Essity AB (publ)

Good morning, everyone, and welcome to this presentation of Essity's half-year report 2023. I'm Johan Karlsson. I'm the head of investor relations here at Essity. And with me here today, I have Magnus Groth, president and CEO of Essity, and also Fredrik Rystöt, CFO and executive vice president here at Essity. We will start today with the presentation of the report. And after that, we will go into the Q&A. And during the Q&A session, I would like to ask you to limit yourself to one question each. So with that, I would like to hand it over to you, Magnus. Magnus, please go ahead.

Thank you, Johan. Good morning, everyone. Just before coming into this Q report, I was reflecting on the last two and a half years and all the hard work that our organization has done to come through the pandemic in a very successful way to manage the raw material tsunami that we had during the last 18 months and of course also all the supply chain challenges. And I feel that our organization is more motivated, more engaged and more energized than they've ever been before. And this is because we're seeing now a very, very positive trend in terms both of sales and results and we'll talk more about that of course during the quarter. So we have the three quarters of continuously improving sales and margins and actually disregarding the energy peak last year it's seven quarters now that we've seen this very very strong growth and profit growth consecutively and we expect this to continue also in the coming quarters. So a very strong momentum in the group and and i'm i'm happy with the results that we have this quarter there are many strengths in here and we'll talk more about them so good progression high level of activity many good good good progress in in many areas here are some highlights of course one highlight is that we exited russia we're one of few companies according to the kiev business school that keeps count of non-russian companies leaving russia we're one of very very few companies actually less than 10 of the companies that had business in russia at the time of the invasion of ukraine that have actually left and we are one of them and we will present that achievement soon The strategic review of our ownership and our future relation to Vinda and our private label division in Europe for consumer tissue are progressing according to plan. We continue, of course, with the underlying, maybe most important of all, development of the business, not least launching sustainable innovations. In this quarter, we had a very high pace, 10 innovations. We're also doing many other good things in the company, not least also seeing a higher pace of savings in the quarter. And all of this together has leads us to progress to a rosy target of achieving above 17 percent return on capital employed by 2025. So another good step in that direction. Looking then at the results, sales growth of 8.7%. Most of that coming from price and mix, a very positive mix again in all three business areas, 0.6% overall. Volumes were down 3.6%. This is a combination of lower market volumes, but also decisions that we have taken, especially in professional hygiene, but also in some other areas actually to step out of underperforming contracts where we don't see the opportunity to get the margins and the rate of return that we are expecting going forward so we're still very much focused on improving margins at the expense of volume but of course keeping that balance by investing in our brands and launching new products and and increasing our amp spend as we'll see and acquisitions The ones included here, Nix, Modibodi, doing really, really well and contributing with 1.3% to growth. And if you look at the numbers there to the right, they're quite different compared to a year ago. Adjusted EBITDA is up nearly 50% to 4.7 billion SEC. It's one of our best quarters ever. And adjusted EBITDA margin compared to a year ago is up 240 basis points. Adjusted return on capital employed, also a big step compared to a year ago towards our long-term goal of 17% by 2025, and we're now at 13.2%. When you look at the adjusted EBITDA margin, as I mentioned, increased to 10.7%. If you do the exercise and exclude The parts of our business that are under strategic review, the adjusted operating margin would actually be 12.5% as a reference. And most of the difference there actually comes from VINDA as you will be able to calculate looking at the VINDA numbers. So a very positive development again, sequentially and year over year. And the adjusted EBITDA margin bridge, I think it's important to highlight that the impact on the gross profit margin contributing to most of the improvement comes very much from self-help. So higher prices, better mix, and again, and we'll talk more about this significant cost savings, something that has been challenging previously due to supply chain disruptions and COVID shutdowns and so on. I think it's important to note that raw materials and energy are still very negative even compared to a year ago, 490 basis points negative. So all of that is of course overcome with the positive things I just mentioned. We also have a negative impact from lower volumes and salary inflations in cost of goods sold. AMP is contributing to our development and we're spending more in AMP, the contribution to, and it's having a negative impact on our EBITDA margin. And that's because we see the benefits long-term of doing this while SG&A is contributing positively. So even though we have higher total costs for SG&A as a percentage of sales, it's coming down and that's as a positive contribution to margins. And again, here in SG&A, the difference is very much salary and to some extent also travel. So as expected, and as you know, we were flagging to have a somewhat higher salary inflation numbers in this quarter because of the salary adjustments that also go back to the first quarter and cover the first quarter. My favorite slide, one of my favorite slides, as you know, the other one is about our innovations, the quarterly development when it comes to sales and profitability. And I think these numbers talk for themselves. And we expect to see a positive trend also in the next coming quarters. And the exception there in Q3 of last year when it comes to adjusted EBITDA. is all relating to the energy shocks that we had there during the beginning of the war in Ukraine. So overall, step by step, moving up. The exit of Russia, something I'm very, very proud of, the organization has done a fantastic job here. We exited on the 17th of July, so very recently, but the work began already a few weeks after Russia's invasion of Ukraine. Russia accounted for approximately 2% of GroupNet sales, The purchase price in the end was 1.2 billion on a cash and debt-free basis. And this leads to an earnings impact of around half a billion SEC. And already last year, we did a write-down of 1.7 billion SEC. And this will be reported as an item affecting comparability in the third quarter of this year. So that's done. We're completely out. And a big achievement, especially when you follow in the press what's going on recently with non-Russian companies that are still active in Russia. Efficiency improvements, very important. We have been challenged here. It's been difficult to work with efficiency improvements in the last years during COVID and then supply chain disruptions. It's easier again now. We see great potential in the areas mentioned here. And in the quarter, we had significant gross savings that actually were even higher than our inflation. so that we showed net savings from efficiencies of 90 million second a quarter. So a big step forward and we expect to see further savings going forward. Much of this is now coming from savings on raw materials, on material rationalization, but also from all the other areas that you see here. So we're working very focused to improve efficiencies and cut costs in all these areas. And it's easier to do now than it was a few quarters ago. Innovations. very much focused on sustainability and strong market trends. This is one example, the TORC and Libres period care dispenser. There's a strong trend towards having dispensers in workplaces, universities, schools, public buildings. where you can actually then have access to free pads and liners, Femke liners. You can see it on the picture, the dispenser we have here. And we have a strong development in this area in a few markets, among others Australia and the UK. Another example of the ten innovations that we had in the quarter is something we're launching in Latin America, and this is then reusable pads and liners. So it's really extending what we've been doing now in washable absorbent underwear and also having then washable absorbent reusable and washable pads and liners. So something we're excited about and that keeps driving our femcare business in a very, very positive way. I mentioned that our AMP investments are up and where we see especially positive developments is in Femcare and in Tena Retail. So what we call intimate hygiene and fueling innovations like these. Before handing over to Fredrik, there's one thing more I'd like to mention, and this is the restructuring that we're continuing in professional hygiene. In the previous quarter, We announced a major restructuring of professional hygiene in Europe. And this quarter, we are announcing a big restructuring in the US. And the aim is to cut out the lowest margin. It's a kind of bigger cure-or-kill exercise. We're cutting out... the lowest margin, most commoditized, oldest assortment, and actually then following with taking out production capacity and cutting costs. What we announced last quarter for Europe will have a positive impact on margins for professional hygiene of about 1%, and what we're doing now in the US will add another 1% of margin. approximately. So two examples of initiatives that are really, really contributing to our journey to 17% return on capital employed in 2025. So let's dig into the numbers. Fredrik, welcome.

Thank you, Magnus. I will be glad to... to do exactly that. So I'll start with health and medical, which is approximately 16% of our total net sales in the quarter. And as you can see from this slide, we continue to have a really strong organic growth, so 8%, as you can see. And this was driven by price mix. So if we look at price, approximately 10.5% in the quarter, and we were actually able to achieve sequentially 1.5%. And you know that we've talked about that a lot, that health and medical is somewhat kind of later in the curve when it comes to price increases. So you can clearly see that we have continued to execute on that agenda also in this second quarter. And mix continued to be positive, so quite a good quarter. Obviously, volumes were down, and this is a consequence of our focus on on profitability ahead of volume and we have left unprofitable contracts primarily in incontinence and of course that has been the main explanation to that. That doesn't mean that it's permanently out of those contracts but of course for now it's more profitable not to do that business. So If we look at input costs, and Magnus alluded to it, if we look at comparable to last year in Q2, we have a significant increase still. And actually, when it comes to health and medical, different to the other two, we also have a slight sequential increase. And, of course, despite that, margins have improved, and that is a consequence of the price-cost gap performance and, of course, also efficiency. So if I then go to consumer goods, and this is about 60% of our total net sales, so continued strong growth there, 8%, including the acquisitions of Nixon Modibodi that we executed during the second half of last year. And of course, as before, the price increases were the main drivers, mainly executed in previous quarters, because if you look at sequentially in this area, prices are... somewhat down sequentially with a couple of percent and this is mainly related to asia and seasonal promotion that is typical for the second quarter relating to shopping festivals in asia so this is the main contributing factor to the The price, the sequential price declined. And as you can see, mix was actually marginally positive, and we are very proud of that, not least given the fact that we see, and of course this is not a surprise, it continued down trading in many places. And of course, despite that fact, and due to the innovations, partly what Magnus talked about before, we've continued to maintain a marginally positive trend. mix and volumes also in this area down you know many of the reasons so the exits of diapers in latin russia and the exit of one of the contracts when it comes to baby retail brand in in the european market but we also have some lower volumes in consumer tissue and this is because we prioritize margin over volume what is really really good to see here and you can see it here that incontinence and feminine so intimate hygiene in general is really really performing well both from a volume and price standpoint just maybe as attached to that intimate hygiene NYX continues to perform super well with more than 20% growth in the quarter. So really, really good. Input cost and SG&A still much higher than last year. So a significant impact, negative impact on margins compared to Q2. But here we now see a more positive trend. So we can see a bit on the input cost, not on SG&A, but on the input cost sequentially a bit lower. And of course, the The improvement that we see in EBITDA margin is achieved in the same fashion as before. So price increases, better mix, and as Magnus talked about, also efficiency. So good performance there. If we talk about then our final area, so this is about 24% of our... Net sales, we are very, very happy with the performance and its strong growth, its strong profitability. We had 11.2% of growth and this is very much impacted by price increases, but of course also a positive mix. So in this case, Price increases in the quarter compared to last year, roughly about 14.5%, mixed positive with nearly 2%. If we look at sequentially, the price development here, largely flat. And of course, from that, you can deduct that the volumes, as you can see, were negative. And this is partly due to the restructuring measures in Europe that we announced last quarter and that Magnus talked about. And all of that sums up to a significant improvement of both the absolute EBITDA, but also the EBITDA margin. And we are, as you can see, above 15%. Also here, better prices and better mix the primary drivers. So as the same as for the others, higher, much higher prices. cost for raw material in the quarter. And in this case, we also saw a slight sequential decline. We talked about, of course, or Magnus, you mentioned that, the restructuring now that we are doing in the United States involving the closure of two plants, one converting paper-making plant and one converting plant. And we will take that restructuring charge into account. in the second quarter and of course the cash impact there there roughly about 350 million from that restructuring and as is the case with the restructuring we're doing in europe over time we will replace that with higher volumes in system-based products like, for example, PeakServe. So let me just end, not specifically related to professional hygiene, but rather to the group as a whole. And as you will remember from last quarter, we do this on a sequential basis. So I'll give you a bit of our outlook in a few areas relating to what has been happening in Q2. So Q3 versus Q2. And if I start with... input cost if I take then the raw material we expect lower costs for raw materials sequentially and this is mainly the case for consumer goods when it comes to energy and this may come as a bit of Surprised, but we expect it's slightly actually higher. So, of course, with the knowledge we have at present relating to the spot prices, time will tell, needless to say. But what we can see at this point of time, slightly higher. And this has to do with the prices that we have within our energy hedges. So we're hedged to roughly about... 70% on gas and electricity for the third quarter and what we can see then slightly higher cost. When it comes to the final part of input, so distribution, we expect that to be largely flat. Talking about SG&A, you saw a sequential increase as we flagged in Q2 versus Q1. Looking forward, however, we don't see that increase. So roughly flat cost for SG&A here in Q3 and Q2. And when it comes to... Pricing. We don't comment on specifically pricing because it has to do, of course, with cost development. But as we have talked about before, the price-cost gap will need to continue to increase. And that is, of course, specifically related to H&M to a degree, but also to Asia. And finally, then, on volumes, it is impacted, as you have heard now, it is impacted by our choices that we have done, either in exiting contracts or when it comes to contracts. restructuring in professional hygiene as a few examples there. And it's always difficult to estimate individual quarters, as we have said. But we do expect, of course, volume to be a bit lower, but gradually over time, improve as we go forward and of course in the longer perspective reaching our 17% target volume growth is of course part of that equation. So with those words Magnus I'll leave back to you.