Essity AB (publ)

Good morning and very welcome to Essity's audio presentation of second quarter 2024 results. My name is Sandra Åberg, Head of Investor Relations, and joining today are our CEO, Magnus Groth, and our CFO, Fredrik Rystedt. Magnus and Fredrik will take us through the results. After that, you are very welcome with your questions. Now, I leave the line over to you, Magnus, please.

Thank you, Sandra, and welcome everyone to our quarter two interim report 2024. And as a summary, SOP had a strong performance in the second quarter with high underlying volume growth, our highest EBITDA operating result to date with higher margins in all three business areas. We continue to show a solid cash flow. And not to forget, during the quarter, we announced a share buyback program and new ambitious financial targets. So, summing up the numbers, organic sales growth was slightly down, minus 0.9%. Underlying, as I mentioned, we had the volume growth of 0.4%, but with taking into account the restructuring that we had done in primarily professional hygiene and to some extent in health and medical, underlying volume growth was actually 2.9%. EBITDA, excluding IAC, as I said, is the highest so far, close to 3.4 billion and increased with 17%, and our EBITDA margin ended at 14.7%. I'd like to draw your attention to our return on capital employed development, which is not any more one of our financial targets. But if you remember, our previous financial target was to achieve a return on capital employed above 17% in 2025. And this was including Vinda and excluding Vinda. We said that that should be then above 18% because Vinda was a drag on return on capital employed. And we actually hit that 18 number and even 18.5 already in this quarter. So the target that we actually had for next year. Since we're now buying back shares, it could be interesting to look at earnings per share growth, even though, of course, the impact from the share buyback program is very, very small so far. And as you can see, there's an increase year over year of 37%. Looking at the development then over the last number of quarters, It's clear to the left there, the sales and organic sales growth numbers, how we come out of a very inflationary environment and then a period of, to some extent, lower costs. And now in the quarter, close to zero growth again. So a big pickup from Q1. And going forward, our ambition is to continue to grow. volumes market rise with good margins, of course, we are aiming for continuing a positive growth trajectory. EBITDA and EBITDA margin, I think that picture to the right there, graph, it talks for itself, 14.7%, but actually good margins overall in the last number of quarters. So a strong development over a number of quarters. And current market situation, just to put things in perspective here, of course, we have inflationary environment, we have the costs, and then last year when costs were coming down and so on. Currently, I would say that market conditions are quite stable. There's nothing specific. We have seen a subdued consumer, consumers who are down trading and to some extent, looking for savings. We see raw materials, energy and so on moving up and down a little bit. It doesn't impact us as much as it did before, and nothing really dramatic. So it's a business environment that's quite stable currently, and in those conditions we are delivering these results. Just to remind also about the new financial targets since they were launched in the quarter. annual organic sales growth of above 3%, and the day margin excluding IEC above 15%, which we believe are very value-creating targets and that we're aiming to achieve in the mid-term. Also in the quarter, we announced a shared buyback program to allocate our strong operating cash flow, and we saw that also in the second quarter. just underlining that the private program amounted to $3 billion until next year's AGM. We need a new AGM approval every year. Having said that, our ambition is to use share buyback as a recurring part of our capital allocation. And that's, of course, something that we've never done before and which is now part of our capital allocation going forward. So that's overall from a group level. I would like to quickly talk about the three business areas, starting with health and medical that had strong developmental volumes, but also fantastic, I would say, EDTA and EDTA margin. So organic sales growth was overall 4.5%, coming both from volumes and higher prices than mixed, so across the line. And as you can see in continents, product health category 3.8% and medical solution 5.5%. very good momentum here, and a sharp improvement of E2A and E2A margin compared to a year ago. I would like to say a few words about this nice blue pack there on the picture to the right, because this is a product launch where we have seen some very, very positive initial reactions from customers and consumers. It's Tema ProSkin 2, so it's a new Pant Launch, where we have very, very strong claims. It absorbs two times faster than our previous products, and it also stays drier for the skin for longer, which is very, very important, especially for people with fragile skin. So very strong claims, a clear upgrade, a new pack, and something that we believe will be very competitive going forward. Because, of course, Pant is the biggest, it's not the biggest, but it's the fastest most attractive part of the incontinence healthcare business. Moving over to consumer goods, higher volumes in all categories, higher EBITDA and margins. Organic sales growth was slightly down, minus 1.3%, even though we saw higher volumes in all categories, up 3.2%, while price makes was negative 4.5%, and this is more or less all related to price concessions that we did in consumer tissue last year in 2023, when pulp prices came down dramatically. Since then, they have moved up again. But this is related to historic movements in our pricing. Looking at where the organic sales growth comes from, we are really happy to see that the incompetence products retail is increasing 9.7%. We have great momentum, but we also have a great go-to-market, good, successful product launches, innovation. So we're very, very competitive now in co-retail. Also in feminine care, continuing to see growth as well as in baby care, which just to mention, it's now very valuable, creating also the baby category that we have, where we have a very strong position in Europe. while consumer tissue was negative 4.7 on organic cells, so again related to price. Higher EBITDA and EBITDA margin nonetheless, EBITDA up 1% and EBITDA margin ending on 12.4%. Another innovation there to the right, this is again TENA, and it's again PAN, also improved performance in many ways, but here we have completely other claims. that appeal and attract consumers, close body fit, comfort, and a more discreet design. So it's a very good upgrade of our silhouette pants range, which is, again, an important part of our retail business. Before moving on to professional hygiene, I'd just like to say something about market shares. There was a period when we were very much focused on margin enhancement, to some extent, to the detriment of market shares. But with our focus that we had now over the last year on regaining growth, volume growth, profitable growth, we are also starting to see a good improvement when it comes to market shares. We have been having 90% of our business now in the consumer goods category, so in the retail, baby, feminine, and consumer tissue. we have been able to retain number one and number two positions in 90% of our sales. This has been the case over many years now, but what's really improved is the increasing shares, which is now almost half of the business. And actually, it's mostly related to the family care, income care, retail, and baby care. And if you include Also, stable shares still increasing. We are achieving 70%, which is a good improvement over a year ago or two years ago. It's showing that all our efforts and investments are really paying off in market share growth in the key categories where we want to grow. Finally, professional hygiene. Again, good volume growth, higher EBITDA margin. Organic sales growth was done with 3.9. Price mix was up 3%. And volumes were down, as you know, because of the restructuring that we did a year ago. So a tough comparison here. Excluding the restructuring, we actually had positive volumes of 1.4%. This means that the overall volume impact from restructuring in the quarter was a bit over 8%. Going forward, we will continue to see a negative impact from special hygiene, but in the third quarter, it will be around 6% instead of at the low rate. And then, again, somewhat lower in the fourth quarter before then lapping that impact. Higher every day, 18% increase with a margin that's also on very, very attractive levels, 19.2% and a good improvement over the last year. Again, talking about the innovations, we continue to build on our unique compression technology, which has great benefits for everyone handling our tissue products. This is a compressed multi-fold hand towel. It increases the capacity in the dispensers. It reduces logistics costs, transport costs, takes less space. So a very straightforward value trading example of an innovation that we have. where we continue to launch broader and broader assortment. With that, I'd like to hand over to Fredrik to dig into the numbers in more detail. Over to you, Fredrik.

Thank you, Magnus, and I will... Perhaps sum up a bit what you have been mentioning, looking at the group in total. And as you've said, Magnus, we had a very strong growth of 2.9% underlying. And of course, especially so in health and medical with 4.4% and consumer goods with 3.2%. But growth in pretty much all the categories, or actually all of them, and good volume growth, and of course, not least in incontinence healthcare and retail, and also medical, so quite proud of that. You mentioned, if you look at the total, you can see it on the slide, that restructuring and exits in professional hygiene and incontinence had an impact of a negative 2.5%, which is basically similar to that of... of the impact we also had in Q1. This is mainly professional hygiene, and looking at the professional hygiene business area, as you said, Magnus, a negative of 8.3%, and for health and medical, 1.2%. If we look forward to Q3, the incontinence impact will basically be gone. So there will be no such impact looking at Q3 and onwards. But pH will remain at roughly about 6% for the business area in Q3 and even lower than in Q4. And looking at Q3 for the group, That 6% in professional hygiene has a group impact in Q3 of roughly about a negative of 1.6%. Price mix minus 1.3. And this is relating to price. And as Magnus already alluded to, this is mainly related to the price concessions we did in consumer tissue in 2023 on the back of falling prices. input cost at the time. Sequentially, we actually have an increase in price. And that amounted sequentially to 0.4%. So the current momentum in pricing is actually positive. And the positive mix component is primarily driven by professional hygiene, but we do have a positive mix development in pretty much all of our different categories and looking at the EBIT A margin bridge obviously we saw a very strong improvement in gross profit versus the same period in 2023 and if we look at it sequentially we remained on the same gross profit level as we had in Q1 so despite increasing input cost between the quarters we remain at the same Gross profit margins. The price cost gap, obviously a big part of that was favorable for all business areas. And we had a good pricing discipline throughout all of our different areas. We had another quarter of good efficiency gains in cost of goods sold. And this is coming from pretty much all areas. It's procurement discounts, changing suppliers or better negotiations. Material rationalization is a big part. We still have, of course, obviously, the restructuring gains in professional hygiene. And there is a general improvement in the efficiency in our manufacturing and warehouses. We've previously mentioned that we expect, and we did that in Q1, we expect a COGS savings for the full year of pretty close to one billion. Now, obviously, as you can see, the performance has been very strong in the first couple of quarters. So it's quite clear that we will deliver more than a billion. However, just worth mentioning that we expect the pace to slow down here in June. third and the fourth quarter of this year. But once again, clearly a very positive picture. We continue, and this is very much in line with our previous statements in previous quarters, we continue to invest more in AMP. And this is very much in line with our ambition to fuel that profitable growth. And of course, as you can see, that had an impact on on margin of 70 basis points, and we now have approximately about 5.5% of net sales in AMP spending. If you look at SG&A excluding AMP, that increased 110 basis points. It's a lower impact than what you saw in Q1. But still, it is a high impact on the back of the inflationary environment that we saw previously more. So this is gradually coming down a bit. But we also continue to spend quite a lot primarily in digitalization of the group. It's not a matter of number of people. In fact, if you look at the number of employees compared to one year ago, we're actually slightly fewer employees. Turning to cash flow, it's a very good development, as you can see on the slide. Normally Q2 is quite negative, and this is due to a negative development of working capital. But this is not something unusual. This relates to the fact that we in Q2 always pay the bonuses for the previous year. So most of the working capital development is related to that. And the rest is a bit higher inventory value because we see higher input cost and therefore the value of the inventory increases. So if you look at it in terms of cover days, we're pretty much in very good shape and similar to that of Q1. CAPEX remains on similar levels as we've seen before, but we'll see a gradual increase now in Q3 and Q4. And if we look at the full year, we expect the full year CAPEX number to be in the range of 7 to 8%. somewhere in that ballpark. And finally, then, we have, despite, you can say, that working capital impact that I showed you on the previous page, we have continued to deleverage and further lowered our net debt position. The share buyback was, of course, launched very late in the quarter, so we have purchased shares to or where our agent has purchased shares to a value a bit over 100 million. So it has had a marginal impact. But despite all of that, we have continued to deleverage and, of course, also reached a lower net debt to EBITDA. It's actually slightly below 1.3 that you see on this slide. And with those words, I'll leave over to you, Magnus.

Thanks, Fredrik. And I would just sum up with a slide, which is, I think, highlighting our equity story. We have a strong market position in attractive and growing markets around the world. We have leading brands that I've been showing, but of course, not only in consumer goods, but also in professional hygiene and in health and medical, both in health and in medical, and we have a very strong launch funnel for new innovation. We continue to keep sustainability in focus. And we have a winning corporate culture, maybe most important of all. We have a very motivated and engaged team. And in general, among our 36 employees, high ambitions and high engagement and a very strong financial position to build from. And I think the second quarter of 2024 is a proof point for this equity story and business case. Then I would like to invite you or to save the date for what the capital markets say that we're planning to have on the 3rd of December later this year in our fantastic multi-category production site in Valls, close to Barcelona in Spain. It's the site where we produce both personal care and tissue products. And This is a picture here just from inaugurating a new machine there in the background. But it will be an opportunity for you to see the site, meet our people, meet our new, to a large extent, new executive management team compared to last time when we had a face-to-face capital market day, which was actually in 2019. So a long time ago, another reason to do this. And also, of course, to talk more about our new financial targets the path forward and also an opportunity to visit our global transportation, logistics and planning hub in Barcelona, where we are seeing a huge benefit from digitalization both today and going forward. So welcome very much. Save the date for our capital market day on September 3. With that, I would like to open up for questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. Thank you. We will now take our first question from Charles Eden of UBS. Your line is open. Please go ahead.

Hi, good morning. Thanks for taking my question. I've got two, please, and it's probably one for each of you. So, Frederick, on the EBITDA bridge for Q2, which you show on Pacey in the press release, the tailwind from cost of goods sold is of nearly 1.7 billion sec. I appreciate there's sort of 400 million benefit from cost savings, which leaves around 1.3 billion from presumably raw mass and energy. Can you help us understand how much of a benefit energy was here? Because I thought raw materials wouldn't have been a major tailwind given pot price trends earlier in this year. but perhaps you're getting some significant rebates from pulp suppliers we need to consider. So sort of any help you can kind of give us with the moving parts there. And then second question probably for you, Magnus, is just looking at sort of the over 15% adjusted EBITDA margin target, which you gave us a few weeks ago for the medium term, do you see scope for overshooting that 15% level? And I appreciate it's quite early after bringing the targets in. Because if I look at Q2, you're already at 14.7% margin there. And I'd expect continued cost savings, operating leverage from volumes mixed to all continue to favourably contribute going forward. Now, health and medical margins might be at the upper end of the range, you'd expect, but probably some scope for profitability improvement in consumer goods. So should we view that 15% margin level as a floor target rather than an ambition? Maybe you can expand on that. Thank you very much.

Yeah, Charles, I'll be happy to. So I think your question was more specifically on energy, which in the number of 1.7 billion, as you mentioned, was 460 million. So it was a very positive movement compared to last year. We had actually lower raw material cost of a bit over 900 million totally, just market movement. And of course, obviously, this is gradually going to turn the other way and sequentially is already happened. So we'll see, of course, higher raw material as we call. And the remaining part is exactly, as you say, the cost savings of close to 400 million. So that's basically the bridge.

Okay, Charles, then over to your second question. We believe that achieving over 15% EBITDA margin, it's quite ambitious. Is it a target or a floor? We haven't set a date for achieving this, other than saying that we expect to be there in the medium term. But of course, just the fact that we haven't set a date means that in the medium to long term, we would like to be above 50%. That's what we say. And I don't see it as easy or obvious. I mean, it's a good quarter we just presented, of course, with 14.7% operating market. I'm really, really happy about that. Most businesses in most geographies, I would say almost all businesses in all geographies are doing well. And so kind of firing on all cylinders from that perspective in quiet, stable market conditions, there's nothing special really one way or the other. I mean, typically maybe there are challenges in one or the other places. So I think that achieving about 15% in the medium term is still a very ambitious target.

That's great. Thank you both and congratulations.

Thank you. And we'll now take our next question from Patrick Folan of Barclays. Your line is open. Please go ahead.

Good morning, Magnus and Frederick. A few questions from you, please. First, just thinking about your new pricing contracts and ability to cover raw material inflation. Q2 would have been the first quarter we should have seen this in action, but price mix in health and medical was lower quarter and quarter, and it looks like professional hygiene pricing was stable. So how should we think about your pricing dynamics in the second half, knowing, as you just said, that some of your raw material costs flowing through will be higher? And secondly, within professional hygiene, so you gave good color on how we should think about the restructuring phasing in the second half in terms of the impact to volumes. How should we think about the underlying volume performance, excluding restructuring? What is driving that growth in Q2, and what will support that in the second half? And this is my last one, just on the Capital Markets Day in December. What should we expect to hear? What kind of categories will you be focusing on? What innovation will you be talking about? Is there any geographies of focus to keep in mind? Thank you very much.

Yeah, so starting then with new pricing, considering raw material, In general, in the group, we're quite happy with our prices and the price-cost gap in general, and believe that we will be able to manage that also going forward. As stated a few times, of course, margins are fantastic in health and medical and in professional hygiene in the quarter. but no need for major changes there really going forward. We managed the price-cost gap just as we go along. Where we need to raise prices is specifically in consumer tissue, and that's ongoing so that the increasing COGS that we see quarter over quarter sequentially is all related really to consumer tissue, and we are in negotiations also to compensate for that. But again, this has left an impact now on the group for two reasons. One is We buy half as much out as a year ago. And secondly, we are much faster, much more agile. We will be able to compensate in one or two quarters changes in input costs also in consumer goods. And so that's the dynamics there. Professional hygiene restructuring, we're really, really focused in general on increasing volumes considering the nice margins that we have and specifically in professional hygiene very much with a focus then on our strategic systems where we have the proprietary dispenser technologies where we know we create a lot of value for our customers and where we have high gross margins and the mix or improvement that you see in the margin jump that you see in professional hygiene is to a large extent related to shedding the restructuring that we did a year ago, but also now focusing all our resources in professional hygiene on the remaining high-margin business. And, I mean, we'll just see how that plays out going forward, but that's what we're striving for, to have growth and both organic sales growth and modern growth in professional hygiene. Capital markets day, we'll be back, of course, with a more detailed agenda. I think our plan right now is to cover the entire company since we'll have time. It's a face-to-face meeting on a site and also gives time for you to meet and talk to many employees in the company, from EMT and other experts. But we'll get back with more detail on the program and, of course, appreciate any input you might have. Super. Thank you, Magnus.

Thank you. And we'll now move on to our next question from Victoria Nyes of Burnstone. Your line is open. Please call the hate.

Hi there. Good morning, everyone. I just wondered if you could come back to better help us understand the impact in the EVA deviation from raw materials specifically. Just how can we reconcile that with the higher pulp prices year on year, which typically hit the P&L with a 45-day rate? I think based on what you said previously, the remainder of your inputs are seemingly quite stable. Or perhaps was there some benefit when it comes to oil-based inputs? Or is it actually that the lag on pulp has increased from when it hits the P&L? Or are you actually just working through some lower-priced inventory? So just trying to reconcile the delivery in the quarter with the prices that we see. And then just wanted to clarify, did you say that raw materials will turn into a drain on the EBA deviation year-on-year from Q3? If you could just sort of help us with that. And then just how we should be thinking about that pricing in consumer tissue. Is that something that we will start to see building from Q3? I appreciate, obviously, it's a lot quicker than it was previously, but basically, could it be something that we might have to wait until Q4 to see? Thanks very much.

I'll take your last question and then leave the first kind of three to Frederik. So we should start seeing some benefits from price increases in the third quarter, but most of it's in Q4 that's when they're going to be finished, which is very, very fast considering that raw materials in this case relating to consumer materials has kind of gradually increased now for a few quarters. So that's our plan to be fairly back in in Q4. I hand over to you, Fredrik, to answer about the Ebitey Bridge again.

Yeah, thanks. Thanks, Magnus. Hi, Victoria. I'll be happy to try at least. But it's generally, of course, it's always a bit trickier to explain the differences because last year we had a falling trend of pulp, which can kind of continue throughout the year. And this year it's just vice versa. So when we compare quarter to quarter, Of course, you got to kind of think of what actually happened last year. So to give you a bit of perspective, we had more or less, you can say, in comparison then to Q2 2023, not that much impact from from pulp actually it was it was rather the same level now obviously as i already mentioned if you compare q1 to q2 or q2 to q1 this year then pulp price is obviously up a lot so in in in comparison to last year pulp is really not the major factor We also had a positive impact from, as an example, recycled fiber. Oil-based material was very positive. There is a lot of positive impact, as I already mentioned, from energy and on top of that, the cost savings. So there is no magic to it. And obviously, as you already mentioned here, We see now pulp cost, of course, coming through very much sequentially, and that will further then impact in Q3. So if you look at Q3, in Q3, generally COGS will be higher. It's as simple as that.

Thank you. Just if that will turn into a drain on the EBIT A bridge.

Yes, yes, that's exactly right.

Thanks very much. Super helpful.

Thank you. And we'll now move on to our next question from Nicholas Eggman of Carnegie. The line is open. Please go ahead.

Yeah, I'm sorry to follow up on. There's been a lot of questions here on raw material prices and into H2. I'm just wondering, because you sound very confident on margins here, but given the quite massive increase, I mean, when I look at the power prices, they're up some 50% compared to the trough one year ago. We're close to peak levels as far as I can see. So you talk about the quite stable environment. Isn't there a clear risk that you could see temporary margin pressure in H2? Or can you please just elaborate a little bit more on that? And are these price hikes that you're talking about, are they sufficient to kind of mitigate this, given that you're coming from a fairly high starting point here in Q2 with a 14.7% margin?

Yes, I mean, I think you're describing the challenge in a good way. And we'll do our best to manage the price-cost gap. That's all I can say. And I also mentioned, I think, to Victoria here that we still have a lag, not only in how input costs actually affect us, but also in our ability to bring that forward to customers, especially when there is a gradual increase, as we've seen now, over capital portraits. So, yeah, that's the challenge and that's what we'll do our best to mitigate and feel confident that we are much better in doing that than we have been historically and that the overall exposure from a group perspective is less than it has been.

Okay, very, very good. Thank you. Secondly, any news on the bond dispute? Any claims that have come through or anything else that we need to know?

No, there is nothing more than what we have previously communicated there.

Very good. Thank you. Thanks for taking my questions.

Thank you. And we'll now take our next question from Linus Larsson of SEB. The line is open. Please go ahead.

Thank you very much, and good morning to everyone. If I may, just one more follow-up on consumer goods. If we look on a sequential basis, You understand, you're right, that you are indeed expecting input costs to increase. That's Q3 on Q2. But price compensation, you are rather seeing the impact in the fourth quarter. That's my first question. And then secondly, on volumes, I was positively surprised. Actually, both in health and medical and consumer goods, both grew by 3.2% year-on-year. And I just wanted to understand the drives behind that and where we are in terms of advertising and promotion, anything suggesting that we're above some kind of short-term trend or below some kind of short-term trend in terms of volume growth. If you could just put some color on that, it would be very helpful. Thank you.

Fredrik, do you want to talk about costs in Q3 and prices?

I think I'll be happy to, Magnus. And Linus, I think actually Magnus said it before. And we've said it many times. Now we're talking about a lot of raw material here. There's so much other things to talk about. But we've said it many times. We always compensate cost increases.

And we will do that this time as well. There is a time lag in the historically. That's been three to five quarters now is one to two. So it's. So obviously, there is always a bit of time lag, but we always compensate. We've already said it, basically.