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

Good morning, everyone. Thanks for -- thanks Fredrik coming to our conference and to do this chat with me. So we'll go straight into Q&A, discuss a bit latest trends, what you're seeing, a lot of news flow around the world.

And maybe to start with around your latest acquisition with Edgewell. Obviously, reinforcing a bit your North America presence, your personal care, which kind of like tick all the boxes you wanted to bit in your bolt-on acquisitions. Can you go maybe a bit more into details around the deal? How do you expect a bit to continue to scale up into the regions? How do you think you can compare to maybe some of the larger players there like P&G, like it would be great to start maybe with this.

Yes, it's a good start. But if I may, Antoine, so first of all, thanks for inviting us to the conference. So that's a pleasure to be here. So Essity, I mean we've been here for many years. And you see here on the slide there that we have about SEK 146 billion or so in turnover, and we're into our 3 business areas. So retail, obviously, and we'll come on to that in a second with your question. Then Professional Hygiene with a Tork business that is existing in most hotels or airlines around the world, and also health and medical with medical and incontinence business. So we have 3 quite attractive areas and a very clear strategy. And the reason I'm mentioning it is because the acquisition of Edgewell's family business is very much into this strategy. So if you look at our 3 business areas, each of them have growth prospects. And when I say growth, it's not just growth, it's profitable growth prospects. So we want to grow. If you look at the health and medical side, we would like to grow pretty much all of that area and especially wound care and incontinence generally. If we look at Professional Hygiene, we'd really like to continue to expand geographically. We'd like to continue to expand in our adjacent business like soaps and sanitizers cleaning. And when you look at our retail business, we would like to become bigger in particularly feminine and incontinence in retail. These are the areas where we're very, very profitable. So from -- if you kind of sum all of this up from a group perspective, we are aspiring and this is our ambition and also what we are doing to overinvest organically and inorganically into our high-yielding businesses. So feminine incontinence, professional hygiene and medical, those are the areas. And so in the retail arena then, we have also stated geographically that we're super good represented in Europe. We're really strong in Latin America. North America, we're small. So on the retail environment in North America, we're only existing with a relatively small incontinence business, relatively small. And so we have aspired to become bigger in the retail area in the U.S. and Canada. In Canada, we're sizable, but in the U.S. And there, of course, specifically, we would like to do it in the feminine area. So this is a good step. This acquisition is perfect for us because what we are acquiring are very, very strong brands. So for the U.S. population, these brands, Carefree, Stayfree, Playtex, o.b., they're very, very strong and well known. And so we have the opportunity that together with the businesses we already have in Inco and washable absorbent underwear with Knix, together with the Edgewell feminine business, we form now, which is a much more sizable retail business in the U.S. And of course, there's lots of synergies. Our intention is to continue to invest significantly into A&P and over time, grow our retail business significantly. It's a very attractive market. It's good -- reasonably good growth and very high margins. So you asked me a very short question, and you got a 10-minute answer, 5 minutes at least, but this is a little bit the strategy of the company. So it's a good acquisition for us.

Perfect. But Edgewell maybe has been losing a bit of market share and growth recently. Part of it was because of pad, the pad part of the business. How do you plan on maybe stemming that and bringing back the business into the growth that you are talking about ultimately?

Yes, it's a great question because if you actually look at the company, just visually, if you look at the numbers, so Q3 versus Q3 of last year, it's minus 10%. So it looks like it's not going anywhere in a positive direction. But the reason isn't really anything else than what they did in Edgewell at the latter part of 2024. They -- if you look at the feminine side, there are tampons under the Playtex brand. There's liners under the Carefree brand, and they also had a pads business under the Stayfree brand, which was much smaller. So market shares are very strong for tampons and liners, but not so strong for pads under the Stayfree. So what they chose to do was to migrate all of their pads business into Carefree. And they believe that, that was a good thing because Carefree was a good brand and known to the consumers. And they also took the opportunity to raise prices. And of course, this didn't work very well for them. So they lost roughly about half of their pad sales in one go more or less, not a good -- unfortunately, not a good transition for them. So after that, things have actually stabilized. So if you look at sequential development, it's been quite okay for them. So it's not that it's really rapidly falling. It was a one cliff or one step change. And since then, it's been quite stable. So of course, our intention is to using the capabilities we have, and we are basically very profitable in every position we happen to be in. And we're typically market leader or #2 in wherever we exist. So what we intend to do is to make sure that we start investing into these brands that we now have acquired in the U.S., so Carefree, particularly in Playtex, those 2, but also Stayfree. We will actually do that and reinvigorate that a bit. And then, of course, we will also apply the innovations that we have on the market, and we will use what is very -- also very good in within the company. So this is our core. It has never been Edgewell's core. So of course, it's -- this is what we do well and Edgewell have an interest to focus on other things. So it's a very good match, I think.

That's great. I mean to follow up on your comment that you need to reinvest a bit in those brands to help them grow. I mean, you have a big part of what you announced around synergies as well. So how will you balance maybe the synergies you would get and the reinvestment needed into these brands to bring them back into kind of that more offensive?

Yes. So it's interesting because we -- the cost synergies or the synergies that we announced and we talked about, they're all cost, and they're not very difficult to actually achieve. We will achieve them. It's not difficult because it's administration, it's procurement, it's things that we can very easily just compare. And when we put this into our own already existing business, those synergies will materialize. There is also lots of other revenue-based synergies that we simply chose not to include in the calculations, right? We chose not to do that because you tend to be kind of optimistic on revenue synergies, and we wanted to make sure that we base financially the acquisition only on very, very tangible cost synergies. So in reality, we'll have much more synergies. I'm absolutely 100% sure of that. Your question was, are we going to reinvest? Yes, we are going to do that. If we do nothing, this and just integrate it, then this will become quite profitable relatively soon. In the next 2 to 3 years, it will actually start looking good without actually a lot of growth. So this is not what we have in mind. As I already said, we would like to, over time, make sure that we have a growing business, both in feminine on washable absorbent and with the business we just bought and the Inco business. So we will invest. So this is a long-term proposition for us. It will be slightly margin dilutive for the business, but you're not going to notice that because it's a fraction only. But for us, this is a really, really interesting way of building the company on the retail business and retail sector in the U.S. We think it's a good proposition. So we'll invest.

And I mean, obviously, the starting point is that it's a bit margin dilutive. But usually in the U.S., maybe in FMCG, there is a bit better margin in North America. So long term, do you think like as you build muscles into this North America Personal Care kind of like regions, do you think it can be a margin driver like in the structural sense for Essity?

Yes, I think so. If I put it this way, U.S. is a high margin. It is actually. I'm not 100% sure why it is, but it is. And so partly, it's an efficient structure and from a production setup, logistics, all of that, there's not a lot of barriers like what we see in Europe. So it's efficient from that perspective, it's profitable. And so I think the answer to your question is, yes, over time, it will be. But of course, if you compare to -- and you were actually asking about scale, we're still relatively small. So although we're small, we believe that there is no reason why this shouldn't be for the group margin accretive over time. But it's going to take quite a few years to get there in our plans, but we will get margin accretive in the future to get really, really good profitability. We need to become bigger. And of course, we would like to do that both organically and inorganically over time. But for the time being, we're -- yes, in the next few -- or next time frame, mostly organic then.

Understood. And when you look at this type of deals, obviously, there is also to take into consideration your own kind of like multiples and how you are willing to pay for this and how do you include the synergies. Does that limit a bit the amount of deals you would like to do? Because as you said, you want to grow, you want to build scale into the U.S. So how does that impact maybe the way you are looking at deals?

Yes. I think it really does impact because it's interesting. When you look at our own valuation, you can very easily just do kind of a traditional EBITDA multiple, and you can conclude that our multiple is quite low. So we have consistently over many years now, gradually improved our profitability. So our margin is much higher now. We've consistently had growth. But you can see, as our peers actually, the share price is standing still, right? And of course, as we grow our profitability a lot and the share price standing still, then EBITDA multiple is obviously then basically falling. So it's quite low. And most of -- or if I should say, more or less all of the acquisition targets typically would have a higher multiple. And so this then becomes at least in multiple terms, not in DCF terms necessarily, but in multiple terms, this becomes dilutive. And so that makes it more difficult to do acquisitions unless you have a lot of synergies that bridges that gap. So if you look at the acquisition of Edgewell, this is one of the examples where actually the synergies are so big that it bridges that gap, right? This is an example. There are others like that, but of course, it limits. If you have a low valuation, my absolute conviction is that the share price of our company should be a lot higher. I mean most CFOs would tend to say that. But we actually do think this is -- it should be the future. So hopefully, this is a problem that, over time, will go away. But for the time being, we need to be cautious and be very, very selective in what we buy. So this is why you don't see a lot of acquisitions coming from us.

But historically, I mean, you have done quite a significant amount of deals.

Yes.

Maybe what have been some of the learnings that you had made from those and kind of like that now affect the way you are approaching deals and then the execution on those once it's done?

Yes. So we've done a lot of it, to your point. And I think I should say all of them, with the exception of 2, have been successful in delivering at business plan or better. So been very value creative, all of them with the exception of 2. One was done in 2017, which was BSN, our medical business, which was a very significant acquisition. That's actually super well performing now, right? But it's, to be fair, 8 years later. So we have a good growth now, good margin, good everything, everything is great. But if you look at what we actually thought when we bought it, the growth of the company was much slower. So we got the synergies. We executed on the margin, all of that was fine, but we didn't actually get the growth, right? And so that made that acquisition being, for a few years, quite expensive. Now it's fine, but it wasn't actually. So there was a learning from this, one -- or actually two, be cautious when you buy stuff from private equity companies. And I hope I'm not stepping on any toes, but be really careful. You think you know everything, but you don't. So there you are. And I think the second thing is that when you venture into something that's quite distance from what you do, then you may -- how shall I say, sounds a bit self-punishing, but you tend to perhaps overestimate your own capabilities. We did that. So we integrated it really fast with our incontinence health care business and a lot of the leading medical people actually left and we had a lot of Inco people running both -- what it was medical, and that was not successful from a growth perspective. So good learning. Now it's okay. But -- and the other that has also been challenging for us was Knix in the U.S., where we paid a very, very high multiple. It was actually -- I've been CFO for many years, many, many years and done a lot of transactions. This was, for me, a completely unique experience because we paid a lot, and this was an opportunity for Essity to become a global leader in this particular segment of washable absorbent underwear. So we took that opportunity. And what actually happened after that was that obviously, you all know that U.S. market really kind of became quite inflationary, not just the U.S., but the globe. And of course, that made people be quite reluctant to buy expensive products. And this is still the case that because of disposable income issues and historic inflation issues, it becomes more tempting to buy perhaps single-use pads at a very low price and not maybe 3 or 4 of these washable absorbent underwear that are quite expensive. So that's actually now recovering again. And I'm absolutely convinced a few years from now, this is going to be a really good acquisition, too. So historically, pretty much all the acquisitions have been okay or actually more than okay. And I don't doubt that Knix will be as well, in some frame, and I'm absolutely convinced this will be as well. So we got very good experience and from acquisitions. And over time, we just want to make money for simple people in that way.

Perfect. I mean shifting gears maybe a bit more towards the current trends and the business. First, maybe around volume, which have been a bit weaker this year. And as we move into Q4, where last year, you had quite good performance in volume, especially in health and medical and consumer goods. I mean, how are you approaching maybe this as you are lapping these tough comps in a quite subdued environment?

Yes, it's interesting. I mean, obviously, I can't -- I don't have a crystal ball. I really would like one, but I don't. So it's quite clear, when you look at this year, the whole year, Q1, Q2, Q3, we've had a collective -- for all those 3 quarters combined, we've had a year-to-date growth, I think it was 0.2%, something like that in terms of volume. So 1.9% in terms of organic sales growth. So that's fine. A couple of percent. It's not a bad number really. But in terms of volume, it's quite low. And when we actually started the year, we were planning for much higher volume growth. So we can clearly see that the market demand in North America on HoReCa, actually Europe as well, Southern Europe, France is one example, where we see things like hotel visits, travel, going out to eat is much less frequent now, and we also see consumers being a bit stretched in how they consume. So it's been a weaker year than we estimated. And so I don't see a big change. I'm actually trying to ask all of you here because you meet a lot of companies, what's your impression? And from what I hear, I'm not seeing markets really changing anytime soon. So as we go forward, we are planning to make sure that we actually grow from a volume perspective profitably also in markets that are a little bit soft. And so in the third quarter here, we launched 2 initiatives beyond, obviously, this acquisition. And one was relating to an organizational change, which is very profound for us and will make us much better in all sorts of different ways. But the other is a cost-saving program where we will take out SEK 1 billion from our SG&A cost, and we will reinvest that into growth. So promotional spend or selective pricing or A&P or whatever to make sure that we also, within this environment, over time will grow. This is more for '26 or the latter part. But still, we can see markets being relatively soft and continuing probably to be that. And then we will, within that context, still grow. That's the plan.

That's clear. And of course, I mean, cost environment is a bit more favorable for Essity. But similarly, I mean, you're lapping a bit of price increase you have put last year in 3Q and 4Q.

Right, right. Yes.

So how -- I mean, considering the bit weaker volume, are you planning to reinvest a bit in price? How -- I mean, is it on the A&P or also a bit on pricing? I mean, how are you kind of like balancing a bit both to try to help a bit on volume?

Yes. I mean it's really difficult to comment on specifically how we are acting from a commercial perspective or even give you a volume estimate. I can only echo what you said there that Q4 last year was really, really strong. So of course, we are up against tough comparables. That's obvious. But -- and with a relatively weaker market, then, of course, you have a challenge there, which we are addressing in all sorts of different ways. And specifically, if you look at actually this year, I already mentioned it, we have just over flat growth. And what has been challenging this year has been, as I said, hotels and all that professional hygiene. Baby, there are unfortunately not that many babies born in the world, which we are very much against. So we would like that to be -- to change, but not something we can influence. And then, of course, we've also struggled with incontinence on the health care side, not on retail, which is really, really doing well, but those 3. And it's interesting because in the third quarter, we have made lots of stuff to -- lots of things to make sure that we get better at growing these 3 areas that I just mentioned. And we actually did that during Q3. But on the other hand, then we saw suddenly Consumer Tissue -- not suddenly, but Consumer Tissue come down. So it is a bit challenging, but we continue to work relentlessly and investing into, as I said, selective price increases, promotional spend, if needed or just a continued increase of A&P.

Yes. And if we take a look at more mix and like innovations, premiumizations, I mean, similarly, this year has maybe been a bit more down trading. And so does that change the way you approach new product launches and innovations into the, let's say, coming periods?

Yes, I think it does actually because this is very, very interesting to me. And this is maybe a behavioral change that we can look to ourselves to figure out. I think it's -- sometimes it's not a bad idea to actually look at your own behavior a bit. So if we look at historic down trading, and that's occurred in the history many times and not least in areas such as Latin America, when times become a bit more challenging with lower disposable incomes or unemployment or whatever, you see down trading. But it typically is not long lasting. It kind of goes back. So we have set a long-term growth target of 3% of organic sales growth. And if you look at that organic sales growth target, we estimate roughly about a couple of percent coming from volume or more than that, more than 2% and roughly about 1% coming from mix. Now if you look at the last couple of quarters or 3, the mix component has been 0.2% in that order of magnitude, so quite low. So right now, what is happening, and it's not consistent for every category and every geography. But if you look at some, the name of the game now is not actually premiumization. People are holding their wallet close to their chest and trying to not save necessarily, but be very cautious on what they buy. It's not -- as I said, everywhere, when it comes to incontinence, this is not the case. When it comes to Feminine, typically not the case. When it comes to Consumer Tissue, absolutely. So we see this people being much more cautious than normally. And this is why we see the growth in areas, which are more the kind of value end. The change for us, premiumization, is that going to be back on as a theme? Yes, absolutely. 1, 2, 3 years, I don't know, but it's going to be back absolutely because it's been the name of the game for so many years. I'm absolutely convinced. We'll go back to that. But in the meantime, what we are doing is we're innovating also for the value end. And this doesn't come out as mix gain in organic sales. It comes out as mix gain in EBIT margin because it's typically you innovate for lower cost rather than for higher price, if that makes sense.

Definitely. And when you look about the new organization that you're putting through and separating a bit within consumer goods, I mean, how do you expect that to influence a bit the decisions taken at the business level to go for growth? And how does that really fit into your midterm expectations on growth maybe?

Yes, it's difficult to give you that exact statement. Maybe as a more philosophical background, I think you all can relate to this. I mean, a lot of companies will kind of centralize and harmonize for scale, right? So you put lots of things together and over time, you become more centralized and harmonized and you start building bigger central functions that will take care of stuff like supply chain or global marketing or global innovation, global this or shared services or whatever. And that's actually not a bad thing because you get better efficiencies and you get scale. But the problem is that as these organizations become over time bigger, you start getting problems with things like accountability and also one other thing, which is super key for any company, resource allocation. And to give you a practical example, where do I put my money? Do I put that into investing into an enlarged shared service center in some country? Or do I put it in developing a new product for incontinence. I mean that's just a practical example. And so typically, those decisions are very, very difficult to make because both are good and what you start doing then is building cost everywhere, right? And so typically, then you change management, bang and you go back full decentralized and then you start all over again. And this cycle is about 20 years, right? You get the point. And so I think we have done a lot of good things when it comes to making our company a lot more efficient. But I think we have come to a phase where it's time for us to become more agile, more accountable and much more decentralized. And to give you a few examples, what we are now doing is to ensure that our business unit heads will be accountable for pretty much all of the cost. Right now, they're actually accountable for approximately -- they got the full P&L responsibility, but they control roughly about 20% of the cost. And from now after New Year, they'll control pretty much all of it. There is no clear ownership of things like market share, things like product cost, things like volume estimate and how much you actually man in your plants, all of that will be transferred to the P&L owners. So it will become a much faster, much more agile and then, obviously, a company much more designed for growth. So exactly how this will play out in the next few quarters, I think we are in the kind of process of putting this in place. So it's going to take a long time. If you look at it on a 1-year perspective, I think it will be clearly growth-promoting.

Great. And maybe, obviously, the competitive environment is also changing a bit. I mean, between Kenvue, Kimberly-Clark deal, for instance, or also the cost environment. Maybe can you unpack a bit how you are thinking it will affect bit Essity and how maybe you can benefit from these changes or not?

Yes. I mean, first of all, I think Kimberly-Clark has done 2 quite remarkable transactions. I mean, obviously, first, the tissue transaction with Suzano, that joint venture and eventually divestment. And then they're international, I should say, Consumer Tissue business and then the acquisition of Kenvue. So I think they've done a good job in reshaping the business. So complements to that, of course. And as you can imagine, all the companies in their sector will immediately start analyzing is this good or bad for us or how is that going to impact? And it's, of course, really is always really difficult to say and you start speculating. I think there are a few factors that we have kind of come to -- it's potentially good for us in a few different ways and potentially also negative in a couple of other ways. On balance, if anything, but it's super difficult to say. We would probably think it's marginally positive for us. And the reason being that, of course, as the combined company will focus on many other things than what we actually focus on. I think this presents a bit of an opportunity. I think second, of course, as you do such a merger, you also tend to focus on many other things rather than the business. I think there is also a few areas where the market -- combined market position becomes a bit of a problem, which is an opportunity for us. So these are some of the potential benefits. I think the disadvantage for us and an advantage for them might be that they become bigger versus retailers, so they become stronger in terms of bargaining power. And this may be negative for us, who knows. But time will tell.

And you mentioned a couple of areas where maybe you could gain a bit of an advantage from that.

Potentially. Who knows?

Any specific sales you want to point out?