ETTYF - Essity AB (publ) (ESSYY) Q1 2023 Earnings Call Transcript

2023-04-29 22:30:05 ET

Essity AB (publ) (ESSYY)

Q1 2023 Earnings Conference Call

April 27, 2023, 3:00 AM ET

Company Participants

Johan Karlsson - Head, Investor Relations

Magnus Groth - President and CEO

Fredrik Rystedt - Executive Vice President and CFO

Conference Call Participants

Victoria Nice - SG

Oskar Lindstrom - Danske Bank

Patrick Folan - Barclays

Linus Larsson - SEB

Simen Aas - DNB Markets

Charles Eden - UBS

Karel Zoete - Kepler Cheuvreux

Karri Rinta - SHB

Niklas Ekman - Carnegie

Presentation

Johan Karlsson

Good morning, everyone, and a very welcome to this webcast. I am Johan Karlsson. I am the Head of Investor Relations here at Essity. And together with me here today, I have our President and CEO, Magnus Groth; and also our CFO and Executive Vice President, Fredrik Rystedt.

So today we will first talk about yesterday’s announcement, and after that, we will present the Q1 results. And after the presentation, we will open up for a Q&A session and in order for everyone to be able to ask a question during the Q&A session, we would like to ask you to limit yourself to one question each.

With that, I would like now to hand over to you, Magnus. So, Magnus, please go ahead.

Magnus Groth

Thank you, Johan, and welcome everybody to this very busy presentation. We will start talking about strategic reviews that we initiated, but I also look very much forward to talking about the strong start of the year that we have had. We have good momentum throughout the company.

But starting with the strategic review of ownership in Vinda and in our European Private Label Tissue division. This is a strategic review that we are starting now with the aim of reducing our share of Consumer Tissue sales in the business. Consumer Tissue, as you know, is our most capital-intensive business with -- and also the business that is most dependent on fluctuating pulp prices and energy prices.

The review only covers these areas. We also have a substantial Consumer Tissue business with our Branded products and also with our retail brand partners, which is very much our core business and where we continue to develop the business for the long-term.

We are looking at different options. We are early on in this process, so no decisions have been taken. We are not in a hurry. We are aiming to maximize value. So this is something we are doing step-by-step, and as you can see, this includes approximately 22% of Essity’s sales, that’s subject to this review.

Looking then to Vinda listed on the Stockholm Stock Exchange, market capitalization around SEK34 billion. We own close to 52% in Essity and net sales last year was around SEK25 billion. And the reason for including Vinda in this strategic review is the fact that 85% -- 83% of sales is Consumer Tissue.

This is a fantastic company, well-managed, strong brands, strong market positions in attractive market, but this dependence on Consumer Tissue is the reason why we are including it in this review.

We are working closely with the Board of Vinda. We have great relation since many years with the Board and the management team. And again, we are in no hurry and we are aiming to maximize value when we pursue this strategic review.

Moving over then to the Private Label division, the Consumer Tissue Private Label division that has sales of close to SEK10 billion last year. Seven production facilities, around 1,900 employees. We are finalizing the carve-out that we started two years ago. It’s been a quite complex process, but we are at the end of that. So it’s a good timing.

It’s also a good timing for the entire strategic review that we are performing now that the Private Label division is back on track after the pandemic and performing well, and I am convinced that Vinda will have a strong second half of the year as raw material prices are expected to decrease in China and in Southeast Asia throughout the year. So good timing, we are starting this review now, no hurry, we are aiming to maximize value here.

So over to the interim report and a very strong start to the year, I think, that sums it up pretty much. Price/mix 18.6%, of which mix was 1.2%. We had positive mix in all parts of our business in spite of continuing to work very much with price increases shows the strength of our brands, our market positions.

And as you can see there to the right a very strong improvement compared to the same quarter a year ago in all areas, sales growth up 17.2%. This includes the acquisition of Knix for instance, that accounts for approximately -- the acquisitions account for approximately 1.2% of the sales growth. Knix is performing really, really well growing over 20% in line with our business plan.

Adjusted EBITA more than doubled and the adjusted margin improved 200 basis points from 8.2% to 10.2%. I am going through all these different numbers now because of the huge improvement. So it’s a good slide to talk to, and of course, return on capital employed in the quarter up 370 basis points to 12.7%. So a very, very strong start of the year.

Looking at that EBITA margin bridge, a good gross margin contribution, gross margin is so important for us. That’s what we need in order to be able to invest in advertising and promotion in our brands, in innovation, up 160 basis points and this is in spite of continued headwinds from raw materials, energy and transport compared to a year ago of 880 basis points.

So for anyone questioning if we were able to compensate for the cost increases through pricing, through cost savings, through mix improvements, I think, this shows that that’s been possible, and of course, something we will continue to work with in the quarters to come.

A&P, doesn’t impact the margin development growing in absolute terms about 5.1% of sales. We expect to have higher A&P this year because we have a lot of good innovation coming. So looking forward to launching that in a proper way.

And SG&A contributed positively as a percent of sales it’s -- and EBITA it’s lower even though it’s higher in absolute terms due to inflation, of course, ending at an adjusted EBITA margin of 10.2% in the first quarter.

This slide shows the quarterly development and I think what the takeaway here from the sales growth is, this is now the fifth consecutive quarter of the very, very good growth. And in most quarters, a combination of price, volume and mix, and of course, very much price throughout the last year, but also the other components.

And we also see a pickup now in the adjusted EBITA margin with an exception in the third quarter -- second -- third quarter of last year when we, of course, had a huge energy spike in Europe that impacted the margin quite significantly, but also a nice trajectory here when it comes to the adjusted EBITA margin development.

Something that is becoming an opportunity for us is to continue to work with efficiency. You recognize these areas. These are areas we have been focusing on improving year over year over year with good outcome, but of course, it was more challenging during the pandemic and also during the supply chain disruptions last year.

So we are really looking forward now to be able to focus more clearly again on energy savings, material rationalization, sourcing savings, waste reductions all the good things that’s good for the environment and good for our business.

We will also talk during the year about further footprint optimizations, Cure or Kill efforts. We are talking about one of those efforts in Professional Hygiene in this quarter, where we will take out some underperforming assets, which will have a EBITA margin improvement in the short- to medium-term associated with some restructuring costs.

Longer term opportunities for improved performance and efficiency is definitely the integrated supply chain to improve our supply and demand planning, the S&OP process and so on through digitalization.

And of course, with the inflation that we have seen -- been seeing now over the last year, an increased focus on SG&A costs going forward. So now that we are out of the turbulent times over the last couple of years, we are increasing focus on these specific areas and see new opportunities also as a consequence of our new organization that we put in place at the beginning of the year.

We always have a slide about innovation. The first quarter is typically not our strongest quarter, still we have some important innovation here. Maybe I had to focus on one, the Tork hand towel that you see there in the middle, it’s quite gray or brown and this is because 30% to 50% of the ingoing material is carton board.

So it’s a new source of fiber for us that’s been difficult to convert to soft and absorbing hand towels before, but we are now launching a new grade here that, of course, has a strong sustainability profile and also expands our fiber sourcing opportunities.

Finally, before heading over -- handing over to Fredrik to go through the three different business areas, we continue with our initiatives and our progress in sustainability, and also a number of awards and recognitions as we are used to, which remains, of course, a core pillar of our strategy. Welcome, Fredrik.

Fredrik Rystedt

Thanks, Magnus. Thank you. And I will just take you through some of the details around our three business areas. And starting with Health & Medical, we have had a good start to the year with growth of 10.5% and growth was strong in all regions of the business area.

And you will hear this some more, but we have had an impact from much lower volumes in our Russian business, and of course, also here for Health & Medical we were impacted. So if you take out Russia, it’s about 1%-or-so higher like-for-like sales, so roughly about 11.5%.

Now as you will hear from me also in the other business areas, price and mix was generally strong. And starting with price, we had an increase this quarter in comparison to the same period last year of roughly about 10%, and also sequentially, just comparing to Q4, the increase was 1%.

So we continue with a good price momentum. And as Magnus you said it, the mix was positive, so close to 1% for Health & Medical. So we continue to benefit from our innovations that we put on the market.

As you can see from the slide, volumes were stable. It’s a bit different in different areas. So we had a minor decline in the Inco business where we left some low end, or I should say, low profitability contracts, but we had a corresponding or balancing growth in our Medical business and that growth volume-wise came from all three therapeutic areas. So -- and so we are quite happy with the development in that area.

Now as you can see here, we had a very significant cost increase if we compare to last year. So in this case, the impact from an EBITA margin perspective was 560 basis points and we also did see an increase in SG&A coming from inflation. So from that perspective, the environment looks kind of similar, as you saw before. I will come back a bit later to what we see for the immediate future. I will do that at the end.

So turning to Consumer Goods. We delivered a really, really strong growth, as you can see. So if you include the acquisition’s 17.6% and the acquisitions that are included here as Magnus has alluded to Knix and Modibodi, and we are very, very happy with the performance not least in Knix with over 20%.

And it’s the same thing here that we are impacted by the lower volumes in Russia. But here we are also impacted by the fact that we left our diaper business in Colombia, as we have reported on before. So if you exclude these two unusual items, if I put it that way, the growth was a bit above 19%. So really, really strong growth.

And the main driver, of course, positive mix here, but the main driver was pricing. So if you compare Q1 versus the same period last year, roughly about 18.5% or thereabout in just pure pricing, and also here sequentially we achieved another 1.3% of additional pricing. So it continues to be a good pricing market for us.

Now you can see here that volumes are down with 3.1% and if you exclude the Russian business and the diaper business in Colombia, the reduction is roughly about 1.7%. And this is a reflection of a couple of different things. First of all, not least in Consumer Tissue, we continue to prioritize margin over growth and we also have done the same for baby, where we have exited one contract with much too low profitability as we have also reported on.

So this is where the volume declines mainly come from where we do just the opposite for Inco and Feminine, we grow volumes there and we are pleased with -- really pleased with the development in both and not least in Feminine actually where we continue to take market share in Latin America, just a perhaps curiosity, we reached our highest market share ever in Mexico during the quarter as an example.

So here, I mean, obviously, the cost inflation is the highest. This is, of course, driven to a large extent by our Consumer Tissue business, so pulp and energy, and the margin impact here was 1,050 basis points, so a considerable increase, and we also have, although, of course, much smaller an impact from inflation in SG&A.

So turning to our third business area, Professional Hygiene. This is actually where we have seen the strongest or highest organic sales growth, and if we exclude Russia here, the growth was roughly about 22%.

This is driven by a fantastic price performance of 21% here. Actually, prices were relatively flat sequentially, but year-on-year up by 21% and the mix was actually 3% in this area. So really, really strong.

You can see volumes are down. This is partly, again repeating what I have already said here a couple of times, due to Russia, but it’s also, as we are going out of very low profitability business, it’s impacted by that.

It’s not everywhere. It’s mainly in mature markets where volumes have come down a little bit. We can also see that emerging markets are continuing to do well, not least in LatAm, although we are, of course, much smaller there, but generally very good performance.

Input costs the same here, 630 basis points, if you compare Q1 of 2023 versus last year same period. So pulp and energy, as it is the -- as is the case also for Consumer Goods, they are the main driving factors and indirect cost, obviously, impacted by inflation.

So I will touch upon the last point a bit. So, of course, as you already know, as part of our strategy, we continue to premiumize our offering with more innovative and value creating products and we will, as part of this general strategy, take some steps in our Professional Hygiene business.

So what we are doing, we are planning to close some capacity used for lower value creating -- for our lower value creating and less innovative range. And as Magnus said, this will trigger some cost restructuring charges approximately in total SEK410 million, and out of that SEK340 million we will take as items affecting comparability in, in the second quarter.

Now this will have some impact on growth also going forward. It’s partly actually had a bit of an impact also in Q1, but we will see low single-digit impact throughout this year and the early part of next, but it will be very much margin accretive. So this is a project that we are planning that will yield some very good results. And over time, obviously, saying that we will replace these volumes that we are now taking out or plan to take out with more value creating sales.

So I will end with a couple of statements. Normally, we just give a bit of an outlook, it’s always uncertain, but when it comes to our cost structure. So three items there, starting with raw material, energy and distribution.

Generally, we see now that sequentially, and I will only comment on this sequentially. So what we will see now in Q2 for all three business areas, we will see lower cost sequentially in terms of raw material. It will be more so for Consumer Goods, but all three will be impacted positively.

When it comes to energy, we see also there lower cost and this is due to a couple of things. If you look at our hedging positions, when it comes to gas and electricity, it is roughly about 60% for Q2.

And prices, if you compare to Q1, they are actually roughly on the same level within the hedging contract, but we also estimate lower market prices. So this is the reason why we also see lower energy cost and then we also see lower distribution costs. So generally, the cost picture on the input side is positive, and of course, that’s also generally seems to be the trend for the year as a whole.

When we look at other costs, you will see in our report that we have had some negative impact from that. It’s mainly inflationary driven and it’s also driven by distribution and other things and we don’t expect that, if you look at it from a sequential basis to deteriorate further. So this is much more something that has happened and we are expecting that to be more stable.

And then, finally, SG&A, so a bit less positive picture there. We are not adding resources when it comes to SG&A excluding A&P. It’s more the inflationary environment that we live in and that will clearly lead to higher costs. So there is a negative thing there coming from SG&A, and as Magnus already said, we expect to have continuously throughout the year higher A&P.

I will end there, Magnus, please.

Magnus Groth

Thanks. If you could move to the next slide, please. We have been very focused on our strong first quarter. It’s a great quarter to talk about and also Fredrik has given an outlook for the next quarter.

We have a longer term perspective. We are focused on the next three years to five years, not the least 2025, when we have set ourselves the target to achieve a return on capital employed above 17%. We are very committed to that. With this report, we have taken a good step in that direction, but we have more to do.

Of course, for this year, there will be a big focus now on price management. We have proven that we can raise prices and we have strong brands and market positions. I want to emphasize that again. And of course, we will leverage that also now when we are entering a phase where we are talking about the cost margin gap and price management.

And then for the longer term to continue with innovations, building our brands, focusing on the growing channels, the prioritized growth areas in our business, both when it comes to categories and geographies, sustainability, efficiency and not least, winning with people and culture and where we are continuously strengthening our team in a very positive way. So all of this is leading to Essity being a leading global hygiene and health company.

Thank you so much for listening. Let’s head over to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will now take our first question from Victoria Nice from SG. Your line is open. Please go ahead.

Victoria Nice

Hello, there. Good morning, everyone. So my question relates to the strategic review. Just wondered if you could go into more detail on the rationale for both reviews and the likely timings? So you say you are in no hurry, but does that mean we shouldn’t expect anything in 2023 and what are you assessing in the review, which might lead to a disposal versus retaining the business as it is and also what could a potential Vinda sell-down strategy looks like? And then still related to that, I wondered if you could just talk about environment in China related to the competitive situation? And then, finally, on the Consumer Tissue Private Label business, if you could indicate how the margin compares to the rest of the tissue business, that would be really helpful? Thank you.

Magnus Groth

Okay. Thank you for that one question, Victoria. And we are just starting the strategic review now and what I wanted to underline really was not, of course, this could take time because we always aim to execute quickly.

But having said that, in this case, our clear focus is on maximizing value for us, for our shareholders and for all the shareholders of Vinda as well. So, clearly, our focus on maximizing value and we are starting this strategic review. So it’s very early to get into the different alternatives and options.

When it comes to the two businesses, the Private Label division in Europe has recovered well and it is operating at a good margin level. So very efficient, high-performing business. And Vinda is, of course, right now as we could see from the Q report, struggling with remaining cost inflation. They are in a little bit of a different cycle than we are. So I expect that the second half of the year will be much stronger for Vinda than the first half. I am ready for the next question.

Operator

Next up we have Oskar Lindstrom. Your line is open. Please go ahead.

Oskar Lindstrom

Why only Vinda in the European Private Label Consumer Tissue business and not the other parts of the Consumer Tissue business, if the aim is to reduce your exposure to Consumer Tissue? Are there other reasons why that remaining part of the Consumer Tissue business in Europe is not part of this strategic review? Thank you.

Magnus Groth

Yeah. So just making the assumption, again, we are early in this process that where you take out the two businesses under the strategic review. Consumer Tissue would reduce from being today 41% of our sales as a total to 29%. So it’s a considerable change there in the overall mix for the company.

And actually in such a future scenario then Consumer Goods would be approximately half of our business, and where Consumer Tissue and Personal Care would be half and then the rest, Professional Hygiene and Health & Medical, so a very good balance in such a scenario.

And the reason why we are not reviewing the rest of the Consumer Tissue business is, because it’s very strong brands, there’s a lot of innovation here, a lot of sustainability, many opportunities actually with also the breakthrough technology that we had mentioned on the sustainability, uptake here also to really -- it is value creating today and we believe it will be even more value creating.

And it regards our own brands, but also the retail brands that we are working with a number of partners to develop in Europe. So that’s a very good value creating business and also the combined business in Consumer Goods of all the different categories with all the strong brands is a strength for us. So that’s not subject to this review currently and not in the future. It’s definitely part of our core business.

Oskar Lindstrom

Thank you. Just a follow-up on this, is there an extent where some of your Consumer Tissue production facilities in Europe are joint with Professional Hygiene facilities and that’s a reason why it would be difficult to carve out the remaining Consumer Tissue?

Magnus Groth

Now this is part of the exercise we have been going through over the last two years. So we are finalizing that carve-out, which it’s both organizationally, financially, legally and not least from an asset allocation perspective.

So by early next year, also the assets will be clearly separated and carved out. So the machine supplying Private Label volumes and the Branded and Retailer Brand volumes. So that’s what we have been working with over the last couple of years and we are now finalizing that and that’s why we are announcing this today or yesterday.

Oskar Lindstrom

All right. Thank you.

Magnus Groth

Thank you.

Operator

[Operator Instructions] We will take the next question from Patrick Folan from Barclays. Your line is open. Please go ahead.

Patrick Folan

Hey. Good morning. Thanks for the question. Moving away just from a strategic view for now. Looking at pricing, how should we think about pricing evolving this year? I am thinking that input cost inflation is coming down. What does that phasing look like, I guess, Health & Medical big step up quarter-on-quarter. How should we think about pricing going ahead for the next -- into Q2 and kind of thinking about Professional Hygiene a bit flat quarter-on-quarter, is that peak pricing there? Thank you.

Magnus Groth

Fredrik, do you want to talk to that?

Fredrik Rystedt

Yes. Sure. Yeah.

Magnus Groth

He is talking about…

Fredrik Rystedt

Yeah. I would be glad too.

Magnus Groth

… the rest of the year.

Fredrik Rystedt

Yeah. Thanks for the question. It’s generally, of course, very difficult to talk about pricing, but what you can see there is that the price cost gap where margin expansion needs to continue to take place and we are convinced that we are able to do that.

But the comment on specific pricing is always difficult because it will depend on, of course, the cost development in the more long-term future. But, generally, the price-cost gap needs to continue to widen and we are committed to make that happen.

Operator

Next up we have Linus Larsson from SEB. Your line is open. Please go ahead.

Linus Larsson

Yeah. Thank you very much. And maybe then after all jumping back to the strategic review in your calculations I wonder Essity ex-Vinda and the European Private Label business, what’s the ROCE change in the portfolio, if you maybe look over -- I don’t know if you look over a cycle or something like that? And also second to that, I mean, today Vinda and Essity are highly integrated. Essity or SCA has sold Asian assets into Vinda in the past their licensing agreements. So I am just a bit curious and I understand it’s an early stage, but if you could open up a little bit on your thinking as to the separation process potential down the road, are you going to maintain some sort of presence in Asia even without Vinda?

Magnus Groth

Regarding the first part of your question, what would Essity look like without these two businesses? It’s too early to say. These are two capital-intensive parts of the business and with volatile earnings. But I think that’s something that you can also kind of look at and estimate from all the numbers that we are continuously publishing.

Second, yes, very good question. We would like to continue to cooperate with Vinda also then in kind of a hypothetical future where we are not longer the owner. We have a great working relationship and we are -- they are licensing our brands, TENA, Tork, Tempo and Libresse, not the least, so global brands.

And of course, we would like to see an outcome where we continue to be represented on the Chinese market and other markets with these strong brands. That’s part of the strategic review that we are doing now, how we can achieve that going forward.

Operator

Next up we have Simen Aas from DNB Markets. Your line is open. Please go ahead.

Simen Aas

Yeah. Good morning, guys. So I have one question. You have previously talked about reaching around 50% emerging market share and I know there is no formal decision on Vinda yet. But if you were to move out of Asia, what kind of region would you be looking at to increase the emerging market share?

Magnus Groth

So I think that our emerging market share today is around 37% and it would be reduced to in this hypothetical again scenario 25%. It’s still something that we are very much pursuing and gradually achieving an increased share of sales in emerging markets, because, of course, the underlying growth rates have been at least historically higher. It’s been looking a little bit different actually recently.

We are very, very successful, growing very nicely in Latin America. That continues to be a key focus area and an area where we are really doubling down, adding categories in countries and really kind of expanding our presence because based on the strong performance we already have.

Former Eastern European countries is another area that’s very important to us, and of course, with Australasia, our business there, we have some opportunities and also especially in Health & Medical to develop in Southeast Asia. So Southeast Asia, including China remains very important for us as a growth area also going forward.

Simen Aas

Okay. Thank you. That’s very helpful.

Operator

Next up we have Charles Eden from UBS. Your line is open. Please go ahead.

Charles Eden

Hi. Thanks for taking my questions. First one just on cost savings in the quarter, if you could sort of set out how those progressed and maybe if you can kind of give it on a gross savings basis, because I know kind of the way you normally account for it, net of inflation kind of gives us a negative number when inflation is there? So comments on the cost savings would be appreciated. And then my second question, just a clarification, so am I right to assume this above 17% ROCE target is also holding true should the strategic review not result in a disposal of either of the assets you announced yesterday, i.e., that target of above 17% ROCE is something you are aiming to achieve as Essity exists and stands today? Thank you.

Magnus Groth

Thanks. To the second question. The answer is absolutely, yes. This is the path we are on with the business composition that we have to achieve above 17% return on capital employed during 2025 so -- by the latest. So that’s definitely a yes to that question. And regarding gross and net cost savings, I happily hand over to you, Fredrik.

Fredrik Rystedt

Thank you, Magnus. Yeah. You are absolutely right. It’s been quite difficult to kind of do the net, because of the significant issues that had related to the past year or two. But if you look at Q1 and you just take the gross efficiency gains in cost of goods sold, it was SEK250 million or SEK248 million to be exact.

So we continue to do the underlying work and as before many many projects leading to those efficiency gains. So that work continues with full force. It just isn’t that visible. Hopefully, as I already alluded to, it will become more and more visible as we go forward in the following quarters.

Charles Eden

Thank you, both.

Operator

Next up we have Karel Zoete from Kepler Cheuvreux. Your line is open. Please go ahead.

Karel Zoete

Yes. Good morning, all. Thanks for taking the question. And the first one is on the exit of Russia you highlighted that. In the annual report, we can see it’s still about 3% of revenues of the Group. So what progress are you making and what can we expect this year? The other question is then on market structure in Europe in Consumer Tissue. Can you speak about how potential sale of your Private Label business might alter the market structure here? Thank you.

Magnus Groth

Okay. So, yes, exit Russia, which is something we announced very quickly the last year after Russia’s invasion of the Ukraine and some things that we have been working with ever since. This is very complex, of course, taking into account sanctions, taking account government approvals and so on.

We are in the middle of that process and we hope to be able to give some new information in the not too distant future. So we are in a very intense phase here and the objective remains the same as before to leave the Russian market.

In the meantime, from a volume perspective, the business is actually shrinking, because of the market conditions, but because of currencies and price increases, you can see from a sales point of view, this number that you mentioned. So that intention is clear and that process is ongoing.

When it comes to the market structure, we believe that there is a clear difference between the Branded market where we are clearly the number one, the partnerships we have with some retailers since decades and the pure Private Label business and we see this also to some extent in other categories.

And with those clear differences, we are partly working in different segments. So I don’t see in the short to medium term, a risk here, which I guess you are kind of maybe alluding to of kind of creating a competitor.

Karel Zoete

Yeah.

Magnus Groth

So that’s our view, and of course, we believe that those consumers who prefer the premium innovative Branded products will continue to do so also going forward.

Karel Zoete

Okay. Thank you.

Operator

Next up we have Karri Rinta from SHB. Your line is open. Please go ahead.

Karri Rinta

Yes. Thank you very much. Karri, Handelsbanken. Very quickly on the Consumer Goods and more specifically this continued difference in pricing for Consumer Tissue Private Label versus Branded Consumer Tissue. So is that a reflection of different contract structures, i.e., that the Private Label is more -- it goes quicker to adjust prices for Private Label and Branded should follow or what’s explaining this? And can you remind us of your contract structures for Branded tissue and Private Label tissue?

Magnus Groth

I am not sure...

Fredrik Rystedt

Maybe we can give a general answer, Karri. So thanks for the question. I think we never comment on contract structures. Typically, we have said before that we have yearly contracts but it varies. So there are differences here.

But one of the reasons why the Consumer Tissue Private Label division has actually achieved somewhat higher prices than the rest is simply also because the raw material content is significantly higher for that business. So if you imagine a Branded business, you have more cost for innovation or for marketing or for A&P as an example and so -- and the typical average selling price is also higher.

So if you take the raw material content, as percentage of the sales price, it’s obviously higher for Private Label. So the need for price increases in that part of the business is obviously higher and this is part of the explanation.

Magnus Groth

And thanks, Fredrik. Sorry, Karri, I didn’t completely get the question, but a good answer. Thanks.

Operator

[Operator Instructions] We will now take the follow-up question from Karri Rinta from SHB. Your line is open. Please go ahead.

Karri Rinta

Yeah. Thanks for follow-up. To Fredrik’s comment about the annual prices. So, I guess, question is that have you gone back to having annual contracts, because the -- I guess the message last year was that you are shortening the duration of your tissue contracts?

Magnus Groth

I guess that -- I mean we are -- what happened during the last two years is that we were kind of continuously negotiations, because we were always behind the cost curve and now we feel that we are in a quite stable situation for the time being.

And that without getting into any specific details, because it varies so much between markets, between brands, between geographies. We are very focused now on kind of managing, again, the price cost gap and the overall margin development.

And we see good opportunity to do that because our brands are strong, but also actually recently, and I think, I mentioned this before that we have quite good service levels compared to many competitors and we are perceived as a dependable supplier that can deliver when there has been some hiccups over the last couple of years. So we are managing that price cost gap from a good position I believe.

Karel Zoete

Okay. Thank you.

Operator

Next up we have Niklas Ekman from Carnegie. Your line is open. Please go ahead.

Niklas Ekman

Thank you. Yes. First, a question on volume and I believe after Q4 you said you still expected to deliver volume growth in 2023. I am curious if that’s still the view given that you have now seen volumes continuing lower in Q1 and do you expect volumes to reverse already from Q2?

Magnus Groth

We stick to the fact that we hope to have positive volume development for the full year. How this will vary now over the quarters is very, very difficult to say, because of course, there are quite some fluctuation normally and also seasonality. So I think that’s very difficult to talk about individual quarters, but in the longer term and also for the year, we would like to see growing volumes.

And that’s because we always try to manage, of course, volumes, market shares, pricing and to find that balance and when it comes to underlying volumes since we are providing essentials and necessities, as you know, we expect there to be an underlying stable or growing volume in many of our categories.

Niklas Ekman

Okay. Thanks. And just a second question also, you mentioned here in the presentation, you talked about Professional Hygiene and the Cure or Kill initiative indicating that you are looking at closing or divesting business. Is that a sizable business and can you give any more details about what kind of business we are talking about?

Fredrik Rystedt

Yeah. As I said, Niklas, I did actually comment on it. I said it will have from a volume perspective low single-digit impact on volumes for Professional Hygiene during this year, so the rest of 2023 and also at the beginning of 2024. So, yeah, it’s -- from that perspective we will have a bit of volume impact and sales impact.

Magnus Groth

Maybe you could mention the restructuring charges?

Fredrik Rystedt

Yeah. I can repeat that if -- I am not sure if you were on the call, Niklas, before, but I talked about the restructuring cost that we will take and the total cost is roughly about SEK410 million and out of that we will take SEK340 million as items affect comparability during Q2. So that’s the cost for it and it’s relating to not actually divestments, but rather closing of some, mainly converting equipment you can say.

Niklas Ekman

Okay. And thanks for the…

Fredrik Rystedt

And just to remind you one thing, this is what we are planning. We have not yet decided this. But this is what we are planning. So we will come back more.

Niklas Ekman

Okay. Thanks.

Fredrik Rystedt

Thank you.

Operator

We will take our follow-up question from Karri Rinta from SHB. Your line is open. Please go ahead.

Karri Rinta

Yes. Thanks. Going back to return on capital employed, the unit that has the lowest return on capital employed right now is Health & Medical, and of course, we know that you still need to raise prices and we should see higher margins in the future and that will to some extent or that will help return on capital and employed as well, but you are still probably going to be quite the ways below the 70% target that you have for the Group. So how do you plan to get to 17% in Health & Medical specifically?

Magnus Groth

We have very specific breakdowns of the overall target but we are not providing that externally. So there are different return on capital employed targets for the different business areas and also different parts within the business areas. But that’s kind of part of our internal work and it depends very much on different plans, but also on the market conditions.

And of course, in the short- to medium-term, the next number of quarters it’s important to continue to work with the price increases specifically in Health & Medical, where we still see a quite significant headwind from costs. So I think that’s the information we can provide right now.

Fredrik Rystedt

And maybe could add one thing, which is just reminding of one pretty obvious thing here that the reason why you would see this very low in comparison or not very low, but low in comparison return on capital employed for Health & Medical is that we have a very considerable intangible asset there as we purchased DSM.

So if you would look at the return, operating return on capital excluding intangibles, actually Health & Medical is clearly very high or highest in the Group. So from a return perspective, it’s actually doing really well, but we have the intangible assets, but just as a kind of a background to what you said, Magnus.

Magnus Groth

Of course.

Karri Rinta

All right.

Operator

Thanks. We have a follow-up question from Victoria Nice from SG. Your line is open. Please go ahead.

Victoria Nice

Hi, there. Just wondered if you could go into a bit more detail on other costs and any other elements that we need to bear in mind in Q2 and through the rest of the year, because presumably, we will have the fallout of energy subsidies paid to suppliers last year from Q2 will this still fall in the other line? Thank you.

Fredrik Rystedt

Yeah. And I did comment on it earlier that when you look at -- and I presume you are asking about other COGS there, because if you look at our report, we split out kind of what is SG&A, et cetera, in A&P and I have already commented on that, we will see there sequentially an increase.

When it comes to other COGS and including the issues that you were you were mentioning there, we expect more stable environment as we go forward. So no real change Q -- sequentially Q2 versus Q1. So, overall, a slightly higher cost because of the SG&A, but in total, it should be relatively flat. So, of course, time will tell, but this is approximately the outlook.

Operator

[Operator Instructions] It appears that there are no further questions at this time. I would like to turn the conference back to our speaker for any additional or closing remarks.

Magnus Groth

So, as a closing remark, we have a very strong start to 2023, very strong topline improvement, strong margin improvement. We are seeing a kind of more helpful market outlook for the coming quarters and rest of the year, and we are starting now a strategic review of our tissue -- Consumer Tissue assets, Vinda and the Private Label division in Europe and we will come back with more information over time. Thank you very much for listening.

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Essity AB (publ) (ESSYY) Q1 2023 Earnings Call Transcript