Essity AB (publ)

Hello and welcome to Asciti's press conference about our third quarter interim report 2022. I'm Josefin Edvall, head of communication, and today our president and CEO, Magnus Groth, together with our CFO, Fredrik Rystedt, will go through the highlights of the report. And of course, we'll have a Q&A in the end. So, Magnus, with this, I hand over to you.

Thank you very much. Good morning, everybody. To summarize the third quarter, we saw sales growth of 17.3% with strong contribution from price, 14.5%. But also, and very importantly, volume growth in all our three business segments and a positive mix. So a combination of all these three parts of the overall growth. And to that, in addition, 1% of growth coming from acquisitions. Adjusted EBITDA was close to 3 billion and the EBITDA margin 7.5%. We continue to see significant cost inflation in the third quarter, especially on energy, but also on distribution and raw materials. Having said that, we continue to focus on all the great things that is making SCTS successful and the leading company in health and hygiene. That's innovations and brand building, continued focus on efficiencies. And we see benefits coming from in cost of goods sold in the short term offset by inflation, but still very good savings. And longer term, our efforts in digitalization and sustainability are paying off. And I'll talk more about that in a minute. In the quarter, we also closed the acquisitions of Nix and Modibodi, two leaders in leak-proof apparel. So taking a closer look at the adjusted EBITDA margin, which was down 400 basis points compared to a year ago to 7.5%. with a big negative impact on gross margin, offsetting the higher prices and volumes I just referred to. Romter's energy and distribution had a negative impact of 1,270 basis points in the quarter, so quite significant, and we saw an increase in all these three cost items in the third quarter. AMP and SG&A contributed positively to the margin. AMP was slightly lower compared to a year ago, while SG&A was slightly higher. So even though margin was down, the offset of the headwinds was very, very successful. I'm very proud of the achievements done throughout the organization. We talk a lot about costs, costs, costs and how we are able to compensate when it comes to pricing. And we've been clear over the last seven quarters since uh costs started rising in a way that we've never seen before that we will fully compensate uh the cost inflation from raw materials from energy and from distribution with pricing and this graph shows how we're doing in that respect so each of the bars is the quarterly cost increase compared to the fourth quarter of 2020. So we're not looking sequentially or year over year. So it takes a while getting used to this graph. But for instance, in the third quarter of 2022, the quarter we're in now, we had 6.4 billion higher costs compared to the fourth quarter of 2020. And as you can see, every quarter it's been increasing compared to the previous quarter, this difference to Q4 2020. And as you can see, so has our pricing and actually at an accelerating level, but there's still a lag. And we have analyzed this in detail and see some very positive developments. And if we take the price increase line that you saw in the previous graph, it's here also in magenta, and just move it horizontally two quarters to the left, you can see that we are compensating for cost increases in energy, raw materials and distribution with a little bit less than two quarters. So much, much faster than we ever did before. And this is an achievement that we've never seen in the organization before. There's a difference. We compensate quicker in the tissue categories. It takes a bit longer in health and medical. But overall, this proves that we are catching up with the significant cost increases with pricing and doing that while still having positive volumes and mix. Now, the big question is, of course, what will this look like going forward? And we will not give any estimates about margin development in the coming quarters. But when it comes to costs, it's clear that distribution costs sequentially, we expect to be quite similar to the third quarter. Energy costs, impossible to predict in Europe. These times, 70% of our energy costs are hedged. Those hedges are significantly more costly in the fourth quarter than in the third quarter, so we'll see sequentially higher costs there. However, the 30% that are not hedged are very difficult to predict, but looking into October so far, any costs have been quite low but there's still two months to go in this quarter so very very difficult to to predict and finally raw materials where we expect in the fourth quarter to see higher raw material costs and this is what we will see in our books and it's a consequence of changes in in currencies in combination with some raw material price increases that we saw in the third quarter that rolls over into the fourth quarter. And I'm underlining that since many of you are seeing that from a global market perspective, a number of raw materials are now flattening out. But in our books in the fourth quarter, we'll still see higher raw material costs. That's the near-term outlook when it comes to costs and when it comes to pricing. As we mentioned, after the second quarter, we expect to see good pricing also, momentum also in the fourth quarter. From a percentage perspective, in line, maybe as third quarter, but from an overall perspective, higher price impact, positive price impact in the fourth quarter than in the third quarter. I mentioned to say something more about innovation and digitalization. We continue to focus very much on innovation based on sustainability. I have some examples. We have more sustainable packaging for all our baby diapers in the Nordics. We've also launched a really exciting innovation with a very positive impact. It's the LibroTouch Hybrid Diaper, which is a textile pant, which includes an insert, an absorbing insert that is then disposed of, reducing the CO2 footprint significantly. Very exciting, something that we're just launching as we speak. Getting back to e-commerce as well now accounts for 14% of net sales in the third quarter. That amounts to 5.4 billion. So we're a big player in e-commerce by any measure. And those 5.7 billion are split quite evenly between pure players and multichannels. And the growth compared to the third quarter of last year was 20%. So good progress here. It's important for us. This is where, I mean, we know that after the pandemic, this channel has grown somewhat slower, but in the longer term, we're absolutely convinced that this is where we need to be to grow in the growing and winning channels. With that, I'd like to invite Fredrik, our CFO, to give some more detail on our three business areas. Welcome, Fredrik.

Thank you, Magnus. I will do exactly that. So starting with health and medical, we continue to do quite well in terms of organic sales growth with strong contribution, both from price mix and also from good volume development. And growth was particularly strong in Latin America and Eastern Europe. We talked about medical continuing to grow and especially their wound care did really well in the quarter. So the cost headwinds, we talked about that and Magnus alluded to that earlier. have been very significant in the quarter. So as you can see on the slide here, 980 basis point margin impact. And to a large extent, we compensate with price. But as we have reported many times, the structure of this market makes it more time-consuming to fully compensate in terms of price. And if you look at that and decompose that slightly more, roughly about 40% of the business relates to tenders. And tenders will have a kind of an average length of about three years. So you can pretty much reset about a third of that every year. So that makes it time consuming to actually adjust the pricing. If you take the rest, about 40%, relates to reimbursement business. And, of course, price increases there are subject to government decisions or indexation and other things. And, of course, that's also quite timely. It takes a very long time. But it does happen. And within this quarter, although not affecting us quite yet, we saw an example of where such indexation has actually moved in the Netherlands, where the index increased with 9.5%. So price increases... happens also in that part. And the remaining about 30 or a bit less than 30% is more self-pay or e-commerce where the flexibility is higher. So if you take this composition, needless to say, it takes time. And we are quite pleased given that structure with the development when it comes to pricing. But bearing in mind the kind of time lag, Magnus talked about the group before with a bit less than two quarters. Here it's much longer. So, of course, obviously, we will need to continue to increase prices as we progress now in coming quarters. So turning to consumer goods. a really strong organic sales growth. You can see here that the organic growth was just under 18 or 17.6 and a bit more if we include the acquisitions that we've had. And once again here, Good contribution from particularly price, but also mix and volume. It looks fairly low if you look at the volume there with 1.3, but here we're quite impacted by our Russian business being much, much lower now. So excluding that, volumes actually increased with about 2.5% or in that ballpark. And you can see that all categories continue to increase with the exception of baby here with being flat, as you can see. But this is largely due to the exit or the closure of our diapers business in Latin America, as we have reported a couple of quarters ago. And if you exclude that deliberate exit of the market, organic sales growth in baby was roughly about 7%. So generally, the demand was actually quite good all over for us, and particularly so as an example in the personal care categories in Latin America. And we continue to expand the e-commerce business pretty much everywhere. And as an example, once again, perhaps using Latin America, we're now market leaders in all categories in Latin America. in that area so a quite a strong development down trading has been a discussion and although in the context of things really not very material for us we don't see that much of signs from from down trading anywhere in our business but there are signs in particular markets so Once again, Latin America, there is some down trading with the premium segment being slightly lower now or a bit lower than we've seen, for example, last year. We see bits and pieces elsewhere, like the UK, where there is a bit of down trading. But so far, no kind of material impact in our books. So input cost headwinds, as we talk about for all the business areas, 1,450. So just very material. And of course, obviously a lot of that in consumer tissue. And of course we compensated here in all geographies, in all categories with price. So to an average of about 16%, so quite significant price increases in everywhere. Needless to say, and that's of course not a surprise, the biggest price increases have happened within the consumer tissue area. And of course, that's also because that's where we are most affected by input costs and, of course, not least energy. So as we look forward, Magnus, you alluded to it, sequential costs will continue to increase, partly due to just adverse currency movements and lag impacts. So we'll see higher costs also sequentially and in the fourth quarter and we will continue obviously to to raise to raise our prices everywhere so turning now to professional hygiene it's actually the area where the organic sales growth has been the strongest and and here a bit different you can see that mature markets is actually growing faster than than emerging markets although growth is strong in in both areas, so to say. There are a couple of explanations to the emerging market numbers there. First of all, once again, Russia. So if you just exclude Russia from the equation, the 2.6 there you see in volume would have been four. And the other main factor is China, where COVID restrictions are clearly still impacting quite significantly the volume growth. So generally, the markets continue to recover from COVID. So it's pretty good in most places. And just as an example, we can see that our hotels and restaurants and catering business have benefited from a strong tourist season in Europe as an example. So generally quite good markets. Now, also for pH, input costs have been very significant, and you can see here 1,000 basis points impact. There is also, as for the other areas, increases in SG&A, and we managed to compensate here a significant part through price increases, so very, very, very strong in the quarter. And in fact, pH is the area where we've been the fastest in raising our prices. And if you look at the EBITDA and you compare it to last year, it's actually higher now. Margin is still lower on the back of raw material and just a higher sales number. But the EBITDA is now higher in Q3. So we're quite happy with that. And also here, obviously, input costs will sequentially continue to increase. So we'll see more price increases as we progress in coming quarters. And with that, Magnus.