Essity AB (publ)

Good morning, everyone, and very welcome to this webcast. I'm Johan Carlsson. I'm the head of investor relations here at Essity. And together with me here today, I have our president and CEO, Magnus Groth, and also our CFO and executive vice president, Fredrik Rystedt. So today we will first talk about yesterday's announcement, and after that we will present the Q1 results. And after the presentation, we will open up for a Q&A session. And in order for everyone to be able to ask a question during the Q&A session, we would like to ask you to limit yourself to one question each. With that, I would like now to hand over to you, Magnus. So, Magnus, please go ahead.

Thank you, Johan, and welcome everybody to this very busy presentation. We will start talking about the strategic reviews that we initiated, but I also look very much forward to talking about the strong start of the year that we've had. We have good momentum throughout the company. But starting with a strategic review of ownership in Vinda and in our European private label tissue division. This is a strategic review that we're starting now with the aim of reducing our share of consumer tissue sales in the business. Consumer tissue, as you know, is our most capital intensive business and also the business that is most dependent on fluctuating pulp prices and energy prices. The review only covers these areas. We also have a substantial consumer tissue business with our branded products and also with our retail brand partners, which is very much our core business and where we continue to develop the business for the long term. We're looking at different options. We're early on in this process, so no decisions have been taken. We are not in a hurry. We are aiming to maximize value. So this is something we're doing step by step. And as you can see, this includes approximately 22% of Essity's sales that's subject to this review. Looking then to... Vinda listed on the Stockholm Stock Exchange market capitalization, around 34 billion Swedish kronors. We own close to 52% in S&E and net sales last year was around 25 billion. And the reason for including Vinda in this strategic review is the fact that 83% of sales is consumer tissue. This is a fantastic company, well-managed, strong brands, strong market positions, an attractive market. But this dependence on consumer tissue is the reason why we're including it in this review. We are working closely with the board of Vinda. Great relations since many years with the board and the management team. And again, we are in no hurry and we are aiming to maximize value when we pursue this strategic review. Moving over then to the private label division. The consumer tissue private label division that has sales of close to 10 billion last year. Seven production facilities, around 1900 employees. We are finalizing the carve out that we started two years ago. It's been a quite complex process, but we're at the end of that. So it's a good timing. It's also a good timing for the entire strategic review that we're performing now that the private label division is back on track after the pandemic and performing well. And I'm convinced that Vinda will have a strong second half of the year as raw material prices are expected to decrease in in China and in Southeast Asia throughout the year. So good timing. We're starting this review now. No hurry. We're aiming to maximize value here. So over to the interim report and a very strong start to the year. I think that sums it up pretty much. Price mix 18.6%, of which mix was 1.2%. We had positive mix in all parts of our business in spite of continuing to work very much with price increases. Shows the strength of our brands, our market positions. And as you can see there to the right, A very strong improvement compared to the same quarter a year ago in all areas. Sales growth up 17.2%. This includes the acquisition of Nix, for instance. The acquisitions account for approximately 1.2% of the sales growth. Nix is performing really well, growing over 20% in line with our business plan. Adjusted EBITDA more than doubled and the adjusted margin improved 200 basis points from 8.2 to 10.2. I'm going through all these different numbers now because of the huge improvement. So it's a good slide to talk to. And of course, return on capital employed in the quarter up 370 basis points to 12.7%. So very, very strong start of the year. Looking at the EBITDA margin bridge, a good gross margin contribution. gross margin is so important for us. That's what we need in order to be able to invest in advertising and promotion, in our brands, in innovation, up 160 basis points. And this is in spite of continued headwinds from raw materials, energy and transports compared to a year ago of 880 basis points. So for anyone questioning if we were able to compensate for the cost increases, through pricing, through cost savings, through mix improvements. I think this shows that that's been possible and, of course, something we will continue to work with in the quarters to come. AMP doesn't impact the margin development. Growing in absolute terms, about 5.1% of sales. We expect to have higher AMP this year. Because we have a lot of good innovation coming, so looking forward to launching that in a proper way. And SG&A contributed positively as percent of sales. It's an EBITDA, it's lower, even though it's higher in absolute terms due to inflation, of course. Ending at an adjusted EBITDA margin of 10.2% in the first quarter. This slide shows the quarterly development and I think what's the takeaway here from the sales growth is this is now the fifth consecutive quarter of very, very good growth. And in most quarters, a combination of price, volume and mix. And of course, very much price throughout the last year, but also the other components. We also see a pickup now in the adjusted EBITDA margin with an exception in the third quarter of last year when we of course had the huge energy spike in Europe that impacted the margin quite significantly. a nice trajectory here when it comes to the adjusted EBITDA margin development. Something that is becoming an opportunity for us is to continue to work with efficiency. You recognize these areas. These are areas we've been focusing on improving year over year over year with good But of course, it was more challenging during the pandemic and also during the supply chain disruptions last year. So we're really looking forward now to be able to focus more clearly again on energy savings, material, rationalization, sourcing savings, waste reduction, all the good things that's good for the environment and good for our business. We will also talk during the year about further footprint optimizations, cure or kill efforts. We are talking about one of those efforts in professional hygiene in this quarter, where we will take out some underperforming assets, which will have an EBITDA margin improvement in the short to medium term, associated with some restructuring costs. uh longer term opportunities for improved performance and efficiency is definitely the integrated supply chain to improve our supply and demand planning the snmp process and so on through digitalization and of course with inflation that we've seen been seeing now over the last year an increased focus on SG&A costs going forward so now that we are out of the turbulent times of the last couple of years we are increasing focus on these specific areas and see new opportunities also as a consequence of our new organization that we put in place at the beginning of the year. We always have a slide about innovation. The first quarter is typically not our strongest quarter. Still, we have some important innovation here. Maybe to focus on one, the torque hand towel that you see there in the middle, it's quite gray or brown. And this is because 30 to 50 percent of the ingoing material is carton board. So it's a new source of fiber for us that's been difficult to convert to carton. soft and absorbing hand towels before, but where we are now launching a new grade here that of course has a strong sustainability profile and also expands our fiber sourcing opportunities. Finally, before handing over to Fredrik to go through the three different business areas, we continue with our initiatives and our progress in sustainability and also a number of awards and recognitions as we're used to, which remains, of course, a core pillar of our strategy. Welcome, Fredrik.

Thanks, Magnus. Thank you. And I will just take you through some of the details around our three business areas. And starting with health and medical, we've had a good start to the year with growth of 10.5%, and growth was strong in all regions of the business area. And you will hear this some more, but we've had an impact from much lower levels volumes in our Russian business and of course also here for health and medical we were impacted so if you take out Russia it's about a percent or so higher like for like sales so roughly about eleven and a half percent now As you will hear from me also in the other business areas, price and mix was generally strong. And starting with price, we had an increase this quarter in comparison to the same period last year of roughly about 10%. And also sequentially, just comparing to Q4, the increase was 1%. So we continue with a good price momentum. And as Magnus, you said it, the mix was positive, so close to a percent for health and medical. So we continue to benefit from our innovation that we put on the market. As you can see from the slide, volumes were stable. It's a bit different in different areas. So we had a minor decline in the INCO business, where we left some low-end or, I should say, low-profitability contracts, but we had a corresponding or balancing growth in our medical business, and that growth volume-wise came from all three therapeutic areas. And so we're quite happy with the development in that area. Now, as you can see here, we had a very significant cost increase if we compare to last year. So in this case, the impact from an EBITDA margin perspective was 560 basis points. And we also did see an increase in interest. in SG&A coming from inflation. So from that perspective, the environment looks kind of similar as you saw before. I'll come back a bit later to what we see for the immediate future. I'll do that at the end. So turning to consumer goods, we deliver a really, really strong growth, as you can see. So if you include the acquisition, 17.6%. And the acquisitions that are included here, as Magnus alluded to, Nix and Modibodi. And we are very, very happy with the performance, not least in... in index with over 20%. And it's the same thing here that we are impacted by the lower volumes in Russia, but here we're also impacted by the fact that we left our diaper business in Colombia, as we have reported on before. So if you exclude these two unusual items, if I put it that way, the growth was a bit above 19%. So really, really strong growth. And the main driver, of course, positive mix here, but the main driver was negative. was pricing. So if you compare Q1 versus the same period last year, roughly about 18.5% or thereabout in just pure pricing. And also here, sequentially, we achieved another 1.3% of additional pricing. So it continues to be a good pricing market for us. Now you can see here that volumes are down. with 3.1%. And if you exclude the Russian business and the diaper business in Colombia, the reduction is roughly about 1.7%. And this is a reflection of a couple of different things. First of all, not least in consumer tissue, we continue to prioritize margin over growth. And we also have done the same for baby, where we have exited one contract with much too low profitability, as we've also reported on. So this is where the volume declines mainly come from, where we do just the opposite for Inco and Feminine, and we grow volumes there. And we are really pleased with the development in both, and not least in Feminine, actually, where we continue to take Market share in Latin America, just as a perhaps curiosity, we reached our highest market share ever in Mexico during the quarter, as an example. So here, I mean, obviously, the cost inflation is the highest. This is, of course, driven to a large degree. large extent by our consumer tissue business so pulp and energy and the margin impact here was 1050 basis points so a considerable increase and we also have although of course much smaller an impact from inflation in in sgna So turning to our third business area, professional hygiene, this is actually where we've seen the strongest or highest organic sales growth. And if we exclude Russia here, the growth was roughly about 22%. This is driven by a fantastic price performance of 21%. Here, actually, prices were relatively flat sequentially, but year-on-year upped by 21%. And the mix was actually 3% in this area, so really, really strong. You can see volumes are down. This is partly, again, repeating what I've already said here a couple of times due to Russia, but it's also... as we are going out of very low profitability business it's impacted by by that it's not everywhere it's mainly in mature markets where volumes have come down a little bit we can also see that emerging markets are continuing to do well not least in latin although we are of course much smaller there but generally very good good performance Input cost, the same here, 630 basis points if you compare Q1 of 2023 versus last year, same period. So pulp and energy, as is the case also for consumer goods, they are the main driving factors. And indirect cost obviously impacted by inflation. So I'll touch upon the last point a bit. So, of course, as you already know, as part of our strategy, we continue to premiumize our offering with more innovative and value-creating products. And we will, as part of this general strategy, take some steps in our professional hygiene business. So what we are doing, we are planning to close some capacity used for lower value-creating products. for our lower value creating and less innovative range. And as Magnus said, this will trigger some cost restructuring charges, approximately in total 410 million SEK. And out of that 340 million we will take as items affecting comparability in in the second quarter. Now, this will have some impact on growth also going forward. It's partly actually had a bit of an impact also in Q1, but we will see low single-digit impact throughout this year and the early part of next. But it will be very much margin accretive, so this is a... a project that we are planning that will yield some some very good result and over time obviously saying that we will replace these volumes that we are now taking out or plan to take out with more value creating sales so i'll end with a couple of statements normally If we just give a bit of an outlook, it's always uncertain, but when it comes to our cost structure, so three items there, starting with raw material, energy, and distribution, generally we see now that sequentially, and I'll only comment on this sequentially, so what we will see now in Q2 for all three items, business areas we will see lower cost sequentially in terms of raw material. It will be more so for consumer goods but all three will be impacted positively. When it comes to energy We see also there lower cost, and this is due to a couple of things. If you look at our hedging positions when it comes to gas and electricity, it's roughly about 60% for Q2. And prices, if you compare to Q1, they're actually roughly on the same level within the hedging contracts, but we also estimate lower market prices. So this is the reason why we also see lower energy costs. And then we also see lower distribution costs. So generally the cost picture on the input side is positive. And of course, that's also generally seems to be the trend for the year as a whole. When we look at other costs, you will see in our report that we've had some negative impact from that. It's mainly inflationary driven and it's also driven by distribution and other things. And we don't expect that if you look at it from a sequential basis, to deteriorate further. So this is much more something that has happened, and we are expecting that to be more stable. And then finally, SG&A, so a bit less positive picture there. We're not adding resources when it comes to SG&A excluding AMP. It's more the inflationary aspect. environment that we live in that will clearly lead to higher costs. So there is a negative thing there coming from SG&A. And as Magnus already said, we expect to have continuously throughout the year higher AMP. So I'll end there, Magnus, please. Thanks. If you could move to the next slide, please.

We've been very focused on our strong first quarter. It's a great quarter to talk about, and also Fredrik has given an outlook for the next quarter. We have a longer-term perspective. We're focused on the next three to five years, not the least 2025, when we have set ourselves the target to achieve a return on capital employed above 17%. We are very committed to that. With this report, we have taken a good step in that direction, but we have more to do. Of course, for this year, there will be a big focus now on price management. We have proven that we can raise prices, that we have strong brands and market positions. I want to emphasize that again. And of course, we will leverage that also now when we're entering a phase where we're talking about the cost margin gap and price management. And then for the longer term, to continue with innovations, building our brands, focusing on the growing channels, the prioritized growth areas in our business, both when it comes to categories and geographies, sustainability, efficiency, and not least winning with people and culture and where we are continuously strengthening our team in a very positive way. So all of this leading to Essity being a leading global hygiene and health company. Thank you so much for listening. Let's head over to questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach other equipment. We advise you to limit yourself to one question each. We'll pause for just a moment to allow everyone an opportunity to signal four questions. We'll now take our first question from Victoria Nice from SG. Your line is open. Please go ahead.

Hello there. Good morning, everyone. So my question relates to the strategic review. Just wondered if you could go into more detail on the rationale for both reviews and the likely timings. So you say you're in no hurry, but does that mean we shouldn't expect anything in 2023? And what are you assessing in the review which might lead to a disposal versus retaining the businesses? And also, what could a potential vendor sell-down strategy look like? And then still related to that, I wondered if you could just talk about the operating environment in China related to the competitive situation. And then finally, on the consumer tissue private label business, if you could indicate how the margin compares to the rest of the tissue business, that would be really helpful. Thank you.

okay thank you for that one question victoria and uh we're just starting the strategic review now and what i wanted to underline really was not of course that this could take time because we always aim to to execute quickly but having said that in this case Our clear focus is on maximizing value for us, for our shareholders, and for all the shareholders of Vinda as well. So clearly a focus on maximizing value. And we're starting this strategic review, so it's very early to get into the different alternatives and options. When it comes to the two businesses, the private label division in Europe has recovered well and is operating at a good margin level. So very efficient, high-performing business. Vinda is, of course, right now, as we could see from the Q report, struggling with remaining cost inflation. They're in a little bit of a different cycle than we are, so I expect that the second half of the year will be much stronger for Vinda than the first half. I'm ready for the next question.

Next up, we have Oscar Lindrom. Your line is open. Please go ahead.

Oscar Lindrom Why only Vinda and the European private label consumer tissue business and not the other parts of the consumer tissue business if the aim is to reduce your exposure to consumer tissue? Are there other reasons why that remaining part of the consumer tissue business in Europe is not part of this strategic review. Thank you.

Yeah, so just making the assumption again, we're already in this process that where you take out the two businesses under the strategic review, consumer tissue would reduce from being today 41% of our sales as a total to 29%. So it's a considerable change there in the overall mix for the company. And actually, in such a future scenario then consumer goods would be approximately half of our business and where consumer tissue and personal care would be half and then the rest professional hygiene and health and medical so a very good balance in such a scenario and the reason why we are not reviewing the rest of the consumer tissue businesses because it's It's very strong brands. There's a lot of innovation here, a lot of sustainability, many opportunities actually with also the breakthrough technology that we had mentioned on the sustainability update here also. It is value creating today and we believe it will be even more value creating. And it regards our own brands, but also the retail brands that we are working with a number of partners to develop in Europe. So that's a very good value creating business. And also the combined business in consumer goods of all the different categories with all the strong brands is a strength for us. So that's not subject to this review currently and not in the future. It's definitely part of our core business.

Thank you. Just to follow up on this, is there an extent where some of your consumer tissue production facilities in Europe are joint with professional hygiene facilities, and that's a reason why it would be difficult to carve out the remaining consumer tissue?

Now, this is part of the exercise we've been going through over the last two years. So we are finalizing that carve out, which is both organizationally, financially, legally, and not least from an asset allocation perspective. So by early next year, also the assets will be clearly separated and carved out. So it's the machine supplying private label volumes and the branded and retailer brand volumes. So that's what we've been working with over the last couple of years, and we are now finalizing that, and that's why we are announcing this today or yesterday. All right. Thank you. Thank you.

Once again, ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We will take the next question from Patrick Swan from Barclays. The line is open. Please go ahead.

Hey, good morning. Thanks for the question. Moving away just from the strategic view for now, looking at pricing, how should we think about pricing evolving this year? I'm thinking that input cost inflation is coming down. What does that phasing look like? I guess health and medical, you know, big step up quarter and quarter. How should we think about pricing going ahead for the next into Q2? And kind of thinking about professional hygiene, bit flat quarter and quarter. Is that peak pricing there? Thank you.

Fredrik, do you want to talk to that? Yeah, I'd be glad to. The rest of the year.

Yeah, thanks for the question. It's generally, of course, very difficult to talk about pricing. But what you can see there is that the price cost gap or margin expansion needs to continue to take place. And we're convinced that we're able to do that. But to comment on specific pricing is always difficult because it will depend on pricing. on, of course, the cost development in the more long-term future. But generally, the price-cost gap needs to continue to widen, and we are committed to make that happen.

Next up, we have Linus Lassen from SEB. Your line is open. Please go ahead.

Yes, thank you very much. And maybe then, after all, jumping back to the strategic review, in your calculations, I wonder, STX, Vinda, and the European private label business, what's the rosy change in the portfolio if you maybe look over, I don't know, if you look over a cycle or something like that? And also second to that, I mean, today, VINDA and SCT are highly integrated. SCT or SEA has sold Asian assets into VINDA in the past. There are licensing agreements. So I'm just a bit curious, and I understand it's an early stage, but if you could open up a little bit on your thinking. As to the separation process potentially down the road, are you going to maintain some sort of presence in Asia even without Vinda?

Regarding the first part of your question, what would the SD look like without these two businesses? It's too early to say. These are two capital intensive parts of the business and with volatile earnings. But I think that's something that you can also kind of look at and estimate from all the numbers that we're continuously publishing. Second, yes, very good question. We would like to continue to cooperate with Vinda also then in kind of a hypothetical future where we are not longer the owner. We have a great working relationship and they are licensing our brands, Tenna, Torque, Tempo and Libresse, not the least, so global brands. And of course, we would like to see an outcome where we continue to be represented on the Chinese market and other markets with these strong brands. That's part of the strategic review that we're doing now, how we can achieve that going forward.

We have Simon from DMV Markets. Your line is open. Please go ahead.

Good morning, guys. I have one question. You have previously talked about reaching around 50% emerging market share. I know there is no formal decision on Vinda yet, but if you were to move out of Asia, what kind of region would you be looking at to increase the emerging market share?

So I think that our emerging market share today is around 37%, and it would be reduced to, in this hypothetical scenario, 25%. it's still something that we're very much pursuing and gradually achieving an increased share of sales in emerging markets because of course the underlying growth rates have been at least historically higher it's in it's been looking a little bit different actually recently we are very very successful growing very nicely in latin america that's continues to be a key focus area and an area where we are really doubling down adding categories in countries and really kind of expanding our presence because based on the strong performance we already have Former Eastern European countries is another area that's very important to us. And, of course, with Australasia, our business there, we have some opportunities, and also especially in health and medical, to develop in Southeast Asia. So Southeast Asia, including China, remains very important for us as a growth area also going forward.

Okay, thank you. That's very helpful.

Next up, we have Charles Eden from UBS. Your line is open. Please go ahead.

Hi, thanks for taking my questions. First one, just on cost savings in the course, if you could sort of set out how those progressed, and maybe if you could kind of give it on a gross cost savings basis, because I know kind of the way you normally account for it, net of inflation kind of gives us a negative number when inflation is there. So comments on the cost savings would be I appreciate it. And then my second question, just a clarification. So am I right to assume this above 17% ROCE target is also holding true should the strategic review not result in a disposal of either of the assets you announced yesterday, i.e. that target of above 17% ROCE is something you're aiming to achieve as SOT exists and stands today? Thank you. Thank you.

Thanks to the second question, the answer is absolutely yes. This is the path we're on with the business composition that we have to achieve above 17% return on capital employed during 2025, so by the latest. So that's definitely a yes to that question. And regarding gross and net cost savings, I happily hand over to you, Fredrik.

Thank you, Magnus. Yeah, you're absolutely right. It's been quite difficult to kind of do the net because of the significant issues that had related to the past year or two. But if you look at Q1 and you just take the gross efficiency gains in cost of goods sold, it was 250 million or 248 to be exact. So we continue to do the underlying work, and as before, many, many projects leading to those efficiency gains. So that work continues with full force. It just isn't that visible. Hopefully, as I already alluded to, it will become more and more visible as we go forward in the following quarters.

Thank you very much.

Next up, we have Karel Zota from Capital Shrugs. Your line is open. Please go ahead.

Yes, good morning, all. Thanks for taking the question. The first one is on the exit of Russia. You highlight that. In the annual report, we can see it's still about 3% of revenues of the group. So what progress are you making, and what can we expect this year? The other question is then on market structure in Europe in consumer tissue. Can you speak about how potential sale of your private label business might alter the market structure here? Thank you.

Okay, so yes, Exit Russia, which is something we announced very quickly the last year after Russia's invasion of Ukraine and something that we've been working with ever since. This is very complex, of course, taking into account sanctions, taking account government approvals and so on. We're in the middle of that process and We hope to be able to give some new information in the not too distant future. So we're in a very intense phase here, and the objective remains the same as before, to leave the Russian market. In the meantime, from a volume perspective, the business is actually shrinking because of the market conditions, but because of currencies and price increases, you can see from from a sales point of view this number that you mentioned so so that intention is is clear and that process is ongoing when it comes to the market structure we believe that there is a clear difference between the the branded market where we are clearly the number one the partnerships we have with some retailers since decades, and the pure private table business. And we see this also to some extent in other categories. And with those clear differences, we are partly working in different segments. So I don't see in the short to medium term a risk here, which I guess you're kind of maybe alluding to of kind of creating a competitor. So that's our view. And of course, we believe that those consumers who prefer the premium, innovative branded products will continue to do so also going forward.

Thank you.

Next up we have Kari Rinta from FHB. Your line is open. Please go ahead.

Yes, thank you very much, Kari. Very quickly on the consumer goods and more specifically this continued difference in pricing for consumer tissue private label versus branded consumer tissue. So is that a reflection of different contract structures, i.e. that the private label is more it goes quicker to adjust prices for private label and branded should follow or what's explaining this and can you remind us of your contract structures for branded tissue and private label tissue?

I'm not sure

Maybe we can give a general answer, Kari. So thanks for the question. I think we never comment on contract structures. Typically, we've said before that we have yearly contracts, but it varies. So there are differences here. why the consumer tissue private label divisions has actually achieved somewhat higher prices than the rest is simply also because the raw material content is significantly higher for that business. So if you imagine a branded business, you have more calls for innovation or for marketing or for AMP, as an example. And the typical average selling price is also higher. So if you take the raw material content as percentage of the sales price, it's obviously higher for a private label. So the need for price increases in that part of the business is obviously higher, and this is part of the explanation.

Thanks, Fredrik. Sorry, Carrie, I didn't completely get the question, but good answer. Thanks.

Once again, ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad.

Ladies and gentlemen, if you have a question, from the