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

Yes. I believe M&A is more incremental from the perspective that we don't expect to venture into completely new areas like we did with medical 7 years ago, which is now really taking off with the bolt-on acquisitions that we've done, really adding value. Or I mean another incremental -- or I mean, more kind of drastic acquisition was into washable, absorbent underwear, which is a very exciting area for us, but also kind of moving away from maybe our core business a little bit. Of course, it's the feminine care, but moving away a little bit. I think we will do more of bolt-on acquisitions in the categories and geographies where we are already present. And to take some examples there, both ABIGO and Hydrofera, which were 2 advanced wound care acquisitions we did in medical, they've been very value creating because they had good margins to start with. We could help them fuel growth. And there were clear synergies where we had, for instance, different customer basis and could then sell -- cross-sell products and so on. So that's been really useful. And Hydrofera in the U.S. has been growing over 20% now for -- since we acquired them and really helping our position over there. Asaleo, Familia were 2 acquisitions where we were already part owners or joint venture partners that were also very value creating when we could take full control and then work with both cost synergies, supply chain synergies and so on and so forth. So it's, of course, quicker to drive value from acquiring companies in categories and markets we already know, and that's clearly a learning that we have and where we see many opportunities going forward. Maybe on that note, just a reflection here, we've done some very successful divestments. You mentioned Vinda where the sales proceed was SEK 19 billion, and actually, the capital gain was SEK 9 billion over 10 years. So the TSR per year during the holding period was 14%. And I think we are 1 of very, very few companies that have been able to pull out of Russia and actually be paid in hard currency, which happened last year. I think it's something less. It's maybe a few hundred out of several thousands that -- been able to do that. So I think we've done quite successful divestments also over the last couple of years. But definitely, as you said, it's part of the strategy, but more kind of bolt-on. And then when it comes to cash uses, we'll get back to that when we update on the financial targets and policies. So definitely, because we have a strong balance sheet now, and net debt-to-EBITDA, I think, was 1.36 in the -- after the first quarter. And of course, our current policy is to stay solid investment grade. So we're managing that very easily. And we also have a very strong cash flow from our own operations now for the third quarter. So that's kind of just part of the thinking now going into our considerations for announcing new targets and policies.

Maybe just to finalize on this one, because I think you mentioned some of the recent acquisition. Could you update us, like the growth rate and profitability. So in Personal Care, you had Modibodi and Knix. And in medical, you mentioned ABIGO and Hydrofera. Could you update us on that?

Both Hydrofera and ABIGO are growing very, very nicely and with very good margins. So double-digit growth. I mean BSN Medical was an acquisition 7 years ago, and we've gone through the whole cycle with the pandemic and everything. And as you can see in the numbers now in the first quarter, Health and Medical is performing quite nicely. Knix is doing really, really well. We had a very tough comparison now in the first quarter. They had quite significant negative growth. But they had some big campaigns last year, and we are working very closely there to get back to growth and expect to have good growth for this year -- by the end of the year and the same with Modibodi. There's been a little bit of a reset because of the consumer climate as consumers are more concerned about paying upfront for a product that can be used -- that's more expensive, but can be used multiple times. So washable absorbent underwear rather than buying pads and diners. But we're just scratching the surface when it comes to absorbent -- absorbent washable underwear. We see that, especially the young consumers, are really, really into this. And we have established ourselves as the global #1 in this subcategory of feminine care and incontinence care, and we believe that this will develop very strong over the next years. Yes. Both Familia and Asaleo doing really, really well. Familia is a fantastic company with a really -- I mean, maybe some of our strongest brands and the consumer orientation and consumer focus that is quite amazing. And also Asaleo in New Zealand and Australia has been gaining market share very successfully ever since we acquired the company, which we partly owned, but it was listed on the stock exchange in Australia.

Now I would like to maybe spend a bit more time deep diving in each of the 3 divisions. Starting with Health and Medical that you just mentioned. You're right, it has been a robust growth and strong profitability. Now can you remind us the split of Medical and Incontinence in the division? And then looking specifically for Medical, what do you think are the opportunity from a category or geographic standpoint for this subsegment. I mean, this is quite a fragmented market and there are a lot of competition -- and there is a lot of competition from medtech players. So where do you think that Essity maybe as an opportunity to do better in terms of distribution or in terms of products? So where are the gaps really for you in that market?

Absolutely. Yes. So out of Health and Medical, Medical is 41% and Inco Health Care is 59%. And looking at Medical, we typically talk about 3 subsegments or therapeutic areas, and that's wound care, it's orthopedics and it's compression. And the area that's really doing well and where we did the acquisitions I just mentioned, is wound care, both acute wound care and advanced wound care. So both areas developing very, very nicely, everywhere where we are positioned today. In general, our medical business is very much a European business, but we're aiming to grow both in North and South America, so Latin America, as well as in Asia where we have a quite nice position in medical actually outside of China, so in Southeast Asia. Compression, with the JOBST brand, we're global #1. Starting to take off, and we're starting to see the growth that we expect from this. It's been a long journey. We've really rejuvenated the brand, the go-to-market, the assortment, and it's really starting to work well now. And the same with orthopedic soft goods, where we have the Actimove brand. It's not a rapidly growing category, but we have a couple of areas there that are doing really, really well. Geographically, overall, yes, Europe is a stronghold. We're growing nicely in the emerging areas I mentioned. We would like to have a strong position in the U.S. I mentioned that the Hydrofera acquisition really helped us. We also made a tiny, tiny acquisition, the sports tape brand, Coach and Zonas, all of that helps us kind of establish ourselves with the new customers in that area and also with new products. But we're still tiny and subscale in the U.S. so that's definitely a prioritized area for us to see how we can grow faster in medical in the U.S.

And maybe to continue on that division. So for Health and Medical altogether, you reached 19% margin in Q1, which I think probably was the highest level for that division, well, coming clearly from some pressure last year. Do you think that such level is sustainable? And what is the structural driver for such a high margin level? .

Yes. The recovery has been quite remarkable compared to a year ago, margin-wise, considering that most of the business in Health and Medical is on 3-year contracts. So only 1/3 of [ the volume ] kind of retender every year. So we have been able to raise prices much quicker than what's in the contract terms, so to say. We have raised prices also in contracts that have not been up for renegotiation. So the team has done a fantastic job there. And one way now to continue to see really, really, because these margins are very, very good, it's volume growth. Because one thing that also differs this business there from the other 2, and the reason why we have 3 business areas, is that we have completely different customer bases and go-to markets, is that this is where we work with health care providers, could be everything from big hospitals to NHS to singular elderly care homes, and typically heavily reimbursed areas and tenders and so on. This means we have a huge sales force. We have feet on the streets really out there showing the benefits of our products and meeting with -- we negotiate thousands of contracts out there and kind of our sales forces out there talking to the different customers. So this is an area where we have a huge benefit of scale and volume because we have a big fixed cost in the sales force, in the SG&A. And of course, we are aiming also to make that SG&A more efficient, but still it's important to have it in order to grow. So volume growth is clearly a top priority, and that coincides with the fact that this is where we have the highest margins and also the highest return on capital. So a clear focus for Health and Medical to increase growth as much as possible as sort of very value creating.

Good. Turning to consumer goods. First, I wanted to talk about personal care. So you've done quite well in Feminine Care and Inco. I would like to understand a bit your views on these 2 categories, and especially from a geographical standpoint around the U.S.A., how big are you now in this market? And what kind of growth and opportunity you see there? You mentioned the U.S. earlier. And then likewise on Latin America, which I think has also been helped by the acquisition of Familia, how the performance have been there?

Absolutely. So now we're talking personal care. Overall, North America and Latin America are about 17% each of our sales but only -- in North America, only a smaller part is personal care. It's actually 4%, 5% of the Group sales. And this is, as you stated, basically incontinence care health care, incontinence care retail, and feminine care. And if you look at it from our perspective, we have about 15% of our inco health care sales in the U.S. and similar number for inco retail. So it's a small part of our sales in those categories. We're also a small player in the U.S. And when it comes to Feminine Care, it accounts for about 9% of Essity sales, and that's just Knix. We have some sales also in the Hispanic parts of -- the Hispanic-speaking parts -- with the Mexican products also. So it's small for us, but we believe it's a huge opportunity. In Canada, we are a market leader with the TENA brand in incontinence care. And then, of course -- yes, we can get back to that later. So what we're seeing an upside from is that when we changed the organization into the 3 business areas and made global or semi-global business areas, we put a completely new consumer team in place in North America. And I think that's already paying off both online, very much with Amazon, but actually also increasingly in retail stores. So from a very low level, we're seeing some positive developments there both in inco retail and in inco health care where we then also have a completely new organization in place because when we split into 3 business areas, inco retail and feminine care ends up in consumer, while inco health care ends up in health and medical, so we really now have the right go-to-market and the right competencies and the right people in place to grow from a small position in the U.S. And like-wise, actually in Latin America, I mean, where we are really super strong everywhere, both with feminine care and inco care, but having that focus now with a completely consumer-oriented organization is really helping.

If I look at the consumer goods as a total category, at Q1 you mentioned that inco retail and fem care were the area of growth, while Tissue and Baby where there to realize the operational leverage. Can you talk about how you think about the growth of that category versus the profitability?

Of the Consumer Tissue, specifically or...

No. I mean that's -- like how, for instance, it feels to me that inco and fem care are really the growth driver, and then you look at the profitability leverage from leveraging Tissue and Baby. So how you basically manage that top line versus margin opportunity? And then yes, I have a question on Consumer Tissue margin after that.

Yes. With all the changes we did in Consumer Tissue and Baby, we feel that the business we have now is very strong and has the opportunity to create value. So what we have now is in Consumer Tissue and in Baby Care are some very strong branded positions in Europe. And in Latin America, when it comes to Tissue, not in Baby, we have very little left. And we also have some strong partnerships with what we call retail brand customers where we have been working together for decades to build strong brands. And we feel now that with all the restructuring that we've done, all the cost improvements, all the innovations that we have, that also Consumer Tissue and Baby is in a good position to create value for the company.

Well, in fact, maybe if I look at Consumer Tissue Europe more precisely, I mean, is there -- are we done now with the efficiencies or are there more to be done? And then can you talk about innovation and premiumization. I think that's something that you were talking a lot in the past. I think it would be interesting to see where we are at specifically in this category.

Absolutely. Yes, we are more or less done, and that goes for restructuring in general. There could always be something somewhere, of course. We're a big company with a lot of assets. But overall, don't expect any big program announcements or anything similar to what we did in Professional Hygiene in the first half of last year. That doesn't mean that we will not work with, of course, continuous improvements in areas I already mentioned and building the brands and so on. So what's happened here in the last year, with a little bit of a more kind of negative consumer sentiment, is that we have seen down trading in Consumer Tissue, specifically in Europe and in Latin America. It hasn't impacted the premium part of that business very much, so we're still very much focused on premiumization. But having said that, we've also worked hard to improve our -- if you look at good, better, best tiering to improve our good assortment so that we catch our customers before they leave us for private label, so that's been a strong push from our side. So the better segment has moved down to the good segment. The premium segment is still quite nice, but that's been a strong focus for us. And also a way to now get volumes back that -- where we have a strong offering in lower tier for Consumer Tissue without giving up on the higher tiers where all the different launches we've done over the last couple of years are growing very, very nicely, like the coreless product, like the wheat straw mixed product in Germany and like, for instance, the [indiscernible] just one product that we're launching in country after country, all of these are doing really, really well. So we're continuing with the premiumization strategy but adapting to the current trading environment basically when it comes. And it's the same in Latin America where we are very, very strong in Mexico and in Colombia and Ecuador basically and Peru is in consumer tissue.

Maybe moving to Professional Hygiene. This is an area where this quarter we've seen a big impact from the restructuring that you are doing. Can you talk about what are -- ultimately what you think the -- how this is helping the division in terms of its go-to-market, in terms of its top line opportunity, and I would say profitability too? I think margin were in the mid-teens. In the end, is that a business that could structurally be more in the high teens level?

Again, margins are good in also Professional Hygiene, but eventually, I think we could work towards a higher margin through mix improvements. And again, just the fact that we changed our organization a few years ago to the 3 business areas and having a global setup for professional hygiene made us realize that we still have businesses and assets that were very, very low-value, unbranded, basic napkins basically that we were selling at close to 0 or very low margins. It would never grow. And we said, let's -- it will always be a drag on margins even if it's nice for top line, but it's not going to grow top line. So let's just restructure. We closed a big plant in the U.S. and a number of paper machines and converting lines in Europe. And what we stated at the time was that this would have a negative impact on growth but a positive impact on margin. And we believe that it has a significant positive impact on margins on Professional Hygiene, actually. So I mean if it's -- I think we said 2 margin points on Professional Hygiene. And if that's now over 20% of sales, for us, it has, maybe not 50 basis points, but 30, 40 basis points impact on the margin for the Group, which is a significant contribution. Looking forward, we will have the same negative impact on top line in Q2 as in Q1, and then it will diminish over the second half of the year. But I mean, we expect to have the same positive impact on margins. And maybe looking into next year, we have now realigned the entire sales force to focus on the very high-margin differentiated strategic product areas where we have patented offerings like the Tork PeakServe, like Xpressnap, which is growing and growing and growing, or the SmartOne system toilet system that's also growing and growing and growing. That's where we want to grow, and that's the way to also improve margins over time. And again, operating leverage, same as for Consumer Tissue.

And can we just, to finish off on Consumer Tissue, talk about Western Europe and North America. I think those are the 2 biggest markets. You have a stronghold in both. If you could talk about the competitive performance in each region.

Which you were talking -- Professional Hygiene I guess now or...

Yes. Finish off on Professional Hygiene, yes.

Okay. Yes. So we have about 40% each of our sales in Europe and North America and about 20% in emerging markets. And we have enjoyed good margins in Europe now for a while. We have improved margins significantly in the U.S. over the last 1.5 years. And in Europe, we're the clear #1; in the U.S., we're the clear #2 after Georgia-Pacific. And I'm also now, as I stated, during the pandemic convinced that we are investing more in Professional Hygiene than any of our competitors. We really see this as a key business where we can really differentiate with these patented systems where we don't have to talk about the price every day, but actually the cost to serve and where we also have considerable sustainability claims. We have recycling services and we have not only lower cost in use but lower sustainability impact from using our systems. So I believe this scenario that we can really continue to grow and leverage going forward.

Excellent. So listen, we arrived at the end of this. Maybe I want to have a conclusive -- to conclude discussion really on the midterm target, which anyway, you're going to announce in a few quarters -- a few months, so let's see. But would it be fair to wrap up to say that you expect organic growth targets, potentially a margin target? And then you were mentioning payout, DPS and capital structure targets. So I mean, are those 4 elements what we should be looking for when you discuss? And then maybe any conclusion you want to say regarding the positioning of Essity since all the changes that we have been discussing in this call?

Yes. Since we haven't announced this different target yet, but very soon, I think I wait providing more -- I think I provided some targets already during this call. And then, yes, overall, of course, concluding as I started, Essity is in good shape, and we worked throughout the last couple of years and actually over the last 6, 7 years to really, really rebuild the company bottom-up in many different areas. And now we feel that we have assets and the people and the ways of working that gives us -- and the margins, of course, that gives us the right to grow. And that's what we're going to focus on after all these years. We're in good shape and we feel very confident about the future. And yes, that's what we're working with now for this year. And that's, as you asked also, less restructuring, less uncertainties, maybe more consistency. But actually, having said that, typically, we can get stuck on individual quarter and the performance this way or that. As you know, I always like to look at the 10-year trend. And if you look at that, we have consistently grown both top line and margins year-over-year-over-year. Then we had a dent in the curve during the 2 pandemic years. And now we're back on track again on a trajectory that I think we can continue or we aim to continue to be on going forward.

Excellent. Thank you so much, Magnus. And thank you, everyone, for joining.

Thanks, Celine.