Essity AB (publ) (ESSITYB) Earnings Call Transcript & Summary

Hello, everyone, and welcome to Essity's webcast on today's announcement. Essity acquired Knix and takes the global lead in leakproof apparel. So Magnus Groth, our President and CEO, together with Fredrik Rystedt, our CFO and Executive Vice President, will go through some of the details in today's announcement. And we also have the pleasure to have Joanna Griffiths with us, Founder and CEO of Knix Wear. So I'm your moderator, I'm Josephine Edwall, Senior Vice President, Communications. So we will also have a Q&A session in the end like normal. With that, I hand over to you, Magnus.

Thank you, Josephine. And yes, this is an exciting day for Essity, and I think this will be a very, very interesting press conference because we have as a presenter, Joanna Griffiths, the Founder and CEO of Knix, the company that we are acquiring today. I will start by setting the scene in how we're taking the global lead in leakproof apparel and why that's important. And to start with, what are we talking about here? We're talking about intimate hygiene and the 2 important categories: feminine care and incontinence care. And of course, Essity is the global leader in incontinence care a major and fast-growing player also in feminine care. And in both these categories, leakproof apparel is quickly growing as a subsegment, then replacing liners, pads, disposable pads and the typical products that you would see or use today. And why is this happening? Basically because leakproof apparel is more sustainable than disposable products. Typically, the CO2 footprint from using leakproof apparel is about half or less than half of that using disposable products. Also from a waste perspective, there's much less waste, 75% less waste using reusable products as opposed to disposable products. Maybe most important, leakproof apparel is comfortable, discrete and reliable. And Joanna will talk more about this in a minute. And also something that has accelerated the growth in this segment is the increasing awareness and availability of these types of products. And this leads to very, very attractive growth opportunities for Essity. It's the fastest-growing segment in intimate hygiene. It's growing with approximately 20% per year. We believe it will continue to grow with around 20% per year for the next 5 years. This would mean that from being approximately 7.5% or 7% of the overall intimate hygiene market today, it will grow to become 15% of the overall intimate hygiene market. So it's a very important segment to be in for Essity. And with that, I would like to show you then the picture of Essity and all our fantastic brands. Now with the addition of Knix and Modibodi, we are offering leakproof apparel in -- under all these brands, but now with the addition of Knix and Modibodi taking the global lead. And without further background, I think we're all now looking forward to hear Joanna. I want to welcome you to -- and your team also the team of Modibodi to Essity and hear about your exciting journey as the Founder and CEO of Knix. Over to you, Joanna.

I'm so sorry about that. I was just saying that it's a pleasure to be here today, and it's a pleasure to share a little bit more information about Knix and this exciting growing category that is leakproof apparel that we have been at the forefront of for the better part of the last 10 years. Whenever I speak about Knix, I think it's very important for us to start by rooting ourselves on our mission because we are an impact-led company. Very much like Essity, we look to have a big impact in our community from a sustainability standpoint, on our customers and on our team. And so at Knix, our mission is to inspire our customers to be totally unapologetically free. And we really are an entirely new kind of intimate company. We combine product innovation with authentic storytelling to redefine what an intimates brand can be. When we think of Knix, we really define ourselves as 3 things. So the first thing is that we are a category creator. We've been pioneers within the leakproof, underwear leakproof apparel space. And as we've just heard, this is becoming an increasingly fast-growing category within the intimate hygiene space and really demanding a lot of attention from consumers and from the market. Secondly, we are product innovators. We have a best-in-class product design team and have won numerous accolades. Last year, we remain Consumer Reports #1 leakproof underwear brand. We remained the #1 leakproof underwear brand by Good Housekeeping for both women and for our teen line, KT by Knix. And we love innovating at a product standpoint and bringing life-changing products to market. And then finally, we are a movement brand. So we love to tackle taboos, to really be at the forefront of some of these huge and really positive trends that are taking place more broadly within the industry in the intimates category. We've been pioneers around the body positivity space. And I'm sure over time, you'll learn to discover all of the great things that we've been up to as a brand and will continue to be up to. So as we think about Knix and redefining intimates, we are the leading player in leakproof period and incontinence wear. We do this through an assortment of functional intimate apparel and activewear, so we have a large and growing assortment based on the feedback from our customers in the market. We love to innovate and have built a very strong and trusted brand, and we are best-in-class when it comes to digital capabilities. So we are a direct-to-consumer brand. 98% of our sales come from direct-to-consumer. This is exclusively through our own websites as well as our 6 own and operated retail branded stores. And at the moment, we share about 30% of the market share in North America and have been growing at a very rapid rate as well. Our sales are split almost equally between Canada and the U.S. And then finally, it really is a high gross margin category in business and it's capital-light as well. So we've been able to scale quite quickly and efficiently to date. When we think about Knix, there are 2 main categories and there's a third category as well, which was made reference to, which is this everyday care. So when I created Knix and had the idea of leakproof underwear, it was really driven by 2 main statistics. So the first one was that 80% of women experienced leaks during their period. And the second was that 1 in 3 women experienced light bladder leaks, but there wasn't really a solution on the market that was discrete, reliable and that gave people the confidence and comfort and peace of mind that I thought that they deserved. And so we pioneered this category. I knew an exciting part of this category as well is the more everyday use. And so at the moment, over 50% of our customers are actually wearing leakproof underwear every single day. And this is a long-term vision for Knix. We really believe that leakproof underwear is the future of both intimate hygiene as well as intimate apparel, more generally speaking. We've taken our expertise in our leakproof technology, and we have now rolled this out across a growing category of products, hence the title of leakproof apparel. So we've started in leakproof underwear. We've now expanded into maternity. We offer great maternity options as well as leakproof nursing bras and pads. We have a growing leakproof swim assortment, which is very important for consumers that are not comfortable wearing tampons and rely on pads, which are not suitable for the water. And then our most recent big move has been in Active. We really believe that leakproof and Active is where the next frontier is. It makes a lot of sense when you think about things like sweat and the fact that many leaks happen during exercise. And so we are very bullish and excited about our foray into the activewear space. And then finally, we have reusable pads as well. Something that from an intimate apparel standpoint is unique to Knix, but also we share with Essity is the fact that we are there for our customers through every single stage of life. In 2017, we launched our teen brand, KT, which stands for Knixteen by Knix. And the goal here was really to be here for consumers from cycle 1 to help give comfort and peace of mind for the next generation around their periods and to offer a sustainable alternative for them to approach periods from the very, very beginning. Our Knix suite and assortment of products really are there for women and people of all ages, starting from young adults. I made reference to our maternity and postpartum offering that we have, and then through menopause and into later in life. Something that I pride ourselves on -- we pride ourselves on in Knix is that we will have women, who will buy for their daughters and for their mothers, and it really is a multigenerational brand that speaks to so many people. How we've been able to accomplish this is actually quite simple in theory, and that is that we put our customers at the epicenter of absolutely everything that we do. And we use our growing platform. We have over 820,000 social media followers now that are highly engaged to tell their incredible life stories and the incredible things that they are doing in our products. So at Knix, our customers are our model. They are our inspiration for new products and how we get all of our great ideas around where to innovate Knix. And they are also our ambassadors as well who really help us grow and scale effectively through word-of-mouth and keep people coming back time and time again. That concludes my slide -- my side of the presentation.

Joanna, it's such an exciting and inspiring story, and I really also see the touch points with the Essity how we try to improve well-being for our consumers and customers every day and also the huge focus on innovation that's so important and where you are really at the forefront. So thank you very much. And I'm sure there will be many questions for you later. With that, I'd like to hand over to our CFO, Fredrik, to talk more about the numbers. Over to you, Fredrik.

Yes. Thanks, Magnus. I will not be able to do that with the same kind of excitement maybe as you, Joanna. But let me just go through that real quick. So the purchase price on a cash and debt free basis is SEK 3.3 billion for 80%. So for 100% for the full enterprise value, that amounts to SEK 4.1 billion. And as I previous -- or as we've mentioned also in the release, Joanna will remain as owner of 20% of the shares of Knix Wear. So if you look at the financials for Knix Wear, in 2021, sales amounted to a bit over SEK 900 million with very high gross margin. And the EBITA margin is attractive, but it's also reflecting the significant investment in growth that's within the numbers. And of course, over time, we expect the growth level of the whole market and, of course, Knix in particular to remain very high. And as a consequence of increasing sale, also EBITA margins are expected to increase over time. We expect to finalize this transaction during the second half of 2022 after completion of customary regulatory approvals. So that's it, Magnus.

Then we will run this as a separate business and learn from all the experiences and fantastic achievements that Knix has seen over the last 10 years. So I look forward to working together going forward. Before moving to Q&A, I want to just remind us that we also announced an acquisition yesterday, an important and exciting acquisition of Modibodi, which is the leader in leakproof apparel in Australia and New Zealand and also with a presence in the U.K. and also full portfolio of leakproof apparel and very strong direct-to-consumer competency with over 95% of sales online. And similar to Knix's high gross margin and that -- much of that gross margin being reinvested into accelerating growth and with a similar EBITA margin levels as Knix. So combined, enabling and supporting Essity's vision of being and building the fastest-growing company in intimate hygiene now taking -- through taking the lead in leakproof apparel with all the benefits that we've heard from sustainability, from comfort, well-being and with the increasing awareness and increasing accessibility through the great job that these companies are doing in attracting consumers and customers in D2C. So with that, we summarize the presentation and move over to questions and answers. And just -- since we've been a number of speakers here, I move to the next slide, and we are all available here now to answer your questions. So let's open up for that. Thank you for listening.

So operator, please help us open up for the questions.

[Operator Instructions] We open our first line.

It's Karel Zoete with Kepler Cheuvreux. Can you touch upon the possibility for the brands to potentially play in mass market retail? Or will this remain a D2C brand for the near term? That's basically the question I had.

Currently, we are launching the Essity brands TENA, Saba, Libresse in the mass market. And Modibodi has started doing a little bit of that in Australia, but we do believe that D2C is the biggest opportunity for Knix and for Modibodi. But that's really over to you, Joanna. You will run this business and what you see going forward.

I think from our perspective, a dual-approach strategy in the long run is the right strategy. We really see that consumers are buying at mass. And so for Essity to continue to have their brands at mass, I think, makes a lot of sense. We have developed products that would be suitable for the mass channels and market. But we also believe that continuing to pursue our D2C strategy is important as well, as this -- the future of leakproof underwear we truly believe will fit within the broader intimate apparel space and will replace everyday underwear. And so we think it's important to have both.

And it's also obvious with the huge amount of SKUs and the complexity of this business is very suitable for D2C. It's impossible in kind of brick-and-mortar retail to keep the assortment that Knix and Modibodi offers today.

We will take our next question.

This is Oskar Lindstrom from Danske Bank. I have 3 questions actually, if I may. The first one, I suppose, will be for Fredrik. That is the growth outlook in terms sales growth for both of these companies for the first half and if possible for the budget for 2022.

Yes. Oskar, thanks for the question. So we're not giving any specific outlook for the immediate future. But as we have been alluding to, the expected growth rate for the market and specifically also for both of these companies, not least Knix is, of course, that growth levels will continue to be high. You've seen from the slide I showed earlier that the growth rate in 2021 was 97%. That may be kind of on the very, very high side. But generally speaking, growth is high. So we're not giving any specific forecast. But of course, these markets or this category is expecting to grow quite significantly.

All right. My second question is -- I suppose, to you Magnus, is did you actually have any presence in the leakproof segment before this? And will these brands be used across the entire Essity platform? And also, will it be part of health and medical or consumer goods?

This is definitely a consumer goods product range. And when it comes to the incontinence care part it's in the consumer space as well. So this will fit into -- reporting into the consumer goods business area. Yes, we launched leakproof apparel approximately 2 years ago now under the TENA brand, our different fem care brands and also TOM Organic, the acquired brand, through Asaleo also has an assortment of leakproof. But this is still in a start-up phase even though it's growing very, very nicely. But with these 2 acquisitions and especially Knix, of course, we take a leading position globally. So it's a huge step going forward. And how we will address the different markets and so on is really up to Joanna, how she wants to develop and around the Knix brand going forward, but of course, this is by far the biggest part of our leakproof offering going forward. And then, of course, with the stronghold in Australia, New Zealand and U.K. of Modibodi as well. We will be leveraging all these strong and attractive brands.

And my final question is more, I suppose, general. I mean are these 2 acquisitions indicative of a wider shift in incontinence and I suppose in all the personal care market towards more sort of niche products, more SKUs, D2C? And if so, I mean, does Essity need to make more investments into these types of businesses or market within other product category?

Yes. Thanks, Oskar. It's not that we need to make these investments. We want to make these investments because they're incredibly attractive. And over the last number of years, we have been talking about success in feminine care, how we continue to grow market share more or less everywhere we are present, how we continue to be the market leader in incontinence care globally. And of course, we want to pursue that further. We see this increased interest in sustainability, in well-being, and that fits very well with this leakproof apparel trend. That's very, very strong and that we believe will have the strongest growth in intimate hygiene over the next 5 years. So it's definitely where we want to be. After listening to Joanna, I'm absolutely convinced that this is not niche. It will be 20% at least of the overall intimate hygiene market. And listening to Joanna, assuming that everyone will be using leakproof apparel every day. This will be the mainstream and not the niche. Over to you, Joanna, what do you say?

That's the trend that we're seeing internally within Knix based on the consumer studies that we've done with our customer base, is that people might try them for menstruation or for incontinence, but the convenience and comfort of wearing them every day and the discreteness in the way that we've built the products, they are products that people are reaching for almost every single day. And so we have a very long-term perspective on leakproof. We fundamentally believe that it is a core part of the future, not only of intimate hygiene, but as intimate apparel and underwear more broadly speaking as well.

[Operator Instructions] We'll take our next question.

It's John Ennis from Goldman. My first question is just whether we can get a bit more detail on the gross margin structure. Because I guess the 10% EBITA margin looks relatively low compared to some of your other categories that you did decide on high gross margins. So can you maybe quantify that in rough terms perhaps? That's the first question. My next question was on the sort of Knix growth rate. The sales growth because the market is strong in 2021, your sales doubled. I guess we're halfway through 2022, so can you give a sense of the current growth rate for the first half or a bit of a sense of what you're expecting roughly speaking for 2022, so we can think about the forward-looking multiples here. And then my third question really relates to, I guess, the Knix sales growth accretion you're expecting from this category leakproof underwear as a whole because you site a 20% CAGR over the next 5 years. But is there a modest cannibalization effect that we should consider as well when we think about the sales growth accretion here. They are my 3.

Okay. I will give it a try. Yes, high gross margin. And for competitive reasons, we've decided not to give details on that, but they are very high. And also from an Essity perspective, some of the highest gross margins that we have in the business and enables significant investments in advertising and -- promotion and advertising. And in spite of those significant investments, having a 10% EBITA margins. So without being more specific, it's good. It's asset light. Of course, we -- Knix, Modibodi, as stated, we buy these products, we source them externally. Over to the growth rate, Fredrik stated already that we will not provide specific figures for this year or for the first half. I think the 20% market growth is maybe something that could be used as a starting point because I'm sure this will be -- as in some of our other categories also varying between the quarters going forward. And when it comes to the net sales accretion, it's too early to say if there will be cannibalization. We haven't seen that so far with the experience we have from TENA and Saba and where we have launched our own leakproof apparel. We haven't seen any cannibalization yet. There seems to be quite a lot of use both of these leakproof, washable products and the disposable products, but I think that remains to be seen. Fredrik, do you want to add something there?

No, not really. I think you said it, Magnus. Maybe on the cannibalization, obviously, when we look at Knix being present as Joanna, you said, Canada and the United States. And when it comes to feminine products, of course, we're not really active nor present in that market. We are very active, of course, in the incontinence side. So there could be a bit over time, in the longer perspective, cannibalization that may happen. But the net is certainly -- net accretion, so to speak, is certainly very, very positive when it comes to those markets. So generally, it is definitely accretive for sales. Cannibalization is expected to be relatively small.

[Operator Instructions] There are no questions at this time. I will pass the conference back to the speaker.

Over to you, Josephine. We always do this.

Magnus, if you have any final conclusion, but I think I have already said this, this is a perfect match. This is the future. Do you want to add anything, Magnus, before we end?

Well, I can add high gross margin, profitable, sustainable, incredibly attractive from a consumer and customer perspective, high level of innovation. It's a perfect match. We're really, really excited and I look forward to working together with Joanna and her team and the team of Modibodi and growing this business very, very successfully over the next number of years. Thank you all for calling in and listening.

So with this, we conclude.