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

Good morning, everyone, and thank you for joining today's call regarding the 2 announcements from Essity on the conclusion of the strategic review of Essity's ownership of Vinda and the Consumer Tissue Private Label Europe business. My name is Sandra Åberg, Head of Investor Relations, and I will soon hand over to our CEO, Magnus Groth, to summarize our 2 latest announcements. After Magnus' summary, we will open up for questions, and our CFO, Fredrik Rystedt, will join. But before that, I just want to remind everyone that as part of the requirement of the Takeovers Code in Hong Kong, we are unable to provide any information beyond has already been disclosed publicly about the transaction involving Vinda. So due to this transaction -- or due to this restriction, we are limited to what we can answer regarding the public offer. With that intro, I hand over to you, Magnus, please?

Thank you, Sandra. On April 26 this year, we announced the start of a strategic review of Essity's ownership of Vinda and the Consumer Tissue Private Label Europe business. And today, we are very happy to announce the outcome of these reviews. Firstly, the Consumer Tissue Private Label Europe business remains a part of the Essity Group. Secondly, a pre-conditional public offer announced for 100% of the shares in Essity's subsidiary, Vinda. To start with the Consumer Tissue Private Label Europe business, creating the Consumer Tissue Private Label Europe division has improved the performance of the business with further efficiencies and a very lean production and excellent service level. The division is, today, a highly competitive player, and I would argue now the best-performing private label producer in the industry. For this reason and also taking into account the current market dynamics, we have come to the conclusion in the strategic review that the division is a value creating part of Essity and should therefore stay as a part of the group. We continue to focus on building strong brands, innovation, strengthening our market positions and it's for this reason that the Private Label Consumer Tissue Europe division will continue to be a separate unit within Essity. Then regarding our ownership in Vinda. We today announced that a pre-conditional public offer has been announced for 100% of the shares in Vinda. Our announcement is based on Isola Castle Ltd. company, directly -- indirectly wholly owned by APRIL Group, part of the RGE Group of companies announcement that they will make a pre-conditional public offer to the shareholders of Vinda to acquire 100% of the shares in Vinda for a price per share of HKD 23.5 million. We support the offer and have signed an irrevocable undertaking to accept offer in respect of all of our 51.59% shares in Vinda. The price in the public offer will correspond to an equity value of Vinda of approximately HKD 28.3 billion or SEK 37.3 billion. This is a very attractive offer for Essity and for our shareholders. An exclusive license to continue to market and sell certain Essity branded products will be offered to Vinda after closing of the transaction to replace the existing license agreement. And we maintain a presence in Asia and in Vinda through continued licensing of Essity's brands with sustainability requirements for sourcing, production and collaboration in innovation and marketing. After completion of the bid, we will also reduce Consumer Tissue's share to 34% of Essity's total sales and enable increased focus on investments and growth in Essity's brands and in higher-yielding categories in line with our long-term vision and strategic focus. And our pulp purchases will decrease with almost 40% or more than 1 million tonnes per year, meaning lower and more stable input costs. We became majority shareholders in Vinda in 2014 and with this public offer, we now intend to end this ownership. A completed transaction would generate cash proceeds to Essity of approximately SEK 19 billion. The almost 10 years as owner has created strong shareholder value in our capital gain that we can invest in growing other categories with the aim of a long-term portfolio direction where health and medical, professional hygiene and our personal care businesses within Consumer Goods will become a larger part of the group, meaning that we will increase the return of our business and decrease the volatility in profits. Essity's financial targets for annual sales growth and adjusted return on capital employed will be reviewed as a consequence of this transaction. I'm very happy for this public offer and expect the transaction to be completed mid-2024. With that, I hand back to you, Sandra.

Thank you, Magnus. I would also like to highlight that as of Q4 2023, Essity will classify the financial reporting of Vinda as discontinued operations, and we will shortly provide updated comparable figures. Now we will open up for questions. And again, please note as part of the requirements of the Takeover Code in Hong Kong, we are unable to provide any information beyond what has already been disclosed publicly about the transaction. I also invite Fredrik Rystedt to join. Please, operator, open up for questions.

[Operator Instructions] We will take our first question from Niklas Ekman from Carnegie.

Just a couple of questions, if I may. Firstly, can you elaborate a little bit on the use of proceeds here? You talked about investment -- investing in Essity's brands, but are you looking at M&A? Or are you evaluating potential buybacks?

Thanks, Niklas. Yes, we always prioritize to maximize shareholder value, of course. And we will first deleverage and expect to find value-creating investments in the highest yielding categories, as you said, both organically and inorganically. Of course, over time, we will make sure to have an effective capital structure.

Okay. Fair enough. Secondly, can you elaborate a little bit on the return on capital employed and how this target is impacted? Because I believe that you've indicated before that the return on capital employed would have been at least 2 to 3 percentage points higher without [ being that ]. Would that still stand? And is that some kind of indication what we can expect in terms of your guidance going forward?

Niklas, I'll take that question. So we have actually not provided the numbers you are mentioning. But on the question relating to the financial targets, we have also clearly stated that those are relevant for the businesses that are included in the company when the targets were set. So we will, of course, revise as a consequence of this upon -- subject to completion, of course, of this offer will be -- we will revise our targets, and we will be back in -- before a potential completion of this offer.

Very good. And just a final question. On the license to Vinda, do you have any indication what kind of the sales magnitude we're talking about in terms of sustained sales to Vinda after this transaction?

Approximately 20% of Vinda sales today are under license from Essity brands.

And maybe to complete that, this is -- this relates to license of brands. It's not a sale from Essity to Vinda. So this is what is sold by Vinda under Essity licensed brands.

We will take our next question from Celine Pannuti from JPMorgan.

Yes. My first question is on the private label. You said that you think there is value creation in keeping that business. Can you elaborate in terms of that? And if you are now -- I mean you made the decision to keep it, yet still it's a separate unit. Are there synergies that you are going to incur -- you are incurring with this business? Would you look to integrate? Or would you want to keep it separate for a potential disposal in the mid-term? My second question is on the -- first, let's go maybe for private label and the second question is a different set.

Okay. Thanks, Celine. Yes, we will continue to run the Consumer Tissue Private Label division in Europe as a completely separate division. And it's very, very interesting because this business, which was perceived maybe to be kind of a lower performing business in the Essity Group, is clearly being divisionalized, improving performance immensely. And as I stated already in my introduction, the most efficient private label business that we can see very competitive and with high service levels and appreciated by customers and consumers. So we believe that this new organizational setup, which, of course, is also the legally separated supply chain, separated organization and so on has made this business much more efficient and value creating. So we'll continue to run it in that fashion going forward.

Celine, if I may, you were talking about who should we integrate it to capture synergies. So we have -- at this current point of time, we have service level agreements between different units in the group. So we already capture synergies at this current moment already now. So we will, of course, continue to do that not to create dis-synergies that we don't have to create. So that will continue.

Could you share maybe the profitability on that business? I think the last time I got -- you mentioned the sales in 2022 were SEK 8.9 billion. Anything you could say about the 9-month sales as well as the profitability?

No, we do not provide profitability numbers for the Private Label division, and this is for competitive reasons.

My second question is regarding the mid-term strategy. So I understand that you are with the sale -the disposal of Vinda, you are lowering the percentage of Consumer Tissue sales and the reliance on the pulp. At the same time, Vinda was providing a strong growth for you in terms of the overall Consumer Goods division. Can you talk about where you see the growth profile coming through when you look at your mid-term target?

We expect to have a good growth in Health & Medical, in Professional Hygiene now after the reset with the restructurings that we've done this year and in the Personal Care part of Consumer Goods, specifically in co-retail and in Feminine Care. So we see good growth opportunities in all those areas going forward.

All right. And then maybe lastly, regarding the debt and the legal advice that you got, do you think that this settle any potential claim on debt repayment?

I can't really comment on that. We don't have a claim. So from that perspective, we can only say that we have had the legal consultation and concluded that this does not constitute the cessation of business under the [ MTM ] program. So we have no further comments, really.

We will take our next question from Karri Rinta from SHB.

First about the Vinda deal. The -- what are your assumptions behind the expectation -- expected closure in mid-2024? And then these -- the conditions, these regulatory approvals, do they apply even to your share of your sales? Or are they more related to the buyer getting 100% of the shares? That's my first question.

As Sandra stated, what's not presented here in the documents provided, we cannot really comment on. And this is the time line that we are expecting, and it's not an unusual time line. So this is what's expected in these types of transactions on the Hong Kong Stock Exchange.

But the preconditions that you mentioned, those are specifically the antitrust?

Yes, we can't comment on the time. It's just merely an expectation and an estimate, but we can't comment on the timing any more than what is already stated. There are preconditions. And when they are fulfilled, then an offer is launched. And exactly how long that can take, we have no real view. We can just make an estimate, and that's what we have done. So there is no guarantee for that or anything else than just our assumption, but that could be wrong.

All right. Fair enough. And then the second question, you mentioned that Vinda has represented roughly 40% of your pulp purchases. But how much of your CapEx has gone to Vinda roughly in the last 5 years on an annual basis?

Karri, there, we are not commenting specifically on numbers relating to Vinda. So if I may propose because the numbers for Vinda are, of course, available based on their reporting. So it's quite easy for you to look at that. But we cannot provide it at this point. But you can see it in their own reporting.

All right. Okay. Then just maybe one final question. In the offer document, this license agreement that you intend to have with the new owner, it says nonexclusive license agreement. So does that mean that you could theoretically continue to sell products in China even outside this license agreement? Or is that too much detail at this point?

Unfortunately, we cannot comment on that any more than what has provided, Karri.

We will take our next question from Oskar Lindstrom from Danske Bank.

Three questions from my side. Number one on Vinda licensing. Could you provide any information on sort of kroner amount on that? And how will it be reported? Is it coming into the EBIT line? And I presume it would be sort of 100% gross margin then. That's the first question. Should I go ahead with the other 2 questions?

We can take the first question because, again, I have to refer back to the fact that we cannot give any more information on the Vinda licensing or any amounts in kroners.

Just a follow-up then on that. I mean, I presume you're -- they are already paying license fees for selling those brands. Is that something -- is that correct?

We cannot, unfortunately, comment on that either, actually. We have to refer. And sorry for being a bit formalistic here, but we are, of course, subject to, as Sandra pointed out, the rules under the Takeover Code. So we will need to refer you to official public information, which you can find in Vinda's past documents.

Wonderful. My second question is, are there any -- I mean, one of the reasons you gave for this or the aims of the strategic review was to reduce your exposure to pulp. I mean have you now exhausted the different sort of possibilities of doing this? Or are there further or other ways that you could reduce your exposure to pulp?

Of course, this is a huge step that we're taking now with this announcement regarding Vinda. I mean -- so it's a big step for us going forward. And then we will aim to reduce our reliance on pulp by growing other businesses. But also, as we have presented many times, finding other sources of pulp to fresh pulp like the Tetra carton board that we're recycling in France or the wheat straw that we are using in Mannheim and so on and so forth. So we're constantly using -- looking for different sources of fiber in order to reduce our dependence on wood pulp, and this will continue going forward.

All right. And then my third and final question is regarding your, in a strategic sense, more longer term presence in China and Southeast Asia. As I understand, I mean, through this divestment, you will no longer have any direct operations in those regions long term. And will you seek to build up a new business in these regions of some kind?

China and Southeast...

Or are you happy being not present there directly?

It's a good question. No, China definitely continues to remain an interesting market for Essity. And as we already spoke about, Vinda will be offered a licensing agreement that we touched upon, which will give us a foothold through this licensing agreement. We are present in other parts of Southeast Asia with our medical business already and looking at other opportunities. So again, we are not using -- doing this to have a smaller presence in Southeast Asia or China because these are still attractive markets, but we want to reduce our share of Consumer Tissue sales in the group.

So maybe if I may just follow up on that. I mean, so should we interpret this answer as being that you may want to have a presence in these regions in the future, but then it would most likely then be in the Health & Medical segments rather than in the Consumer Goods segments.

It could also be in Feminine Care and incontinence care retail, where we are typically successful and where we are already active in some Southeast Asian markets. So definitely in the other categories that we aim to grow going forward, the higher-yielding categories with a strong underlying market growth.

We now will take our next question is from Jesper Mothander from Dagens Industri.

I have a 3-part question, which centers around the ESG issue. Royal Golden Eagle has been heavily criticized from an environmental aspect from NGOs locally and globally. So what, if any -- my first question, what, if any, risks to your brand do you see from an ESG standpoint in this deal?

Thank you. And of course, many aspects have been reviewed in this divestment process, and sustainability is one, as it always is for Essity. And just underline that Vinda sustainability profile is ranked with an A rating in ESG terms on MSCI. Vinda is also on the Hang Seng Sustainability Index, and Essity -- Vinda has also been awarded as an ESG leading enterprise by Bloomberg Business Week. So of course, that's something that we are very happy about. Now coming over to the licensing agreement, the potential licensing agreement, it clearly outlines the conditions for retaining the sustainability profile that these brands stand for today.

So the answer to the question is no risks or because that was the question, what if any risks?

We think this is a good solution that we're pursuing. And it's very, very important for us that our brands fulfills Essity's sustainability requirements when it comes to sourcing and -- in other terms.

Okay. So what assurances have you asked for and secured that Vinda's raw materials will still be sourced responsibly after closure?

We have, and as you can see in the disclosures, made sure that the brands licensed by Essity will be sourced in according to Essity standards.

Okay. Final part of that 3-part question. What is your responsibility other than maximizing returns in choosing a partner to divest to?

It's a very important responsibility to our shareholders. Of course, this is a public bid that we have responded to, and this is the result of that bidding process.

Not sure I understand if you did answer the question other than maximizing returns, which I believe is what you answered now.

Yes. And of course, making sure that the licensed products by Essity fulfill all our supplier standards and sustainability standards, which is a very important part.

Okay. But doesn't your responsibility extend beyond that given that you have owned Vinda?

Our responsibility in regards to the ownership of Vinda, and as I stated, Vinda has a leading sustainability profile in Southeast Asia and in China. And this is my answer to your question.

We will move to our next question from [ David Wu ] from HSBC.

I'm slightly late to the call. So this may have been answered already. I was looking at how a subsidiary is defined under the Swedish Companies Act. And it seems to be a subsidiary with more than 10% of assets or turnover. Can you confirm that Vinda is around 16%? That's the first question. And secondly, could you just provide a bit more clarity as to some of the analysis you've done in terms of why this wouldn't constitute a cessation of activities for that box, please? I completely accept what you're saying, but I would just like a bit more clarity as to why you're saying it because it seems to be at odds with some of our takes from the OM and some of the other legal framework.

Yes, let me take that. I will not provide too much comment on it. But let me just, first of all, say that Vinda, if you take into account our ownership, which is 51.59% of their turnover represents less than 10%, if I start in that end. And whether your question what the legal grounds are, there are many. And we have acquired sufficient legal counsel to make the statement we are making. And beyond that, we cannot give any more comments on that specific issue.

[Operator Instructions] We will take our next question from Patrick Folan from Barclays.

Just a clarity on the question. You got asked earlier in prioritizing shareholder value on the cash usage. I mean is there -- it sounds like priorities on deleveraging. Is there discussions for a buyback on the table? And is the kind of priority that we should be thinking about deleveraging, number one, shareholder returns; number two, and M&A, number three? And I have a follow-up question, but I'll go with that first.

I really can't comment on that. All 3 are important here. And of course, over time, we will make sure to have an effective capital structure while maximizing shareholder values. In the way I mentioned, it could be deleveraging and it could be -- of course, continue like we have done investing in our brands and market positions.

Okay. Then secondly, just on the -- you talked about Personal Care and Professional Hygiene and Health & Medical. I think in April, you guys talked about how post the strategic review, there'd be an emphasis particularly on those categories, which has done well for you first 9 months this year. Is there a particular geography you're focused on? I know it's 6 months before this is completed potentially. But is there any kind of geography you're looking at? I think EM is something you guys called out before. Any kind of color there would be helpful.

Of course, we are focused on leveraging our strong positions in Europe and very much on growing in both South America and North America, where we have strong positions in several of these areas. And as I already mentioned, we are looking at also growing in Southeast Asia, including China, in other categories than Consumer Tissue. So those are all our priorities going forward.

Then I think we would have to close this call. And I would like to thank everyone for joining, and have a nice Friday.