Essity AB (publ)

And welcome to SCT's press conference about our year-end report 2022. I'm Josefin Edvall, Senior Vice President Communications, and here with us today, we have Magnus Grupp, our President and CEO, and he will join us from our office in Eastman in Germany. And in Stockholm, our Executive Vice President and CFO Fredrik Rystedt will also join. And in the end, as usual, we will have a Q&A session. So with this, I hand over to you, Magnus.

Thank you, Josefin. And good morning, everyone, to this Q4 full year report, but also with a focus on the fourth quarter, of course. And to summarize the fourth quarter, we saw record high sales growth both in growth and sales in total. Our adjusted EBITDA was in line with 2021, despite significant cost inflation. Of course, the massive price increases that we put through played an important role here, but also efficiency improvements and higher volumes. So we were able to combine throughout the year price increases with the continued volume growth. We did three acquisitions during the year, so we'll talk a little bit more about them, and a very high pace of innovation, higher than in the years before. E-commerce grew with 20% to 15% of sales. So the financials for the full year, net sales increased with nearly 30%, and the organic sales growth, including M&A, was 17.7%, of which acquisitions amounted to 2%. Adjusted EBITDA, as I mentioned, almost in line with the year before, thanks to the top line growth in combination with the efficiency improvements. Adjusted EBITDA margin 8.4% and ROSI at 9.7%. With all of this combined, the board suggests to the annual shareholders meeting an increase in the dividend from 7 kronors per share to 7.25%. which means that we continue on a nice gradual increase here in the dividends provided an increase if that is approved by the annual shareholders meeting by 4% compared to the year before. I mentioned three acquisitions. Legacy Converting, which strengthens our offering in North America in wiping and cleaning. And Nixon Modibodi that we've spoken about before, that saw significant growth here in the fourth quarter, giving us a leading position in leak-proof apparel in the world. Very exciting, very sustainable, very much in line with what our consumers and customers are looking for. I mentioned that our pace of innovation was higher than in previous years. We have launched over 30 new products and some of them you can see here behind me, which is 20-30% more than the year before. So in spite of the difficult and challenging market conditions, this is important to us and we can continue to invest here. E-commerce, 23 billion of e-commerce sales, a growth with 20%. And this is in a year when many e-commerce sites or e-commerce businesses have been struggling coming out of the pandemic. So we still grow slightly faster in e-commerce than we do as a whole. And you can see the split here. And what we expect going forward is that direct-to-consumer, which is currently 2% of sales, will be gradually a higher share going forward with the acquisitions of Nix and Modibodi, but also with other initiatives that we are doing in the company. Something that's really, really key to us is to remain in the lead in sustainability. And we saw a lot of progress also in 2022. We were able to continue our path to achieving a reduction of our Scope 1 and 2 emissions to 2030 by 35%. We're now at minus 18%. And today, I only present Scope 1 and 2, Scope 3. We're still waiting for those numbers. It takes some more time, but we expect to see good progress in that area as well. And then you can see a list of awards and recognitions there from very reputable institutions. So this is something that's so appreciated by our customers, our consumers, our employees and other stakeholders. Moving over then to the fourth quarter of this year, which might be the part that's of most interest. Again, very strong sales growth, net sales 28%. and a sales growth in the quarter organically with acquisitions of 16% and as an adjusted EBITDA that grew over the same quarter of last year with 33% and you might wonder of course how can this be when the margin is only up 30 basis points from 9 to 9.3% but this is of course due to the huge growth in top line. So overall, if margin is increasing slightly, which we're very happy about, we're even more happy about the fact that overall the EBITDA profit is growing by 33%. And adjusted ROSI improves with 130 basis points and earnings per share by 20%. So a very strong development in the fourth quarter. The adjusted EBITDA bridge, where we saw a support from uh gross profit margin of 70 basis points in in q4 and this was in spite of headwinds from raw materials energy and distributions of 950 basis points so we are now through our price increases and other initiatives over compensating for that for the first time so we are really moving here uh amp in line with uh with ebitda growth which means that amp is increasing but not as percentage of sales while sdna which is lower as percentage of sales for the year increased in the fourth quarter and this is a combination of salary inflation higher payout on incentive programs in 2022 travel costs so it's more of normalization effects than but also some salary inflation rather than and that we're taking on actively more cost which we are not so that's the the overall bridge and another way of looking at presenting that was uh much discussed in the last quarter is this input cost increases versus implemented price increases and after the third quarter we presented that uh that we were catching up with the cost inflation in energy, raw materials and distribution. And we were less than two quarters behind. So I'm really happy to announce that we have now caught up with these costs after having a sequential price increase from Q3 to Q4 of 6%. So as you can see, a really steep uptick there in the curve when it comes to price increases. Now, looking forward, even though we see stabilizing input costs in these areas, we expect to continue to have salary inflation and an inflation environment in maintenance, in our SG&A costs, sales administration, which is particularly, when it comes to sales force, important for health and medical. And this is something that we will have to continue to to compensate with price increases. So price increases is still high on the agenda, even though we have caught up in this area. So with that, I will hand over to you, Fredrik, to talk about our three business areas, which have all of them grown through the year. So over to you, Fredrik.

Thank you, Magnus. And I will start with health and medical. And we achieved a good growth, organic sales growth in Q4 with 4.6%. And all of our business areas are affected by lower activity in Russia, including health and medical. And as you know, we are in the process of... exiting our Russian business. If you exclude that for health and medical, organic growth amounted to approximately 5.1%. And this is mainly driven by pricing. You all know that pricing, in comparison to our other business areas, is a bit of a slower process. Reimbursement systems, tender business and inco are the main factors. explanations to that but despite that q4022 in comparison to q4021 we increase prices with over 7% and sequentially just from Q3 with 1.7%. So really, really good progress there on the pricing side. You can see that volume was slightly negative, and this is predominantly driven by the fact that we abandoned a few loss-making or non-profitable contracts in incontinence healthcare. So, cost inflation continued to be very severe. And if you look at the margin impact, just in comparison to the same quarter of 2021, the margin impact was 6.6 percentage points, 660 basis points. The main drivers there being super absorbance, fluff, and actually negative currency transaction impact. Now, we expect as we go forward that input costs for health and medical will largely stabilize. But, and I think you mentioned that previously, Magnus, if you look at indirect cost, inflation is quite significant. And not least for medical, this is a major factor. So, of course, we will need to continue to increase prices as we progress in future. incoming coming quarters of course to compensate for that but also to the restore the margins of of the business area now just a final couple of comments on on the acquisitions that we've made so hydrofera aquacast and the sports tapes business with several brand names they all have been well integrated now into the rest of our business strengthening our offening all performing very well and just take that as an example of hydrophera in q4 with a growth of 11.4 so really a good progress on on the acquisitions now turning to consumer goods really excellent growth as you can see nearly 16 percent here organic And, of course, the same as for health and medical has also been impacted by the lower activity in Russia. And here also the exit of the baby diaper business in Colombia. And if we kind of adjust for those two, growth was actually roughly about 17.5%, so really strong. And same here, the main driver was actually pricing. So we achieved a kind of year on year in Q4 of roughly about 20% and sequentially a bit over 6%. So very, very strong progress. And we had that pricing increase in all our categories and all our geographies. And of course, as we have seen also before here, consumer tissue was the main driver. You can see here that volume actually was down. And this is new because we have seen volumes previously in Europe. during 2022 actually being positive. Here, the main drivers, and if you disregard here, Russia and baby, approximately 3% down in volume. The main drivers being consumer tissue and baby. And if you take consumer tissue as a start, then, of course, this was impacted by the very significant price increase, but actually to an extent also that price negotiations We're ongoing during the fourth quarter impacting that. It's our actual belief here that it's absolutely our belief that as competitors catch up in the balance between input cost and pricing, volumes will pick up in the coming quarters. And of course, when it comes to baby, the impact was there beyond LATAM, also the fact that we also in this area left an unprofitable retailer contract. So this was the main explanation. So if you look at the input cost, starting with energy, it was actually much lower in the quarter than we anticipated. And this had to do with a couple of different things. So first of all, generally, pricing levels in the spot part of our energy consumption was lower. And secondly, we had subsidies in the European system, and also a couple of one-offs, so in terms of the energy price, it was much lower. But you can still see that the input cost, the impact from that was very severe, with 1,130 basis points, so really very significant. and as exactly the same as for health and medical we see inflation in indirect costs so so basically in coming quarters we'll see input costs actually stabilize with the exception of one thing and that is the energy that will significantly increase a couple of reasons for it the prices in in our hedging contract will be significantly higher and the one offs and the subsidies that i will men that i mentioned earlier will not be there in Q1. So we will see that increasing. And the same goes for indirect costs that will increase. So overall, of course, we will continue to work extensively with price management. And then finally, a couple of... comments on the acquisitions of Modibodi it's early days there but it's a good progress and progressing in line with our plans and as an example Nix had a growth in the fourth quarter of 28% so we were really happy with that and it was specifically in the United States that was the main driver so very much in line with our with our hopes for the company, so performing well. Turning to professional hygiene, we've been really pleased with the performance of professional hygiene throughout this year, and Q4 was really no exception. So if you exclude Russia here, the organic growth was pretty close to 20%. And pH or professional hygiene is the area where prices have increased the most. So Q4 versus Q4 of 21 was increasing with about 23%. And sequentially, we increased prices with approximately 8.5% between Q3 and Q4. Now, volumes were negatively impacted, as you can see here, and the price increases played a part of that. I mentioned Russia earlier, and we also had a quite challenging market in Asia, and you can actually see this very clearly from this slide when you compare the organic sales growth in mature versus emerging markets. Now, also, and pretty much the same story in terms of professional hygiene, input cost inflation was very severe and input cost increased or had a margin impact of roughly about 690 basis points. So very, very severe. But as you see, and this was also the same for consumer goods, that overall EBITDA is much higher. And here we also see, and it was slightly so also in consumer goods, but here a very, very significant margin increase. improvement so we are quite happy with the performance as as you can see here from professional hygiene now the cost outlook remains pretty similar to the other energy will increase significantly indirect costs so all the margins have picked up here here it is definitely our view that prices need to stay and potentially even increase further now just as a Final comment, also in this area, we made an acquisition at the early part of 2022 with legacy converting, really strengthening our offering in the wiping segment in North America. And also legacy has performed well in the fourth quarter with strengthening margin and growth, good growth. And if you look at the total wiping and cleaning business in Q4, it actually increased with a bit over 12%. So, Good progress in general for professional hygiene. And with those words, Magnus, over to you.

Thanks, Fredrik. So after having listened to that, it's quite clear what our priorities are for the year ahead. Price management will remain very, very important for us and a strong focus. But also our longer-term efforts to innovate, to strengthen our brands and to launch products products and solutions that our consumers and customers appreciate. We also will have a strong focus on cost efficiency to manage also the increases that Fredrik referred to in indirect costs. So that's an important focus for the year. And of course, as always, working with the overall mix to grow faster in the high margin businesses and continuing our very important sustainability journey. So very clear priorities for this year. And we're already one month into it and working hard in all these areas. So thank you for listening. Let's open up for questions. Thank you.

So thank you, Magnus. Thank you, Fredrik. And let's invite our audience for a Q&A session. Operator, can you please help us open up the lines?

Thank you. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question from the queue, it's star two. But again, please press star one to ask a question. We will take the first question from Victoria Neese from SG. Please go ahead.

Hi there. Good morning, everyone. My first question is on other costs, which stepped up sequentially again by around another £900 million. What is driving that other than the more negative cost savings? Could we assume that there's some reallocation of energy costs to surcharges within other costs versus underlying cost allocations? And then my second question is on the volume drop-off in professional hygiene, in part driven by the sequential step-up in pricing. Was the volume reaction more than anticipated? And are you seeing greater elasticities in Europe, as we're hearing from some other companies? Or perhaps is there an element of forward buying by distributors ahead of anticipated or planned price increases? Thanks very much.

So Fredrik, if you want to start with the first question, I will take the second about professional hygiene.

Yeah, basically, thanks, Victoria, for your question. I'll give a brief answer. We can provide more details should you want that. But if you take the overall cost increase... It's mainly related to distribution cost overall being higher. It's also actually an inflation in our product or our COGS relating to inflation in salaries. And the rest is largely actually due to SG&A. And if you look at that SG&A, it's driven by many factors. So salary inflation, we actually have a bit of higher bonuses this year and general inflation. So it is a cost increase that we see that's generally driven off of the market inflation. market conditions and to some degree as i mentioned also bonuses okay so regarding the second question about professional hygiene

We have a very, very strong performance in Europe and an improving performance in the US and quite weak development in Asia in the quarter, as you could also see from the much lower sales in emerging markets. Nothing specific, no news about any pre-buying in anticipation of higher prices or anything like that. I think it's just one of those variations in general, I feel very confident about our professional hygiene business that will continue to develop really, really well as it did in the fourth quarter and throughout the year, actually.

Thank you.

The next question comes from Charles Eden from UBS.

Hi, good morning. Thanks for taking my questions. My first one is on price increases. You mentioned the need to take incremental price increases again in 23. Frederick, are you able to give a magnitude of sequential increase you're looking for in Q1 like you did with respect to Q4 with the Q3 results last year? My second question is on energy costs. And obviously, it's not an insignificant number for F&T. You are normally, I believe, on average 70% hedged entering the year. I just wanted to clarify, is that still the case for 23, i.e. the variable impact, depending on where energy prices go from here, is going to be on the 30% that is unhedged? And then if I could sneak a third one in, could you talk a little bit about your private label consumer tissue business in Europe and give some details on the organic growth and margin there relative to your overall consumer tissue business? I'm sort of I guess I'm asking, is the business gaining volume share as consumers are trading down and how does that impact the margin? Thank you.

yeah yeah i didn't actually get your your second question there but i'll start with the first one i think it was regarding generally energy cost and yes they will be significantly higher so i think i mentioned that already that that if we look at input cost they will be largely stable with the exception of energy But the energy will increase significantly. So it's not really spot rate related. We don't know the spot rate, of course, the part that is unhedged. And that's roughly the unhedged portion is roughly about 30%, you can say. for electricity and for gas. It's actually, you can say, more for electricity, but if you include the regulated market is roughly to that extent. So we are not speculating on the spot price. We hope it will stay low, but we can see that for the 70% that we have hedged in gas and electricity, prices are significantly higher. And then I mentioned that we had subsidies and one-offs. And we are not, for commercial reasons, exposing that number. We cannot do that. But you can get kind of a lead if you look at the Q3 energy cost versus Q4. It's about $500 million or so lower in Q4 versus Q3. And, of course, that was... was much better than we expected although prices were super high in q3 it was still much better than we expected and this is of course the subsidies and the one house that i was referring to and they will not think be there in q1 so so in reality we will see q1 being much much higher in terms of energy costs and and also mentioned indirect okay

Maybe I could answer the first question you had about price increases, if we're giving any indication regarding the first quarter. And we're not. As you remember, Charles, we expected price increases going into Q4 from Q3 to be on a similar level of about 3.5%, as we saw from yesterday. q2 to q3 and then it turned out to be much higher of course there will be a positive rollover effect but so we we will see price increases also in in q1 but we're not providing a number there and then when it comes to private label yes we are seeing some down trading still very much in in the uk and to some extent in latin america but also in some other markets and that is benefiting our our private label division it's interesting to see that even though we have raised prices more towards the retailers on the private label products than on our branded products just to to a large extent for for cost reasons so the cost impact on on the private label products is much higher. The retailers have not raised prices on private label as much as on branded. So that's a specific situation. But that's what we're seeing in down trading that we are picking up by having a tiered good, better, best assortment with our brands, but also by having strong position in private label.

Thanks so much. Speak later.

The next question comes from Farhan Big from Credit Suisse.

Hi, guys. Good morning. Thank you for the questions. A couple, one for Magnus and one for Frederick, if that's okay. Magnus, I want to discuss the environment in China in as much detail as you can. Vindef, I think, reported a loss in Q4 after already seeing a sequential slowdown in Q3. And if I remember the discussion we had at Q3, I think the focus was going to turn on recovering profitability, potentially at the expense of losing the number one position. Could you discuss the operating environment in China? the pricing landscape, the excess supply potentially in the market that is impacting pricing ability there. And then secondly, housekeeping for Frederick. Could you help us with the likely net interest cost for 2023? particularly as it stepped up in Q4. And if you can explain why the cash flow interest charge is much lower than the P&L, that would be good, as well as touching upon capex expected for 2023, as well as the tax rate. Thank you.

Okay, thanks, Fahm. I will talk to China as much as I feel I can as a board member. Of course, Vinda is a listed separate company where S&E is the majority shareholder. Q4 was challenging because of partly the reopening of the markets with the high infection rates that had an impact on throughout the supply chains in our plants and also in our ability to supply products. So there were a number of specific issues for the fourth quarter. But having said that, Vinda did raise prices, not sufficiently. There is price competition, especially then on the basic grades, less so in the premium grades where Vinda is moving. And especially in the fourth quarter, it was a challenging environment because of an anticipation of lower pulp prices coming in 2023. So it made it more difficult to raise prices. Vinda has launched a number of new products in the premium part of consumer tissue to move away from the areas that are and have been commoditized for a long time, and where there is an oversupply, the flat products, and more into products like the 4D deco, the embossed four-layer product, and of course the Tempo assortment. shift towards more premium products is successful and is ongoing, and we'll see more of that next year. And Vinda has continued a clear focus to raise prices going forward. So that strategy hasn't changed. I think that's as much as I can say about China and Vinda's performance and plans for now, Faham. And I hand over to Fredrik for the housekeeping questions.

housekeeping thank you i will try and and do a bit of of that so i think your first question related to the net interest cost and it's difficult to give a forecast there and the reason is is quite simply that we got a lot of floating so if you take according very much in line with our policy but if you look at the the proportions of fixed of of our debt is roughly about 30 and if you take floating of course obviously then 70 the average maturity if you look at interest rate fixing is about 40 14 months or in that order of magnitude so So clearly, when you look at that, you can see that we are quite dependent when it comes to the finance net of the floating rate. And to just give you a bit of proportion, if you take Q4 here, we had an average interest of 3.1%. And if you look at the corresponding period in 2021, we had 1.3. So it's been a very significant increase of the floating rates. Of course, we have the flexibility to go into more long term. We can do that. But of course, it will be much, much higher now. As we kind of work our debt down a bit, then that's a positive impact. But of course, it's not expected to be lower than what you've seen here in Q4. And so when you come to CapEx, we've... We're quite close to our estimate in 2022, as you have seen. It's always difficult to judge exactly with timing. When it comes to 2023, roughly about 8 billion SEC or in that order of numbers. I think the final housekeeping question you had, Farhan, was the tax rate. And here it's always difficult to get an exact forecast of the reported rate because it's impacted by all sorts of different movements back and forth. But structurally, if we just take our structural rate, is roughly between 24 and 25, as in that order of magnitude. That will vary a bit depending on country mix, etc., but roughly 24, 25. So that is what you should expect for 2023. Thank you very much.

The next question comes from Fulvio Casol from Bernberg.

Yes, good morning and thank you for taking my questions. The first one is on plans for 2023. I understood your comment during the call regarding the priority being the recovery of input costs and essentially margins, but we heard from one of your competitors yesterday signalling that they intend to raise AMP or advertising costs specifically by about 100 basis points for this year to invest behind innovation and growth in the brand. So I was just wondering if you can sort of share what your intentions are in terms of planned investment levels this year versus last year, whether you also intend to invest a little bit more than you did last year. And then my second question is on the cost-saving program, which had a pretty significant step up. in the fourth quarter, I think it was just over a billion. So if you can just give some cover on how you managed to unlock those savings so late in the year and how that should impact the next couple of quarters. And then my last question, if I could, is whether you can provide any sort of indicative inflation guidance for the all-in costs, COGS, I should say, for 2023. Given that you've got flat pulp but still rising energy, still some inflation on labour charges, should we expect mid-single-digit, high-single-digit, low-single-digit COGS inflation for 2023? Any guidance there would be great. Thank you.

Okay, I can start with AMP. Yes, we are planning on higher AMP levels. We're not giving the detailed guidance. on the number of basis points, but we are planning to do more AMP this year because we have a lot to talk about and we're coming out from a very, very challenging year. So expect a step up in overall AMP investments for 2023. Fredrik, do you want to talk about the cost savings programs and all-in-COGS inflation?

Yes, let me start with the last question first. So I can't really give you more guidance than I've already did for all of you, because in essence, we can only kind of look at one quarter ahead. And as I have already mentioned there, we see stable, largely, I should say, stable cost on input factors, with the exception of energy, which will increase a lot. And, of course, longer than a quarter is quite cumbersome. We can make all sorts of assumptions, but in the end, it's about adapting to the surrounding world with being agile in terms of pricing, et cetera. So we can't give you much more guidance. When it comes to the cost savings, I'm a bit unsure there what you actually mean, because, in fact, it's a bit tricky when you look at cost savings. We constantly save cost and become more efficient in general. And Q4 was no exception. But if you look at the way we look at productivity, you will remember that we look at our cost saving or cost picture differently. in terms of total productivity. So we look at it on a net basis. All the positive savings that we do, and of course also the negative impact, which comes exactly, well, as an example with inflation in maintenance or productivity loss from other factors in the surrounding world. It was actually quite negative for us, the total productivity in Q4. So there was no savings. So I'm a bit... I'm not sure what you're referring to. Underneath the surface, the savings continue to be good in terms of material rationalization, in terms of yield improvement, in terms of how we become more efficient in the plants. But on a net basis, with all the kind of negatives that were existing in Q4, it was in total negative. So I can't really answer your question there, Fulvio.

Thank you for that. I think we can pick it up later. That's fine. No problem for you. Thanks for that. Thank you.

The next question comes from Celine Punuti from JP Morgan.

Thank you. Good morning, everyone. So you said that you expected I was a bit surprised by this. What are your expectations for the difference in groups that you have? And it seems to me that the U.S. dollar has weakened. So could you explain why? And we're not seeing the world improve because of that. What kind of information shall we be talking about? And my second question is on pricing negotiations.

I mean, first of all, why was it that you were able to get a better pricing in Q4? But importantly, you just had a pricing negotiation in the autumn. Are you able to, right now, go back to the table with retailers for further pricing, or are we expecting that further pricing increases to be later in the year? And what do we expect in terms of how you finance the discussion to be tougher. We were mentioning costs