Essity AB (publ) (ESSITY-B.ST) Earnings Call Transcript & Summary

Good morning, everyone. I'm Sandra Åberg, Head of Investor Relations at Essity. Thank you for joining our audiocast today following yesterday's evening announcement with the news that Essity acquires Edgewell Feminine Care business in North America. Today's presenters are Essity's President and CEO, Ulrika Kolsrud; and our Executive Vice President and CFO, Fredrik Rystedt. They will take us through the highlights of the acquisition and the financials. Presentation slides are shown in this webcast, and you can also find them on essity.com. After the presentation, we will open up for questions. With that, I hand over to our CEO, Ulrika Kolsrud.

Thank you, Sandra. And also from my side, good morning, everyone. I am very pleased with our announcement last night that Essity is acquiring Edgewell's well-known feminine care brands in North America. We're talking about Carefree, Stayfree, o.b. and Playtex. And this is a business with net sales of approximately USD 260 million or SEK 2.5 billion. And this means that our global Feminine Care business of today will increase 18% in net sales based on 2024 numbers. Now the benefit of this acquisition goes beyond that increased size, and I will come back to that in a minute. In addition to the brands, the acquisition includes a production facility, and this is where most of the 500 employees who will join our organization work. The purchase price is USD 340 million, approximately SEK 3.2 billion. So the brands that we are welcoming into the Essity portfolio through this acquisition are well-known, established brands with strong positions both in the U.S. and in Canada. They have a #2 or #3 position in their respective segments: Carefree within liners, o.b. and Playtex within tampons and Stayfree and Carefree within pads. And this is a strong foundation to build on. And by applying Essity's recipe for success in feminine care, we aim to revitalize these brands, gain market share and grow further while improving profit margins. Feminine care is a high-margin category where we have the right to win and where we do win where we choose to play. And the acquisition of these brands represents a unique opportunity for us to expand our Feminine Care business also into North America. In addition to expanding our presence in feminine care, the acquisition provides scale in retail for the benefit of our incontinence retail business in the U.S., and this will generate revenue synergies. We also expect cost synergies, and Fredrik will soon provide more details on what those are. So with this acquisition, we take an important step on our journey to create a stronger Personal Care business in North America, not the least in the U.S. We can leverage Edgewell's brick-and-mortar footprint for our Personal Care categories and we'll become an even more relevant partner for retail customers by having a broader portfolio and bigger scale. The tangible benefits that I've just now mentioned is one reason why I'm truly excited about welcoming these brands to Essity. Another reason is the perfect strategic fit. This is our strategy for profitable growth, and you have seen it many times before, with the first two pillars being to focus on high-yielding segments and to grow in attractive geographic areas. Feminine care is definitely one of our high-yielding categories and so is, by the way, incontinence retail that will also benefit from this expanded platform. And U.S. being the world's largest hygiene market, where we currently have limited presence in personal care, is certainly an attractive geography where we would like to expand. It is furthermore a perfect match with our M&A strategy. For those of you who joined our Capital Markets Day in Valls, you might remember our inorganic growth priorities in consumer goods: to grow in the feminine care category and to expand our U.S. presence. Now you might wonder how we will make these brands more successful. Well, feminine care is a focus area for Essity. We know how to win and have strong positions where we choose to compete. If we look at the last 5 years, we have clearly outperformed the market with a net sales growth CAGR of around 8% to compare with a market growth of 2% to 3%. And one of the ingredients in our recipe for success is our global innovation platform with unbeatable protection and superior products, innovations that now will benefit our acquired brands. Another ingredient is our bold and purpose-driven brand building. Combined with relevant product positioning and strong claims, we know how to cut through to consumers. Among the many other ingredients in our recipe for success, I'd like to highlight also our go-to-market expertise and, in the back end, the cost-competitive supply chain, including global scale benefits in purchasing of raw materials. And briefly, a few quick touchdowns around the world to illustrate how we have developed the Feminine Care business in other regions. And we start now with Australia and New Zealand, where Essity acquired Asaleo Care and the Libra brand in 2021 and has since successfully gained market share and advanced to be the #1 brand. Moving on around the world to Latin America, where we have a strong #1 position in both Mexico and Colombia. The graph that you see here shows our fantastic journey with the Saba brand in Mexico, which we can attribute to consistently applying Essity's way of working in the feminine care category. And then finally, in Europe, where we are the fastest-growing player in feminine care with strong positions in key markets. We are, for example, #1 in the Nordics and #2 in France and in the U.K. Now over to some more details about the transaction. So over to Fredrik.

Thank you, Ulrika. And as already been said here, the purchase price on a cash and debt-free basis is USD 340 million or equivalent to about SEK 3.2 billion. The revenue, and here we're basing it on the 12 months rolling ending June 30 of 2025, was approximately USD 260 million and the operating profit is approximately USD 17 million, so roughly SEK 2.5 billion in sales and about SEK 160 million of operating profit. We expect to complete this transaction and, of course, this is subject to customary regulatory approvals. We are not expecting any specific issues there. And we expect the transaction to close sometime during the first quarter of 2026. Obviously, the company is a continuous business and it will continue to run as is for the time being. So there is a transaction service agreement, or TSA, with Edgewell. And this will last for up to 1 year relating to such areas as IT, HR, administration, customer service and actually also for sales. And we will gradually, over the course of 2026, take these services over. So if we look at the financial impact. I'll bridge a little bit the EBITDA multiples on the next slide, so I'll show you some more detail. But as you can see, based on that June 30, 2025 rolling 12 months number, the EBITDA multiple is approximately 12 or just over. And if we include all the synergies on a pro forma run rate basis, then multiple is 8.3. We expect those synergies to fully materialize by the end of year 2 at the latest. And it's worth noting here that these synergies relate to cost synergies. There are also other synergies relating to more revenue benefits coming from joining our incontinence sales in the North American market and the feminine sales of Edgewell, but we have not calculated the benefits within those multiples that you see here. So there are additional synergies that we expect to come from year 3 and thereafter. So you're already aware of, most of you, I guess, that we have a very strong balance sheet. So as of September 30, we had an approximate leverage or net debt-to-EBITDA of 1.18 or close to 1.20. And if you now look at this acquisition as if we had done it by September 30, the pro forma number would have been 1.28. So the impact is 0.2 in net debt to EBITDA. We expect this to be neutral from an EPS perspective year 1, excluding onetime costs. Now those onetime costs are not material, so largely neutral, you can say, for the first year and then, of course, accretive from year 2 and onwards. So if I turn to the next slide and just show you briefly the bridge. So we've based it on, as I already mentioned, June 30 rolling 12 months, approximately $17 million. And if you look at historic decrease in amortization, roughly about $10 million. And then there are smaller accounting adjustments to translate the result into IFRS with another $1 million. You get to an underlying pro forma EBITDA of approximately $28 million. And then we have, and I already mentioned that, cost synergies. They are relating to COGS, so procurement, they are relating to admin and many other areas. And the total amount there is $13 million. We've done a lot of benchmarking versus our own cost in other parts of the group to derive at this number. And we feel very certain that we will be able to deliver this in cost synergies. And all in all pro forma $41 million, and that leads to an EBITDA multiple of 8.3. And with those words, Sandra?

Yes. Thank you, Fredrik, for that. And thank you, Ulrika. Now we will move to Q&A. So operator, please open up for questions.

The first question comes from the line Niklas Ekman calling from DNB Carnegie.

Can I just ask about your view on the strength of this Feminine Care business? Because when I look at Edgewell's reporting, it seems like this is a business that has been struggling for quite a few years with declining sales and margins that are well below historical levels. What is your view on this? What do you view as the reason for this? And how confident are you in managing a turnaround of this business?

Well, you're totally right that sales have declined. There has been a weak development and sales have declined and profits have declined. The brands acquired are very well known. They hold #2 to #3 positions in their respective segments. And they do that and have been able to retain these positions based on a lasting brand equity despite being noncore, if I may say so, under the previous leadership or ownership. So for Essity, of course, Feminine Care is a core business, and we will give it another level of attention and our full focus. So that is the starting point. The brands, with them being well known and trusted among women, then we have a very good base to build from. And then we have this success recipe that I talked about. We know how to win in feminine care and we will apply this to these brands. They will get the benefit of the innovations that have been successful across markets. They will get the benefits of our brand building that has been successful across markets. And that will help to revitalize the brands and thereby gain market share and grow.

Niklas, if it's possible, can I add just one thing. So when you look at the numbers, as you've seen, sales and profit has fallen as you rightly point out there. There was a very special circumstance. So during Q4 of 2024, the Edgewell Feminine Care business migrated the pads business from Stayfree to Carefree, and that migration was less successful. So there was a quite significant loss of sales at the late part of 2024 and, to a smaller degree, in the beginning of 2025. So if you look at the year-on-year sales development, it's exactly as you say, quite a lot down, a bit over 10%, as you see. But if you actually look at it sequentially, you will have discovered that the situation has clearly stabilized. So in fact, it's not shrinking anymore. This was a result of that migration that was less successful and that has now partly been mitigated and partly reversed. So the company has now stabilized. So it looks a bit weaker than in reality it is, if that makes sense.

Very clear. Can I also just ask, when you're talking about sales synergies, is your aim to use this as a springboard to expand your existing brands into the North American market? Or are you more talking about using the existing technology and applying that to these Edgewell brands?

Well, there, we have to differentiate between the trademarks and the brand positioning. So the trademarks, of course, they have built a lot of trust and awareness in these markets. And that trust and awareness we, of course, want to build on and keep those trademarks. The brand positioning that we have that is driving how we communicate around our brands, how we drive innovation, what innovations that we put on the market in order to deliver on customer or consumer needs, that we will apply to those brands. So there is a difference between the two.

The next question comes from the line of Patrick Folan calling from Barclays.

So I understand the U.S. angle and increasing exposure in fem care. But in the fem category, what makes you believe you have the right to win in U.S. retail, I mean, considering you have a relatively small exposure there at the moment, as you said? And I get what you've done in LatAm and European fem care. But the U.S. market is quite different and very competitive, as you touched on. And then just secondly, on the synergies within the COGS front. Can you just maybe elaborate here where in particular you'll see the benefit? Is it across raw material buying? Does it change the raw material mix much in the consumer segment?

Well, obviously, as you say, the U.S. market is competitive. But the competition that we see in the U.S. market is quite similar to what we see in other markets as well. So that competitive set is not unknown to us. I mean, if we look at Australia, we look at Europe and many other markets where we are successful, we meet the same competitors and have a lot of competitive pressure. So we believe that our -- and the consumer needs, by the way, are actually quite similar across the different mature markets. So we believe that our recipe for success will work as well in the U.S. as it will in other markets. Then, of course, what's important in the customer-facing part is to have a broad portfolio and a scale and thereby relevance with the retailers. And by now having both Incontinence Care and Feminine Care in the U.S., we are much better placed to drive that growth across our Personal Care business.

You were asking specifically on the COGS savings. And there are two sources, I'm sure there are more, but what we have been able to very clearly quantify. And the first one relates to procurement conditions. So of course, using our scale relating to materials used for feminine products production will enable us to simply have better conditions, better terms. And the other one is relating to, and you were actually mentioning it yourself, material rationalization and those kind of projects. So those are the main two parts in the COGS side. Then we have very significant synergies also in the admin side.

Okay. And just as a follow-up, Ulrika, on your comments, I mean, in terms of volume growth, which in terms of the target you guys are focusing on over the medium term, that's obviously a key focus for you guys. So I'm just wondering how you plan to turn this around, the business that's kind of been struggling for the last few years, to get to a maybe 3% top line target considering some of the headwinds. Is that something that will be a bit more long dated? Or should we expect an immediate improvement?

Well, I think there are two aspects of that. Firstly, to your point, I mean, the market growth roughly is 2%. And we have the clear ambition to outgrow the market. And I think one effect you will get just by us having a different level of focus and attention, that one in itself will be a benefit to the business. Then when it comes to reapplying the innovations and brand building and so on, the effect of that will, of course, take a bit longer time.

The next question comes from the line of Celine Pannuti calling from JPMorgan.

My first question is probably a bit of a clarification because I think Edgewell yesterday said that for fiscal year '26, they expected the business to contribute to $35 million to $45 million in EBITDA. You are saying that with the synergy, it's $41 million. So I just want to understand whether with your $41 million there was anyway something backed up from like some form of recovery in the underlying business. And then if you can specifically talk about where are the synergies and quantify the synergies that you are seeing on top. And then the second question in terms of understanding your -- like how you plan to turn around this business. Can you talk about the A&P spending? And once you have done this EBITDA level, how much do you need to spend on top in order to revitalize the business? And what do you think this business will need to have? What are the plans if you think about 1 to 3 years, your plans in terms of reinvestment and when the new innovation will come through?

If I start with the second question and then Fredrik can come back to the first one. I mean, that level of detail is difficult to go into at this point. But of course, we will invest in A&P in order to revitalize the brands. As I said before, it's a very good starting point because the fact that these brands have been able to keep their positions in spite of quite low attention tell something about the strength of these brands. So we have something good to build on, and we'll gradually apply our innovations and our brand building over the coming years.

Celine, on your first question, I'm actually not sure I fully understood it. But just to explain the bridge perhaps as a starting point, it is a mix of history and future, as I explained there. So the starting point, the $17 million, is the rolling 12 months up until June 30 of 2025. So that's history. And the D&A there as well as the pro forma IFRS adjustment, all of that is history. So you can say the $28 million is just what would it have been sort of EBITDA June 30 of 2025. Now the $30 million I mentioned there or you can find in the bridge is forward looking. So this is the run rate after 2 years, so fully realized in year 3. So you can say the $41 million is a mix of history and the future. So of course, the profit in 3 years' time will be different than $41 million, obviously. So I'm not sure. I think you were referring to an estimate done by Edgewell.

Basically, Edgewell says that the impact on '26 fiscal year is $35 million to $45 million EBITDA. So I mean, that means that they're forward looking. So the $28 million would have become $35 million to $45 million for fiscal year '26. So there was already a bit of a step-up that they were planning for.

As I said, we are not providing -- as you already know here, Celine, we're not providing any forecast. So the view they're portraying there is then more a forward-looking statement for next year. And we're not doing that. We're just taking pro forma numbers for '25 and adding synergies in the future. So we're not providing a forecast for '26 and they are doing that. So it's a bit comparing apples to pears. And of course, it's of course good that they envisage a positive development for the company. So that's helpful.

Yes. Maybe can I just follow up on that? So the synergies -- because the level of profitability of that business is quite low and much lower of that of your Feminine Care business. And if I look at the $41 million EBITDA, basically, more or less, will raise that margin to the low teens level. I mean, do you think that this is the right level of profitability you can maintain, including the investment that this business needs?

When we look at Edgewell's reported margin today, it also in our view reflects an overallocation of costs. So when we apply our costs based on benchmark that we have internally, what we need to drive the feminine business, then the real profit margin is higher. It is still below what we have in total for the Essity Feminine Care business, but it's higher than what you see in the report from Edgewell.

I think, Celine, to be fair, without giving you kind of a time frame on that, we don't see a reason why this business should be weaker in performance than the rest of the business. But of course, the priority, as Ulrika very clearly alluded to, is to revitalize the brand, make sure that this business is growing. And we will do that through investing in the business with A&P. And over time, as we grow this business and we grow scale and we kind of normalize A&P investments then, of course, over time, margins will also expand and approach those of the rest of our business. But that's, of course, for the future. So this is a long-term investment project, a very exciting one. So this is the plan. It's not immediate, of course, as we've already said here.

[Operator Instructions] The next question comes from the line of Oskar Lindstrom calling from Danske Bank.

Two questions from my side. First off, looking back a bit, back in 2022, you acquired the Knix wear business based in Canada but, I guess, operating in the U.S. as well. How does that fit into this or maybe vice versa? So that's my first question. And then second question is, do you see this acquisition now of the Edgewell business as a platform acquisition enabling you to grow further in the wider U.S. personal care segment? Should we expect further acquisitions? Yes, the sort of strategic implications of this acquisition, those are my two questions.

Yes. I think to start with the first one, the M&A strategy and the strategy for profitable growth that we have, that remains the same. So feminine care is still an attractive category to invest in and the U.S. remains a priority market. So yes, this is a platform for further growth, organic and potentially inorganic. Then when it comes to Knix, Knix is having a bit of a different go-to-market today. But of course, having a stronger presence and strength in the retail environment could potentially over time benefit also Knix.