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.

Thanks Fredrik and this is our last slide before opening up for questions. We are committed to achieving 17% return on capital employed by 2025 at the latest and As you can see here, another big step. We're now at 13.2%. So the gap is narrowing quarter over quarter. We have good momentum. We have a really, really energized organization and everyone's laser focused on moving towards this long-term target. through all the measures that you can see here on this slide. So very high activity level, many things going on. And then in addition and on top of this, the strategic initiatives that we announced in the last quarter. So thanks for listening to our presentation. Operator, let's open up for questions.

Thank you, ladies and gentlemen. If you'd like to ask a question, To redraw your question, please press star 2. The first question comes from Victor Nice, calling from Societe Generale. Please go ahead.

Morning, everyone. So my first question is on price levels, which were lower sequentially versus 2019 at group level. And I know it's difficult to be too specific, but what can you tell us at this stage to help us think about the evolution of pricing from here? And I guess in this context, Were there any additional impact on volumes from any potential stocking ahead of any price decreases? And if so, is this something that could reverse? And then if I could just make another one related to this end, please. Do you still expect stable to slightly growing volumes for the full year?

Thank you. I'll start. Price levels. What we're focusing on here is now the price-cost gap. and it will look very different in different geographies and for different categories. As Fredrik mentioned, we have promoted slightly more on consumer tissue in Europe, for instance, which then has a negative impact on price. On the other hand, this is the area where costs have come down the fastest. So it's all about managing the specific situation in that category, in that market, at that point in time, and to make sure that we come out with higher margins than before, and, of course, giving away as little prices, possible and adding a positive mix component continuously. So really, really difficult to give a more clear answer, which I can do regarding your second question, destocking. No, we don't expect that there has been destocking really among our customers and consumers here in the second quarter. So no kind of positive reversal from that area. However, when it comes to your last questions, Of course, it will be challenging to have flat volumes on an annual basis since we're down 3.1% after the first half year. And part of this, as Fredrik mentioned several times, is actually also subject to that we are focusing on margins before volume also. Having said that, we believe that we will gradually improve here throughout the rest of the year, also from a volume perspective. And from a kind of high-level overall perspective, it is more important for us to focus on the margin expansion ahead of volumes. But of course, it's a fine balance. I want to add there that we're naturally also really, really following market shares. And overall, that's looking quite good, actually. We're gaining market share in approximately 40% of our branded positions and we're stable in over 40% of our branded positions. So that's looking quite good in spite of the strong focus we have on the price-cost gap.

The next question comes from Cillian Panuti calling from J.P. Morgan. Please go ahead.

Yes, good morning. Thank you. My question is regarding cost outlook. First of all, I was a bit surprised that the cost was quite elevated in the second quarter. So could you help us understand the moving part of where you see inflation? And Magnus, you mentioned that costs had gone down the fastest, I think, in Europe. We've seen that Pell prices is down in the 20, 25%. So I'm a bit, yeah, I'm a bit even surprised about your lower cost sequentially guidance. Can you say whether it will be a deflation in the third quarter or not yet? Thank you.

Fredrik, I leave that to you.

Yeah. Hi, Celine. Thanks for your questions. I think I got it right. But if I start with the first one, you're surprised about if I understood it, the cost development here in Q2. And of course, it is... It's quite observable and you are quite aware of, of course, the lag impact. So a market price adjustment in, for instance, PAL takes roughly about three months or a bit more than that to actually flow through. And, of course, that has to do with shipment times and, of course, process times and inventory and all of that. So that's the reason. So there is no kind of secret there. And, of course, that lead time is longer if you take... sap or non-woven or other oil-based products, as an example. So it's not strange. And when you look at the overall picture when it comes to sequential development, I think I mentioned that when it comes to raw material, we will see that lower in Q3 compared to Q2. So on that question, I can confirm, I think, what you actually said there.

The next question is from Charles Eden, calling from UBS. Please go ahead.

Hi, good morning. Thanks for taking my question. Just one other one for me, and it's actually on Vinda. Can you help us understand what's going on there, please? And I appreciate this density, but you see pulp prices falling dramatically in China, and yet the gross margin fell slightly sequentially for Vinda in Q2 to 25%. The EBIT margin was only 10 basis points higher. If there isn't an ability to recover profitability in this environment, like you've seen, I guess, in the balance of S&T's business, it's difficult to see how it will improve. So can you just help me understand the dynamics for Vinda in China, please?

Thank you. Yeah, thanks for asking that, Charles. And I think it can partly also answer Celine's question, because, of course, this was a disappointment also for us. And what we're seeing with Vinda, and I know that this is also what they stated when they reported earlier today, is that They did, in order to secure supply, actually build a pulp stock Towards the end of last year, that's quite significant and priced on very high levels. And due to slower than expected growth in China, they are still producing from this pulp stock, which leads to these elevated costs that are impacting not only Vinda, but the entire group. And of course, having a quite negative impact on S&T's overall margin. I mentioned at the beginning of my presentation, if you would, take out the businesses under strategic review from the margin calculation, the rest of S&D would be at 12.5% and most of that gap difference down to 10.7 is actually attributable to to Vinda so of course that's that's not good in the quarter going forward I think that Vinda mentioned also in in the call that they expect positive gradual margin progression and this is by working through that pulp stock actually And, of course, also working very much with price increases and managing prices in a good way. So that's the basic reason for the performance of Inda in the second quarter.

Next question is from Jeremy Fialkow calling from HSBC. Please go ahead.

Hi there. So just got a couple of questions on consumer tissue. So the first one is obviously the organic growth there slowed down very dramatically from Q1 when we look either on the branded or on the private label side. So could you talk a bit about the factors behind the slowdown? And then the second thing is you mentioned in your comments that there's been a little bit more promotion in consumer tissue in Europe. So, again, can you give us a bit more details about that and whether you are budgeting for a kind of continual increase in promotion levels as you go through the second half of the year? Thanks.

Yeah, we are budgeting for higher promotional levels also to balance volumes and the market share. So, consumer tissue Europe is one area where we have seen some down trading to private label and to lower value products actually in the quarter and we are working to counter this now going forward with some more promotion levels but also with an extensive kind of launch program where we are relaunching our product assortment to focus more on kind of the cost efficiency from a user and consumer experience. Having said that, again, we're very much focused on the margins. And when there's a question, we stick to defending the margins over volume. But we expect to see an improving balance here going forward. And of course, as Fredrik referred to, also having help from lower raw material costs here in the coming quarters in consumer tissue. So that gives us more room to maneuver in this area.

And perhaps we can add there, Magnus, also that if you look at the general market, Jeremy, it's actually also down. So it's not just us. It's actually the market is down for various reasons now in the second quarter. And, of course, that will gradually stabilize.

The next question comes from Karel Zeut calling from Kepler. Please go ahead.

Yes, good morning. Thanks for taking the question. I have a question on cash flow, actually, which was not very strong in the first half of the year, despite a significant increase of the operating profit. So can you speak a bit about cash flow generation and particularly what's going on in the networking capital and how you see that evolving in the rest of the year. And then related to that, the exit from Russia, how do you get the cash out of the country? Will we actually see a cash-in in Q3 of the $1.2 billion? Thank you.

Yeah, I'll just give the short answer. And the short answer on cash flow is that we expect a strong cash flow during the second half of the year and to see the result of this strong performance in operating profit and revenue generation. So that's the short answer. The short answer is about Russia. We have the money, so it's in the bank. In Europe. It's already done. That's why we waited so long for the announcement. We wanted everything to be done and registered and completed before announcing.

Over to you, Fredrik. Yeah, I can comment a bit on cash flow. I think the short version is, of course, that we will improve quite significantly here in Q3 and Q4. And technically, what has basically happened here is that, referring to what Magnus said earlier, when it comes to the significant... Pulse purchases in China that Vinda did in the end of last year, they have been repaid. So the movement you are actually seeing in cash flow is all related to working capital. And if you look at it specifically, it's mainly related to payables. So we see slightly lower production volumes in cash. in Europe which has a negative impact when it comes to payables and the same as I mentioned for Vinda. So it's mainly payables and maybe just to add on that it's actually just a temporary impact. When it comes to inventory we are having actually a good development there so this is why we are so confident when it comes to cash flow as we go forward. It's more temporary nature.

And we did build some excess stock over the last year or two when we had supply chain disruptions and we're focused on on keeping high service levels so we are reducing stock levels again to two levels that we saw more closely to what we saw before the pandemic and and the issues last year so positive development expected in the second half the next question is from saham beg calling from pretty twist please go ahead

Hi. Good morning, guys. Thanks for the questions. A couple of small ones on professional hygiene, if I may. Are you able to quantify the restructuring efforts on volumes in Q2 versus the end market demand? And should we assume the restructuring efforts double as you exit businesses? in the U.S. in Q3. And then secondly, on the business, the returns of the business have improved pretty impressively over recent quarters and now stand at around 23%. Historically, I think, If I'm not mistaken, you were targeting the division to reach a ROCE of 18% to 20%. That's far exceeded your expectations. What was the end goal, do you think, the returns of this business could reach, particularly as you ascribed to another 200 basis points of margin improvement coming from the restructuring efforts?

Yeah, so thanks for that. for highlighting professional hygiene because it's it's such a well-performing business and i always say that this is an area where where we have such great opportunities going forward because we are the global number one and it's an area that's to some extent less competitive than others and no one is investing as much as we are doing behind systems strategic products uh dispenser systems as as as we are so really kind of having momentum there and Partly what we're actually seeing in this quarter and the very high returns is benefits from pricing ourselves out of some of the lowest margin basic product assortments in anticipation of the restructuring. So the way we've gone about with this is to just raise prices as high as we can. And as we start to lose volumes, we can then restructure. So this actually gives a kind of boost to the margins already in this quarter. And going forward, the volume impacts of the restructuring efforts, Fredrik, do you want to?

Yeah, Faham, we said when it comes to the European restructuring that it's low single digit impact for Q3 and the first part of 2024. And that's actually been the case already in the second quarter here. So we've had that low single digit impact. And of course, the impact for the U.S. restructuring, as we have outlined now during this call, is about the same. So if you kind of add that together, it's mid single digits roughly. But, of course, just highlighting the obvious, Faham, the profitability impact is quite strong.

Next question is from Oskar Lindström calling from Danske Bank. Please go ahead.

Yes, good morning. First off, just like to revisit this, what's happening with prices, especially in consumer goods and for consumer tissue. I mean, we've heard announcements from several retailers that they are cutting their toilet paper prices up to I think it was 12% starting July. Now, my question here is, are these the types of price declines in line, you know, on the shop shelves? Is that in line with what you're facing for your consumer tissue business in Europe? And, you know, is there a risk that just as your price increases lagged, cost increases when pulp was going up, that we're now sort of in a situation where your price, you know, prices will be going down quicker than your costs come down as pulp costs come down? And also, was there any negative impact from revaluation of finished goods inventory from lower pulp prices impacting results in this quarter?

Thanks. OK, I'll start with the first two questions. So we can't comment on specific percentages. And of course, it looks quite different in different markets. But Yes, we do expect increasing promotions. Having said that, we know that the retailers have fully compensated themselves throughout the last year or two and that they have been actually having quite reasonable margins in our categories. So it's, I mean, that's the starting point, just to mention that. Secondly, the price-cost gap, we're getting back to that. And we are firmly convinced with our strong brands, our strong market positions, our go-to-market positions, The trust we built with the retailers that we can increase that gap so that we can manage prices so that even if they come down, they come down less than the cost. That's expanding our margins. That's absolutely our focus. And that's also a reason why we're talking so much about prioritizing margin before volume. So that's what we're doing. That's what you're seeing in the improvements in margin quarter over quarter. And that's what we're going to continue to do. And then when it comes to the revaluation, Frederik?

Thank you so much for that question, Oskar. I'll be happy to answer it. But just to add maybe to the previous one there, that we have been able, and we've said many times, we have been able to increase prices a lot in consumer tissue. So to a large extent, the price-cost gap has been managed there. We have one big exception, and we've already alluded to it during this call, and that, of course, relates to to Asia or to China in more specific terms, where we still have quite some distance to travel. And of course, there we need to continue to improve. When it comes to revaluation, this is a technical accounting issue. That's why I said what I said just a second ago. And of course, this is just the lag impact. So yes, there are negative impacts from stock revaluation, but this is just due to the fact that we buy and we process and then we sell. So we don't have the actual spot prices for pulp the same day we sell. Of course, we have bought the pulp or whatever material in a previous occasion in compared to when we sell it. So we always have that lag impact. So you shouldn't think so much about stock revaluation, Oskar. It's just that this is the cost we have for the products we sell at this point of time. So, of course, yes, in our books, and we talked about that when Celine asked her question before, they will gradually come down. So our cost will kind of approach market prices over time.

But can I ask you, Fredrik, when there are big swings, rapid movements in the underlying input costs, this becomes more noticeable. Absolutely. So let's... So, Oskar, I'm supporting you here. Yeah. Okay.

Yeah, it just takes time for us to realize the actual cost. It's no more difficult than that, Oskar.

Next question is from Patrick Follan calling for Barclays. Please go ahead.

Hey, good morning. Thanks for taking my question. So you mentioned volumes are lower but improving over time. I'm assuming that's still within the full year outlook of flat to slightly up volumes for 2023. And from my understanding, There was a destocking impact in the quarter. Is it possible to quantify how much of that impacted the top line volume decline of minus 3.6? And should we expect any destocking impact in Q3, especially considering where prices are going within consumer tissue? Thanks.

then yes sorry then i i was unclear no we we did not see really any destocking impacts in the second quarter so and we don't expect to see that in q3 either and actually now that we've seen lower volumes of 3.1 percent in the first half of course it's very challenging then to recover all of that in the second half of the year so What we expect now is to see improving volume development in the second half, but I think on the full year now it's quite challenging to see flat to increasing volumes. And this is also to not a small extent due to that we have this strong focus on pricing over volume. So I hope I was more clear now.

The next question is from Oscar again. Oscar Lindstrom calling from Dan's Bank. Please go ahead.

Yes. Thank you for taking my second question here. I realize we're busy today. But just on Ukraine, I mean, I read somewhere before that FCD had been placed on Ukraine's blacklist for not having left Russia. So two questions on this. I mean, number one, are you now off the Ukrainian blacklist? And second, I've also read that Russia is forcing companies who want to exit to pay, I think it's a 10% contribution to the sort of war budget fund from the sales price or face a deferment of payment. Were you forced to make such a payment? Those were my two questions.

No, we have not made such a payment. Then to your first question, because there's such a massive misunderstanding here when it comes to this so-called blacklist. And now my blood is flowing here, Oskar. I'll spend two minutes on this. So at the time of the Russian invasion of Ukraine... The Kiev School of Economics, they put up a list of all foreign companies active in Russia, 3,350-something companies, and urged them to leave. So all the companies who have had activity at the time of the invasion are on that list, all 3,300. There's no black lists where companies are coming and going. It's the list of companies in there. Now, looking one and a half years later after they created that list, 7% of those companies have fully exited. And Essity is one of them. We're one of the first companies. We're really proud about that. It's been a huge effort, very complicated. We have the money in the bank. We have all the registrations. We have not paid any fee. I think this will be big trouble for many of the companies that are still there. If you include with those who have exited the 7%, those who have significantly reduced their business or are stating that they are aiming to leave the country, that's about a third of these 3,300. The rest are still active in the market. So I'm really, really proud that we are one of the first and we've done it in a successful way. And we had a deal where everything has been approved from a sanction perspective 10 times in 100 different jurisdictions. So done and dusted, and there is no blacklist.

Very good to hear. Thank you.

Okay. And you can look at leaveRussia.org and look at the numbers for yourself and check for different companies.

Thank you. I will do that.

Okay.

The next question is from Tom Sykes calling from Deutsche Bank. Please go ahead.

Yeah, morning everybody. Firstly, just on the, back to pricing again, sorry. I think you previously said the waterfall of pricing coming down would be energy-related costs coming down first, then promotions up, and then list prices, if they came down, would be coming down last. Where on that waterfall would you put yourselves at the moment, please? Then on the volume side, I think you had some pre-buying last year. And I know you're saying there's no destocking. But have you got delayed buying at the moment because of potential price decreases? And how significant is that at all, please? And then just on the energy costs, you released last year, reported last year, probably a max in Q4. energy subsidy of around 200 250 million so obviously your grants and subsidies reported were higher than that in the annual report on a full year basis so i just wondered whether that the sort of energy subsidies and government grants would you have a view on how large that would be for this year and also where your energy trading-related revenues would be, versus the circa 700 million you made last year, please.

Okay, when it comes to the pricing waterfall, what we did is that we, of course, we raised prices and then we also added the energy surcharges. All the energy surcharges are gone. The last ones in professional hygiene went out in July. So we're not expecting that that will have a significant negative impact going forward because much of that was converted into to normal price increases in the normal contracts. And of course, now with the declining raw materials, we see that our customers, distributors, retailers are coming back to us and talking about that price cost gap. And those are the negotiations we're in and where we are working very hard then to increase that gap and increase our margins as raw materials comes down and it's a bit different in a different three areas in consumer tissue it's it's ongoing as we already mentioned very much in in personal care in in consumer goods it's more stable In professional hygiene, there are some negotiations here, not that extensive. And in health and medical, we're actually still in a price increase move, price increase momentum because there has been a delay due to the contract structures, but also a delay in how raw materials have moved up and down over the course of time. So slightly difference there, but overall, of course, now with the quite rapid decline we're seeing in costs in many areas. The negotiation is not anymore to raise prices, but rather to manage prices and the margin. I hope that answers your question. Pre-buying, we saw some pre-buying, I think, in the beginning of the year, but not really in the second quarter. We saw that at the end of last year and the beginning of this year, but not in the second quarter. quarter so we don't expect that to have a negative impact on the third quarter and energy subsidies i don't think we are planning to have any energy subsidies those were extraordinary subsidies due to the extraordinary situation last year so we don't expect we don't have anything that in our books and that's 700 million i leave to you frederick

I'm a little bit unsure, actually, what you were referring to when it comes to 700 million. I can just confirm that we just don't have any specifics when it comes to energy cost in the quarter. So there is no trading gains and we don't really trade in energy from that perspective. There are hedges, as I referred to earlier, but we don't have any trading gains and there are no subsidies here in the second quarter. I think one other question you asked there was relating to potentially delayed purchasing, which is not dissimilar to destocking. And as you referred to earlier, Magnus, we don't see a lot of that in the second quarter, to our knowledge at least. Yeah, thanks.

The next question is from Carrie Rinta calling from SHB. Please go ahead.

Yeah, thanks. I have a question on your fixed costs, and you mentioned the words salary inflation 16 times in the report today. And as you have seen, many global companies have made quite significant reductions in their headcount, and they have been amply rewarded by your actions, and I I acknowledge that you are making these efforts, these sort of focused efforts in professional hygiene and in some other parts of your business. But the question is that how are you thinking about your sort of white-collar employee base, given that you have made these investments into IP systems in recent years, and the pandemic must have sort of accelerated some of the efforts to make increased flexibility in your system so Are you comfortable with the level of your fixed costs, given what you know about volumes and what you know about the expected demand for the coming quarters?

We're quite comfortable with how things are progressing. We are continuously taking out costs, both in cost of goods sold when it comes to staffing levels and also in SG&A. So there are many efforts ongoing and many smaller programs and projects in different parts of the group. We are definitely seeing efficiencies from digitalizations. There's no doubt about that. And also efficiencies coming from our shared service centers that we established a few years ago in Portugal, in Lisbon and in Santa Fe in Mexico. So there are a number of initiatives ongoing. And actually, overall, I don't see that we have a big challenge here. So maybe we actually mentioned too many times in the report. We had a one time impact now in the second quarter, as we have many times from before. in this quarter because of that's when the salary increase for the first quarter also accounted for. But other than that, I think we will have good, we have good control and we'll continue to have good control also going forward on these costs. Anything you want to add there, Fredrik?

No, no. Yeah, maybe, Kari. So first of all, thanks for reading up reports so thoroughly and even counting words there. But it is, I think, important to mention here that the increase of cost is related to inflation and not actually to headcount increases. So I think that's worth actually mentioning. I think there is one other factor. We spend considerable amounts, and we have been talking about that many times before on re... not revitalizing, but building a new IT platform, which has been very successful. We've implemented the pilot and we are now proceeding with updated versions and over time we'll roll it out completely. So that's a very very good project, and over time that will enable quite large efficiencies as we also go forward. So from that perspective, I think we are actually taking a lot of action in line with what Magnus was talking about, and we will continue to do that, and then we have further potential as we roll out our IT environment. So I think we are in a good shape when it comes to SG&A resources.

Okay, I think we have five more minutes now, so we have time for a few more questions.

That's right, yeah. Next question is from Michael, sorry for the pronunciation, BNP Paribas exam, please go ahead.

Hi, Magnus. Hi, Frederick. Michel Monade here from BNP Paribas. One question from me. Can you please comment on the competitive environment, particularly in tissue? In your view, has private label already recovered its profitability to the levels where they can engage into meaningful price concessions and still make money at all? Thanks.

Again, I think where we have a challenge is in China with consumer tissue in Vinda. Clearly, as you also can see from their report. In Europe, I feel that we have a very, very good and stable starting point. We have long relations with the retailers, partnerships. We have high service levels, good quality products, and we have quite margins that we think are... or where they should be and that we will be able to protect and work with those margins going forward as we see raw materials coming down further here in the next quarter.

Thank you.

Maybe just to add, I guess, the private label division as we have created, it has quite good margins in general, so it's performing really well.

You said it more clear than I did, Fredrik. Yeah.

Okay. Maybe.

You might be on mute. It's your turn. Please go ahead.

Sorry, thank you for taking my question. My question is on Russia. I know you stated that it's only about 2% of group sales last year. Can you share how much it was of profitability? I'm just guessing that you probably were not investing much for growth in the market, so we could see a bit of a margin drag from the deconsolidation of that business from Q3. So any detail you can give there, that'll be great. Great, thank you.

Yeah, Fulvi, I can... I mean, once again, Russia is a couple of percent of our net sales, or I should say was a couple of percent of... And the margin impact on a group level from taking Russia out is absolutely negligible, so it doesn't have an impact, in short. Though we've had, of course, volume impacts, as we have reported on, so there's been gradual... negative volume impact and we have told you about that every quarter so from that perspective from a sales growth perspective it has been negative before but from a margin perspective really no no impact okay so let's let's take two more questions then and then we we sum up well the last question here is basically from simon as calling from bnb markets so please go ahead

Good morning, guys. I have just one question, and that's regarding, could you just remind us, what are the underlying volume development if you adjust for Russia and all the ongoing restructuring efforts, just to get a feel for how much the underlying volumes are down? Thank you.

Yeah, I can't really do that because it depends on what you mean by underlying. But if you exclude Russia and the diapers business there, that has an impact on the overall volume of roughly about 0.6%. And then, of course, then in addition to that, we have... As we have reported, exits of contracts in baby, we have the pH restructuring, and we have exits of various contracts that have had much too low profitability. And, of course, that also has another impact, but that we haven't actually quantified. So if we just take the diapers in Russia, it's roughly about 0.6%.

Okay, but it's still fair to assume that it is negative, right?

Yeah, the underlying is negative, yes. Okay, thank you.

There are no further questions, so I will hand it back to your host to conclude today's conference. Thank you.

Okay, thank you for good discussions, good questions. We are progressing. We have good momentum. Our organization is motivated, energized. It's great to be out of all the conundrums we had over the last couple of years with the market challenges. And we are in good shape, taking many actions to continue towards our long-term target of ROC above 17% by 2025 at the latest. So thank you for listening.