for raw materials. I mean, this has not been necessary. What we have seen as one of the huge benefits of this whole category, especially the NINCO category, I mean, in medical, the impact is very, very small still. But in IncoHealthcare, we have a significant impact from all the oil-based materials, super absorbents, also fluff pulp. We are working to change the contract structures to negotiate higher prices. but also as we see increased pressure on the healthcare systems and expect to see that going forward to catch the customers and consumers as they move over to self-pay and and we have an advantage here since we are one of the few actors who are both in the regulated dream burst part of incontinence care business what we call inco healthcare and in the retail part or self-pay part and then of course there are combinations where there's a self-pay component and a top-up component so pulling all the levers and then working very, very actively also with public affairs in order to make sure that the reimbursement systems are healthy and to the benefit of the users and the whole sector. So a lot of work going on there. When it comes to energy specifically, it's not relevant for personal care. Personal care uses not much energy. The energy consumption is really on the paper machines for the drying of the paper. Energy surcharges, as Fredrik mentioned, we see as any other price increase. And with the A drama that you're reading about every day now, also yesterday. We don't see them going away anytime soon. They should probably be higher with what we've seen now in the last couple of days in Europe on the ongoing gas discussions. So with that, other costs, Fredrik?

Yeah, my speciality, as you said, Magno. So, John, thanks for that question. So, I think your question was, where do you find the transaction impact? So, the miners, roughly about 500 million that I talked about earlier, and you would find those in market. So the market cost in raw material, basically, that's where you'll find them. There are some transactional currency impact also in others, but they're much smaller and they're relating to, for instance, bought in Finnish goods. But as I said, that's a much smaller market. I think your question was also, what about discounts? That's normally part of our productivity improvement. So if there is an increase of discounts for a raw material, that we calculate as a productivity improvement, or you can say COGS savings. And your question is, are they higher, I guess, in comparison to... to last year, and they are higher actually. So there is a positive contribution from higher discounts. But if you look at the kind of derivative or the change, that impact is actually lower than previous years. So getting discounts or increased benefits from that perspective is a bit more challenging in this market environment.

That's really helpful. Thank you. I just have one quick follow-up on the energy surcharges. So I guess if energy prices were to fall next year, what happens to the surcharge component of your price increase? Does it disappear or does it just stay there?

We have different terms for different surcharges, but in general, it's not purely mathematical. It's part of the overall kind of negotiations with our customers. So there's no easy answer to that.

Okay. Thank you.

Thank you. We'll now take our next question from Falvio Cazal from Bernberg. Please go ahead. Your line is open.

Yes, good morning, and thank you for taking my questions. Sorry, I have another one on the energy surcharge, just to understand the mechanics behind that. So I guess I'm interested in sort of understanding how long we could see this continuing to be added to customer invoices. Is the plan to continue to include it until you negotiate the price increases? And also, how have... retailers responded because I read an article a few weeks ago not relating to you but it highlighted a case of a retailer charging back their supplier on other costs such as distribution so wondering if you've seen any of this on your business and then my second question is relating to the private label business which grew faster than the overall tissue business in the quarter I realized that you took a little bit more pricing here but I wanted to ask if There's any contract wins that may have also contributed to this stronger growth or if you are seeing more down trading from European consumers in tissue. Thank you.

Okay, starting with the downtrading, with the energy surcharge, we actually have a percentage increase on top of the price that we have negotiated. That's very, very similar for all customers, both in professional hygiene and in consumer tissue in Europe and in North America. And we are also getting energy surcharges from our suppliers and increasingly so. And this is part of the inflation that you see that's actually not accounted for in the COGS headwinds of 1280 basis points. So this is something that not only we are doing, but many of our suppliers as well. And we will negotiate increasing surcharges or stable surcharges or taking them away depending on how costs develop. I can't be more specific than that. When it comes to the growth of the private label business, a lot of it is pricing, as you're saying. It's a combination, actually. There is some down trading. There's also some customers that we lost a year ago when we increased prices faster and more aggressively than many of our competitors that are actually coming back to us because their new suppliers were not able to actually supply them with sufficient service levels. So that's a positive. On a relative scale, we had a slightly negative impact, as already mentioned, on the branded business from Russia, from the lower growth in China, even though that improved later in the quarter. So I think that explains the dynamics overall in why private label grew to the extent it did.

Great. Thank you for that.

Thank you. We'll now take the next question from Martin Deboe from Jefferies. Please go ahead. Your line is open.

Yeah, morning, everybody. I have got some questions on Nick's. I think one for Magnus and Frederick, two for Joanna. Magnus and Frederick, the question is around synergies. I get you're buying into growth with this business, but you're paying 35 times EBITDA for the privilege of doing that. So the question is, what's the synergy case here, both revenue and cost, and are you quantifying that? And then for Joanna, I think, Joanna, two questions for you. One is, it's clearly a North America-centric business at the moment. I would imagine that part of the revenue synergy is going into Europe. But what's the competition? What's the competitive landscape like for leak-proof in Europe? And who are you going to have to beat, if anybody? And secondly, Joanna, how do you feel as a sort of entrepreneur? Do you worry that the entrepreneurial spirit you've built will get lost inside the big corporate? So those are my questions.

Thanks, Martin. That's excellent questions. We are not expecting any synergy. This is not a synergy case in how we've calculated the pricing here. What we are buying is a global leading position in leak-proof apparel. We're buying us into a position where we are the fastest growing company in intimate hygiene. We're buying into a very, very strong market position in North America, which we didn't have before, and into the most attractive segment of intimate hygiene where we are already very, very successful. So this is what we're happily paying for because it's... And we're buying into, as Fredrik has mentioned, very profitable companies from a gross margin perspective and also profitable from a net margin perspective. So that's how we see the purchase price. Over to you, Joanna.

Sure. Yeah, I think that part of the strategy here and plan is to really focus on North America. As Magnus just mentioned, there's a great opportunity to help build both the NYX brand in North America as well as the Essity family as well within North America and the United States. When we think about the competition as we think global, and we do see a lot of potential for NYX on a more global scale, we certainly have had that interest in the past. To be honest with you, it's a once in a consumer product lifespan opportunity. Um, it's a very fast growing category, not just within North America, but globally as well. It's still predominantly smaller niche players. There is not a leading global brand as of yet. Uh, we would like to see Knicks become that brand. Um, and so the competition is actually quite fragmented, uh, both, uh, in Europe as well as across North America as well. So that's how we think about those two things. Finally, in terms of entrepreneurial spirit, of course. I think that I've had the privilege of spending the better part of two years actually in conversations with Estity and the team there and have spent a lot of time discussing with them how we maintain our entrepreneurial integrity, how we bring that innovation of thought to the table as we see an exciting category that's having a lot of growth. And part of the rationale as I stay on as a major shareholder is that we will continue to operate independently and to have the ability to continue with the growth and momentum that we've seen.

Okay, thank you for that.

Yeah, of course.

Thank you. We will now take questions. a question from Oscar Lindstrom from Bank. Please go ahead. Your line is open.

Oscar Lindstrom Hi. A couple of questions from my side. The first one is also to, I think, both Joanna and Magnus. Direct-to-consumer sales seems to be taking an increasingly, you know, becoming increasingly important and also taking market share from traditional retail sales. You know, are there any wider consequences for the consumer goods business and I guess S&D's business as well? For example, I mean, do you foresee a more sort of fragmented market, more niche products, more SKUs, less power of retailers, of course? I mean, are there some wider consequences of this development? So that's my first question. My second question is on the divestment of the European private label consumer tissue business. What's the status of that? I know it's operating as an independent company, but there were some issues with the legal separation. If you could provide an update on that. And then my final and third question is on your comment about a better product mix system. also contributing to the overall price mix improvement in the quarter. I mean, does this mean that you don't see any real impact from consumer choosing lower-priced, simpler products as a consequence of the price increases? And, you know, what's your expectation for the future on that point? Thank you.

Okay, I will start before handing over to Joanna, and then maybe, Joanna, you can hand over to Fredrik for the better mix question to end with that. And first of all, when it comes to the European private label tissue division, you made some implications that we have never done. So we are not preparing for the divestment. We are preparing for setting up a separate entity to run this independently and That's progressing well. And when it comes to legal entities, it's not that we are having issues. It's just that it takes time, really. So that's progressing well. And I think the performance is fantastic in the private label division and also the culture and the momentum. So it's developing quite well. Then when it comes to this big question about the impact of D2C, We could talk for hours, of course, about this. What we always say is that we want to be overrepresented in the winning channels. And by that, we will kind of be on top of whatever happens. And clearly, D2C is now a winning channel. And that's one of the reasons we are so excited about the acquisition of D2C. of Nix. You touched on a couple of things that I think are very, very true. One is that it is easier to carry many, many SKUs direct to consumer than, of course, in a retail store. And there's also a greater opportunity for brand building of niche brands or bigger brands like Joanna has done with Nix. Over to you, Joanna.

Thank you. Yeah, I think what's interesting that we've seen in North America at least is about a 10-year acceleration in e-commerce as a result of COVID. And so I think it makes sense that you're seeing an overcorrection towards D2C because so many consumers have now changed the way that they shop. As Magnus mentioned, specifically for our category and for leak-proof apparel, D2C plays such an important role. When we think about leak-proof underwear, it's not just about one single pair of black underwear that you would buy in a drugstore aisle. Really, we see the future of leak-proof underwear being ubiquitous with regular underwear. And for that to happen, customers have to have the ability to pick different styles and colors and to match it with their bras, etc., And that's where direct-to-consumer becomes increasingly important for two reasons. One is to be able to have the offering, and then the second is to be able to have that direct relationship with the end consumer so that you can optimize the SKUs and assortment on a go-forward basis. I think that from our perspective at NYX, and it certainly seems like it's in line, is that really what's important today is to be there where consumers are shopping. So, for example, for NYX, while we've been exclusively direct-to-consumer in the past through our own channels, we do see the opportunity to partner with third-party retailers, to have that act as a discovery mechanism for the brand. perhaps where they try a product and then they come online to see the full assortment. And so I think increasingly what you're seeing, at least within the North American landscape, is really more of a multi-channel approach and showing up in the right way with the right assortment depending on the channel. I will pass it to Frederick now, who will speak to the better mix question.

Yeah, thanks. Thanks, Joanna. It's actually quite a difficult question to answer because I think we do see some, what you mentioned, some down trading, Oscar, especially towards the latter part and in some markets. But overall, I think demand is still very strong. And of course, the focus for our company is and has been very much focused around premiumization around innovation and we can just see that we have continued to see good demand for for those products especially in professional hygiene and in in consumer consumer goods so so the mix has been quite strong going forward very very difficult to estimate exactly how the day down trading will play out but uh So far, it has actually been, on the balance, a relatively marginal impact, although we see those signs.

Thank you.

Thank you. We'll now take our next question from Carol Zood from Kepler Shuffle. Please go ahead. Your line is open.

Good morning, and thanks for taking the question. I have two. The first one is on professional hygiene, which has a strong quarter compared to last year, as COVID is more and more to the background. I was wondering, on a more high level, how has COVID changed this market in North America and in Europe in terms of product, competitive landscape, et cetera? And the other question is on cash flow. with margins under pressure and working capital up. And that is now closer to three times EBITDA. How do you look at the capital allocation going forward? Are you still eager to do more M&A or less so, given where we are with the balance sheet? And cashed out, it still comes for a mix and motive.

Thank you. COVID and the impact on professional hygiene, it's the only business area that hasn't fully recovered compared to 2019 in relation to volume when it comes to overall top line, it has by far, but volume-wise... We expect to see similar volumes a year over 2019 by the end of this year. So it will take a few more quarters because it's still growing volume-wise. And what we are still seeing is a higher consumption of the skincare products like hand sanitizers, soap, paper hand towels. So hand hygiene is still something that's driving the category even after COVID is over. gradually subsidized. I mean, we still see COVID in many markets, of course. And as Fredrik mentioned, we are also seeing a strong premiumization, actually, that the demand for our premium or strategic dispenser lines is increasing. And partly, I think, because it's replacing also the jet air dryers, which have become less prevalent, even if we still see them a lot following the pandemic. With that, I hand over the question about capital allocation.

Yeah, Carol, good question, because we are very committed, as you all know, to our capital restrictions, so solid investment grade, as you know. And exactly as you mentioned, we are pretty close to the thresholds in terms of net debt to EBITDA. So from that perspective, there isn't a lot of room in our balance sheet at this very moment in time. Now, stating perhaps the obvious, so... In the first half, typically, we consume working capital. In the second half, we normally generate working capital. So, of course, we continue, as you have seen, to have a good cash flow. And so we are rebuilding our strength in the balance sheet. So maybe you shouldn't expect any immediate acquisitions, but, of course, we will create room for further acquisitions as we go forward. But we are committed to our capital policy.

Thank you.

Thank you. We'll now take next question from Tom Skyes from Dojo. Please go ahead. The line is open.

Yeah, morning everybody. Firstly, just a couple of questions on NICS. You said it's the capital light model. So I just wondered that presumably you're outsourcing all of the manufacturing and logistics. How long are those contracts and When were those renegotiated, please? Then just on the breakdown of sales of NYX, how much of the revenues are actually the core leak-proof underwear and how much are other items that are advertised? Seems to be a broad array of categories that items that NYX is actually selling. And then just for Frederick and Magnus, just on the SG&A, please could you just remind us or just tell us how much of the SG&A is sector-nominated and how much is in other currencies, just so we think about the effects further down the P&L and the SG&A line as well, please. Okay.

So thanks before handing over to Joanna. Just when it comes to the breakdown of the different types of products in leakproof apparel, we don't provide that number for two reasons. One is that it's competitive information. Secondly, because as we see it, it goes together. And Joanna already mentioned the why from a consumer standpoint. perspective it's you tend to buy in pairs and both bras and underwear and I'll hand over to you now Joanna to give more color on this and also on the capital light structure of the business

Sure, that's right. I think, as I mentioned before, what we believe the future of leak-proof underwear is is that it will be ubiquitous with regular underwear. And so for that reason, we do have a broader assortment so that customers can purchase our products exactly like they do any other underwear that they would buy from a major retailer. Another kind of reason behind the rationale behind the mix of assortment is, especially as we enter more broadly into apparel, having... our logo be something that our customers wear with pride and confidence, where it's not necessarily known that it's a leak-proof product. It might be or might not be. As I mentioned in the slide where I sort of outlined how we've incorporated that IP across the entire range and suite of products that we offer, I think if you go back and take a deeper look, you'll actually see that theme of leak-proof across almost everything that we produce. So just to highlight that piece there. In terms of Capital Light, that is right. We like to do what we do best and then partner on other aspects of the business. So we do outsource manufacturing. While we do all product development in-house and take a strong approach to product development, we do outsource manufacturing and we do outsource our fulfillment and warehousing as well. From a length of relationship standpoint, we've been working with our 3PL partners since 2016. They've been tremendous partners for us as we've scaled and continue to build their own infrastructure to keep up with our level of growth. And so that is a long-term relationship. The last contract renewal took place a couple of years ago. I believe it was in 2019, although we're actively in discussions now to see if there are rooms for economies of scale now that we have grown, especially coming off of 97% year-over-year growth last year. And then from a manufacturing standpoint, we've had long-term relationships with the bulk of our manufacturers. Our main manufacturer we've been working with since 2015. And we've been diversifying our supply chain over the past few years as we've continued to scale. We negotiate prices on an ongoing basis and have been able to keep our cost of goods stable over the past two years in spite of the many challenges that I think have been highlighted today. And that has a lot to do with our growth and our volumes and driving economies while offsetting some of the other pieces.

Yeah, Tom, maybe taking the last question, to be perfectly honest, I don't have the exact percentage there, but it would be roughly about 10%. And if you need a more exact number, we can come back to you later. But it's roughly about 10%.

Okay, that's fine. Thank you very much indeed.

Thank you. We'll now take our next question from Victoria Nice from Soctron. Please go ahead. Your line is open.

Good morning. Our first question is on Vinda. I think, as Farhan said, that Vinda seemed to be much better as a whole and almost unimpacted by COVID disruptions, at least outside of professional. We just wanted to clarify whether that was the case or was it largely because of the softer comparative and growth was actually still contained overall? And if so, could that catch up in the third quarter if lockdown situations improve from here? And then our second question just relates to the cost saves which were negative as a result of inflation. Could we expect this to continue through the second half with inflation levels where they are still? Thank you.

The first question answer is I don't know. What we saw in the second quarter was both very negative impacts in the beginning of the quarter from lockdowns and then I think quite a lot of restocking towards the end of the quarter. So expect it to be lumpy and uncertain. So I can't say about give any outlook for Vinda for the second half of the year. When it comes to cost saves and the impact from inflation, Fredrik,

Yeah, it's very difficult, Victoria, to give you a forecast, but I would probably expect so. So once again, we talk about cost saving. Just to remind everyone here, what we've already said is that we have cost saves coming from various projects that we undertake, and there are hundreds of them in everything from logistics to within the plants, relating to material rationalization, et cetera, et cetera. So there are hundreds and hundreds of projects that we kind of entertain on a continuous basis. And they continue to generate very, very good and healthy savings. So the activity level is high. What is actually affecting us, and we've said this now many times, are things that we also have impacting our productivity. So the measure we're producing is actually not a cost save, it's a cost productivity. And we use that as a proxy for cost save. So Normal inflation also comes into that, as I said. So what we've seen now in the first half is very elevated costs in terms of inflation, in terms of maintenance costs, in terms of a bit of productivity generally in plants. So there are many, many different things. And we would expect probably most of these elements to stay for the second half. So this will be... You can say not a normal year, and it will be challenging. Exactly how it will play out will be difficult to say, but probably similar to the first half. Of course, as things go back to normal, we expect to see the kind of productivity and all the projects that we do, all those efficiency measures, to come into the P&L once again. But for now... Well, they are coming into the P&L.

Yeah, on a net basis. On a net basis, yes.

But they're very much in the, you know, exactly. Yeah.

Good. I think that was the last question. So any final words from you, Magnus?

I think we have a very good Q&A here covering both the fantastic growth and pricing momentum that we have based on our strong brands. We continue to face significant cost headwinds, as mentioned several times. It was really interesting and exciting for me to listen also to Joanna today. And I hope that all of you also learned a lot about leakproof apparel and the opportunities in this exciting category. So with that, I wish all of you a great summer and thank you for listening.