Essity AB (publ)
STO:ESSITY B
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Essity AB (publ)
Earnings Call Analysis
Q2-2024 Analysis
Essity AB (publ)
Essity saw a strong performance in the second quarter of 2024, marked by high underlying volume growth and the highest EBITA operating result to date, leading to increased profit margins across all business units. Organic sales, however, showed a slight decline of 0.9% due to restructuring efforts. Underlying volume growth was 0.4%, but if adjusted for restructuring, it reached an impressive 2.9%. EBITA (excluding items affecting comparability) increased by 17%, resulting in an EBITA margin of 14.7%. The company also announced ambitious new financial targets including a return on capital employed above 17% by 2025 excluding the impact of Vinda, which has been achieved a year earlier with a current return of 18.5%.
Earnings per share saw a significant year-over-year increase of 37%, partly influenced by the company's newly introduced share buyback program. This strategic move, estimated at SEK 3 billion, is a key part of Essity's capital allocation going forward. This initiative, along with improvements in operational efficiency and a favorable market environment, contributed to the company's financial health and shareholder value.
The leadership at Essity set an ambitious target for an adjusted EBITA margin exceeding 15% in the medium term. This ambition is supported by stable market conditions and ongoing cost management strategies. While higher raw material costs are anticipated for the latter half of 2024, the company is confident in its ability to offset these through strategic pricing and cost-saving measures. Specifically, energy and raw material costs reductions contributed significantly to a SEK 1.7 billion tailwind in Q2.
Health & Medical products experienced robust growth, with organic sales increasing by 4.5%, driven by both volume and price increases. This segment saw notable developments in incontinence products and medical solutions, with incontinence products growing by 3.8% and medical solutions by 5.5%. Similarly, Consumer Goods saw higher volumes across all categories, although organic sales slightly declined by 1.3% due to prior price concessions. Innovations like the TENA ProSkin 2 and Silhouette Pants helped maintain competitiveness and drive growth.
Professional Hygiene faced restructuring impacts reducing volume by over 8% in Q2, but underlying positive volume growth stood at 1.4%. The restructuring is expected to continue to impact volumes, albeit to a decreasing extent in subsequent quarters. Margin improvements in this segment were also driven by strategic exits from low-margin businesses and a renewed focus on high-margin products and innovative dispensing technologies.
Despite typical seasonal working capital headwinds, Essity demonstrated a strong cash flow performance. The company emphasized its commitment to maintaining robust operational cash flow, aiding in deleveraging efforts and supporting ongoing and future capital expenditures, estimated between SEK 7 and 8 billion for the full year.
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Good morning, and very welcome to Essity's audio presentation of second quarter 2024 results. My name is Sandra Åberg, Head of Investor Relations, and joining today are our CEO, Magnus Groth; and our CFO, Fredrik Rystedt. Magnus and Fredrik will take us through the results. After that, you are very welcome with your questions.
Now I leave the line over to you, Magnus. Please.
Thank you, Sandra, and welcome, everyone, to our quarter 2 interim report 2024. And as a summary, Essity had a strong performance in the second quarter with high underlying volume growth, our highest EBITA operating result to date with higher margins in all 3 business areas. We continue to show a solid cash flow. And not to forget, during the quarter we announced a share buyback program and new ambitious financial targets.
So summing up the numbers. Organic sales growth was slightly down, minus 0.9%. Underlying, as I mentioned, we had a volume growth of 0.4%, but taking into account the restructuring that we had done in primarily Professional Hygiene and to some extent in Health & Medical, underlying volume growth was actually 2.9%.
EBITA excluding IAC, as I said, is the highest so far, close to SEK 3.4 billion (sic) [ SEK 5.4 billion ] and increased 17%, and our EBITA margin ended at 14.7%.
I'd like to draw your attention to our return on capital employed development, which is not anymore one of our financial targets. But if you remember, our previous financial target was to achieve a return on capital employed above 17% in 2025. And this was including Vinda. And excluding Vinda, we said that, that should be then about 18%, because Vinda was a drag on return on capital employed. And we actually hit that 18% number and even 18.5% already in this quarter, so the target that we actually had for next year.
Since we're now buying back shares, it could be interesting to look at earnings per share growth, even though, of course, the impact from the share buyback program is very, very small so far. And as you can see, there's an increase year-over-year of 37% there.
Looking at the development then over the last number of quarters, it's clear to the left there, the sales and organic sales growth numbers, how we cannot have a very inflationary environment and then a period of, to some extent, lower costs, and now in the quarter, close to 0 growth again. So a big pickup from Q1. And going forward, our ambition is to continue to grow volumes, market size with good margins. Of course, we were aiming for continuing our positive growth trajectory.
EBITA and EBITA margin, I think that picture to the right, the graph talks for itself, 14.7%. But actually good margins overall in the last number of quarters. So a strong development over a number of quarters. And the current market situation, just to put things in perspective here, of course, we have inflationary environment, we have the costs, and then last year when costs were coming down and so on. Currently, I would say that market conditions are quite stable. There's nothing specific. We have seen a subdued consumer, consumers who are down-trading and, to some extent, looking for savings. We see raw materials, energy and so on moving up and down a little bit. It doesn't impact us as much as it did before and nothing really dramatic. So it's a business environment that's quite stable currently. And in those conditions, we are delivering these results.
Just to remind also about the new financial targets since they were launched in the quarter. Annual organic sales growth of above 3% and EBIT margin excluding IAC above 15%, which we believe are very, very value-creating targets and that we're aiming to achieve in the midterm.
Also in the quarter, we announced a share buyback program to allocate our strong operating cash flow, and we saw that also in the second quarter. Just underlining that the buyback program amounted to SEK 3 billion until next year's AGM. We need a new AGM approval every year. Having said that, our ambition is to use share buyback as a recurring part of our capital allocation. And that's, of course, something that we've never done before and which is now part of our capital allocation going forward.
So that's overall from a group level. I would like to quickly talk about the 3 business areas, starting with Health & Medical that have strong development volumes, but also fantastic, I would say, EBITA and EBITA margin. So organic sales growth was overall 4.5%, coming both from volumes and higher prices and mix, so across the line. And as you can see, Incontinence Products Health Care grew 3.8% and Medical Solutions 5.5%. So very good momentum here and a sharp improvement of EBITA and EBITA margin compared to a year ago.
I would like to say a few words about this little nice blue pack there on the picture to the right, because this is a product launch where we have seen some very, very positive initial reactions from customers and consumers. It's TENA ProSkin 2. So it's a new pant launch, where we have very, very strong claim. It absorbs 2x faster than our previous products and it also stays drier for the skin for longer, which is very, very important, especially for people with fragile skin. So very strong claims, a clear upgrade and new pack, and something that we believe will be very competitive going forward. Because of course, pants is the biggest -- it's not the biggest, but it's the fastest, most attractive part of the Incontinence Products Health Care business.
Moving over to Consumer Goods. Higher volumes in all categories, higher EBITA and margins. Organic sales growth was slightly down, minus 1.3%, even though we saw higher volumes in all categories, up 3.2%, while price/mix was negative 4.5%, and this is more or less all related to price concessions that we did in Consumer Tissue last year in 2023, when pulp prices came down dramatically. Since then, they have moved up again. But this is related to historic movements in our pricing.
Looking at where the organic sales growth comes from, we are really happy to see that the Incontinence Products Retail is increasing 9.7%. We have great momentum, but we also have a great go-to-market, good successful product launches, innovation. So we're very, very competitive now in Inco retail. Also in Feminine Care, continuing to see growth as well as in Baby Care, which, just to mention, it's now very value creating. Also the baby category that we have, where we have a very strong position in Europe, while Consumer Tissue was negative 4.7% on organic sales growth, again related to price. Higher EBITA and EBITA margin, nonetheless. EBITA up 1% and EBITA margin ending on 12.4%.
Another innovation there to the right. This is, again, TENA and it's again pants. Also, improved performance in many ways. But here we have completely other claims that appeal and attract consumers. Close body fit, comfort and a more discreet design. So it's a very good upgrade of our Silhouette Pants range, which is again an important part of our Inco Retail business.
Before moving on to Professional Hygiene, I'd just like to say something about market shares. There was a period when we were very much focused on margin enhancement and, to some extent, to the detriment of market shares. But with our focus that we have now over the last year on regaining growth, the volume growth, profitable growth, we are also starting to see a good improvement when it comes to market shares. We have been having 90% of our business now in the Consumer Goods category, so Inco Retail, Baby, Feminine and Consumer Tissue. We have been able to retain #1 and #2 positions in 90% of our sales. This has been the case over many years now, but really improved the increasing shares, which is now almost half of the business. And actually, it's mostly related then to the Feminine Care, Incontinence Care Retail and Baby Care.
And if you include also stable shares still increasing, we are achieving 70%, which is a good improvement over a year ago or 2 years ago. So it's showing that all our efforts, investments are really paying off in market share growth in the key categories where we want to grow.
Finally, Professional Hygiene. Again, good underlying volume growth, higher EBITA and margin. Organic sales growth was down 3.9%. Price/mix was up 3%. And volumes were down, as you know, because of the restructuring that we did a year ago. So a tough comparison. Excluding the restructuring, we actually have positive volumes of 1.4%. This means that the overall volume impact from restructuring in the quarter was a bit over 8%.
Going forward, we will continue to see a negative impact from Professional Hygiene, but in the third quarter, it will be around 6% instead of at a low grade, and then again somewhat lower in the fourth quarter before lapping that impact. Higher EBITA, 18% increase, with a margin that's also on very, very attractive level, 19.2%, and a good improvement over last year.
Again, talking about the innovations, we continue to build on our unique compression technology, which has created benefit for everyone handling our tissue products. This is a compressed multifold hand towel. It increases the capacity in the dispensers. It reduces logistics costs, transport costs, takes less space. So a very straightforward value creating example of an innovation that we have, where we continue to launch and broaden value assortment.
With that, I'd like to hand over to Fredrik to dig into the numbers in more detail. Over to you, Fredrik.
Thank you, Magnus, and I will perhaps sum up a bit what you have been mentioning, looking at the group in total. And as you've said, Magnus, we had a very strong growth of 2.9% underlying and, of course, especially so in Health & Medical with 4.4% and In Consumer Goods with 3.2%. But growth in pretty much all the categories, or actually all of them, and good volume growth and, of course, not least in Incontinence Health Care and Retail and also Medical. So quite proud of that.
You mentioned, if you look at the total, you can see it on the slide that restructuring and exits in Professional Hygiene and Incontinence had an impact of a negative 2.5%, which is basically similar to that of the impact we also had in Q1. This is mainly Professional Hygiene. And looking at the Professional Hygiene business area, as you said, Magnus, a negative of 8.3%. And for Health & Medical, 1.2%.
If we look forward to Q3, the Incontinence impact will basically be gone. So there will be no such impact looking at Q3 and onwards. But PH will remain at roughly about 6% for the business area in Q3 and even lower than in Q4. And looking at Q3 for the group, that 6% in Professional Hygiene has a group impact in Q3 of roughly about a negative of 1.6%.
Price/mix, minus 1.3%. And this is relating to price. And as Magnus already alluded to, this is mainly related to the price concessions we did in Consumer Tissue in 2023 on the back of falling input cost at the time. Sequentially, we actually have an increase in price. And that amounted sequentially to 0.4%. So the current momentum in pricing is actually positive. And the positive mix component is primarily driven by Professional Hygiene, but we do have a positive mix development in pretty much all of our different categories.
And looking at the EBITA margin bridge. Obviously, we saw a very strong improvement in gross profit versus the same period in 2023. And if we look at it sequentially, we remained on the same gross profit level as we had in Q1. So despite increasing input costs between the quarters, we remain at the same gross profit margins. The price/cost gap, obviously, a big part of that. It was favorable for all business areas. And we had a good pricing discipline throughout all of our different areas.
We had another quarter of good efficiency gains in cost of goods sold, and this is coming from pretty much all areas. It's procurement discounts, changing suppliers or better negotiations. Material rationalization is a big part. We still have, of course, obviously, the restructuring gains in Professional Hygiene, and there is a general improvement in the efficiency in our manufacturing and warehouses.
We've previously mentioned that we expect -- and we did that in Q1, we expect a COGS savings for the full year of pretty close to SEK 1 billion. Now obviously, as you can see, the performance has been very strong in the first couple of quarters. So it's quite clear that we will deliver more than SEK 1 billion. However, it is worth mentioning that we expect pace to slow down here in the third and the fourth quarter of this year. But once again, clearly a very positive picture.
We continue, and this is very much in line with our previous statements in previous quarters, we've continued to invest more in A&P. And this is very much in line with our ambition to fuel that profitable growth. And of course, as you can see, that had an impact on margin of 70 basis points, and we now have approximately about 5.5% of net sales in A&P spending. If you look at SG&A, excluding A&P, that increased 110 basis points. It's a lower impact than what you saw in Q1. But still, it is a high impact on the back of the inflationary environment that we saw previously more. So this is gradually coming down a bit. But we also continue to spend quite a lot primarily in digitalization of the group. It's not a matter of number of people. In fact, if you look at the number of employees compared to 1 year ago, we're actually slightly fewer employees.
Turning to cash flow. It's a very good development, as you can see on the slide. Normally, Q2 is quite negative, and this is due to a negative development of working capital. But this is not something unusual. This relates to the fact that we in Q2 always pay the bonuses for the previous year. So most of the working capital development is related to that, and the rest is a bit higher inventory value because we see higher input costs and, therefore, the value of the inventory increases. So if you look at it in terms of cover days, we're pretty much in very good shape and similar to that of Q1.
CapEx remains on similar levels, as we've seen before, but we'll see a gradual increase now in Q3 and Q4. And if we look at the full year, we expect the full year CapEx number to be in the range of SEK 7 billion to SEK 8 billion, somewhere in that ballpark.
And finally then, despite, you can say, that working capital impact that I showed you on the previous page, we have continued to deleverage and further lowered our net debt position. The share buyback was of course launched very late in the quarter. So we have purchased shares to -- or our agent has purchased shares to a value a bit over SEK 100 million. So it has had a marginal impact. But despite all of that, we have continued to deleverage and of course also reached a lower net debt-to-EBITDA. It's actually slightly below 1.3 that you see on this slide.
And with those words, I'll leave over to you, Magnus.
Thanks, Fredrik. And I would just sum up with the slide which is, I think, highlighting our equity story. We have strong market positions in attractive and growing markets around the world. We have leading brands that I've been showing, of course, not only in Consumer Goods, but also in Professional Hygiene and both in Health and Medical, and we have a very strong launch funnel for new innovation.
We continue to keep sustainability in focus, and we have a winning corporate culture. Maybe most important of all, we have a very motivated and engaged team, and in general, among all 36 employees, high ambitions and high engagement and a very strong financial position to build from. And I think the second quarter of 2024 is a proof point for this equity story and business case.
Then I would like to invite you or to share the date for our Capital Markets Day that we're planning to have on the 3rd of December later this year in our fantastic multi-category production site in Valls, close to Barcelona in Spain. It's a site where we produce both personal care and tissue products. And this is a picture here just from inaugurating a new machine there in the background.
But it will be an opportunity for you to see the site, meet our people, meet our, to a large extent, new executive management team compared to last time, when we had a face-to-face Capital Markets Day, which was actually in 2019. So a long time ago. Another reason to do this. And also, of course, to talk more about our new financial targets, the path forward, and also an opportunity to visit our global transportation, logistics and planning hub in Barcelona, where we are seeing a huge benefit from digitalization both today and going forward. So welcome very much. Save the date for our Capital Markets Day on December 3.
With that, I would like to open up for questions.
[Operator Instructions] We will now take our first question from Charles Eden of UBS.
I've got two, please. There's probably one for each of you. So Fredrik, on the EBITA bridge for Q2, which you show on Page 3 of the press release, the tailwind from cost of goods sold of nearly SEK 1.7 billion. I appreciate there's sort of SEK 400 million benefit from cost savings, which leaves around SEK 1.3 billion from presumably raw mats and energy. Can you help us understand how much of a benefit energy was here? Because I had thought raw materials wouldn't have been a major tailwind given pulp price trends earlier in this year. But perhaps you're getting some significant rebates from pulp suppliers we need to consider. So sort of any help you can kind of give us with the moving parts there?
And then second question probably for you, Magnus, is just looking at sort of the over 15% adjusted EBITA margin target, which you gave us a few weeks ago for the medium term, do you see scope for overshooting that 15% level? I appreciate it's quite early after bringing the targets in. Because if I look at Q2, you're already at 14.7% margin. And I'd expect continued cost savings, operating leverage from volumes mix to all continue to favorably contribute going forward. Now Health & Medical margins might be at the upper end of the range, you'd expect, but probably some scope for profitability improvement in Consumer Goods. So should we view that 15% margin level as a floor target rather than an ambition? Maybe you can expand on that.
Fredrik, do you want to start?
Yes, I would be happy to. So I think your question was more specifically on energy, which in the number of SEK 1.7 billion, as you mentioned, was SEK 460 million. So it was a very positive movement compared to last year. We had actually lower raw material costs of a bit over SEK 900 million, totally just market movement. And of course, obviously, this is gradually going to turn the other way and sequentially has already happened. So we'll see, of course, higher raw material, as we call. And the remaining part is exactly, as you say, the cost savings of, yes, close to SEK 400 million. So that's basically the bridge.
Okay. Charles, then over to your second question. We believe that achieving over 15% adjusted EBITA margin, excluding IAC, is quite ambitious. Is it a target or a floor? We haven't set a date for achieving this other than saying that we expect to be there in the medium term. But of course, just the fact that we haven't set the date means that in the medium-to-long term, we would like to be above 15%. I mean, that's what we can say.
And I don't see it as easy or obvious. I mean, it's a good quarter we just presented, of course, with 14.7% operating margin. I'm really, really happy about that. Most businesses in most geographies -- I would say, almost all businesses in all geographies are doing well. And so kind of firing on all cylinders from that perspective in quiet, stable market conditions, there's nothing special really one way or the other, as I already said. I mean, typically, maybe there are challenges in one or the other places. So I think that achieving about 15% in the medium term is still a very ambitious target.
And we'll now take our next question from Patrick Folan of Barclays.
A few questions for me, please. First, just thinking about your new pricing contracts and ability to cover raw material inflation. Q2 would have been the first quarter we should have seen this in action, but price/mix in Health & Medical was lower quarter-on-quarter, and looks like Professional Hygiene pricing was stable. So how should we think about your pricing dynamics in the second half, knowing, as you just said, that some of your raw material costs flowing through will be higher?
And secondly, within Professional Hygiene, you gave good color on how we should think about the restructuring phasing in the second half in terms of the impact of volumes. How should we think about the underlying volume performance, excluding restructuring? What is driving that growth in Q2? And what will support that in the second half?
And just my last one, just on the Capital Markets Day in December. What should we expect to hear? What kind of categories will you be focusing on? What innovation will you be talking about? Is there any geographies of focus to keep in mind?
Yes. So starting then with new pricing considering raw material. In general, in the group, we're quite happy with our prices and the price cost gap in general and believe that we will be able to manage that also going forward. As I stated a few times, of course, margins are fantastic in Health & Medical and in Professional Hygiene in the quarter. But no need for major changes there really going forward. We manage the price/cost gap just as we go along. Where we need to raise prices is specifically in Consumer Tissue and that's ongoing. So that the increasing COGS that we see quarter-over-quarter sequentially, it's all related to Consumer Tissue and we are in negotiations also to compensate for that.
But again, this has less of an impact now on the group for two reasons. One is, we buy half as much pulp as a year ago. And secondly, we are much faster and much more agile, and we will be able to compensate in 1 or 2 quarters changes in input costs also in Consumer Goods. So that's the dynamics there.
Professional Hygiene restructuring. We're really, really focused in general on increasing volumes considering the nice margins that we have, specifically increasing Professional Hygiene very much with a focus then on our strategic systems where we have the proprietary dispenser technologies, where we know we create a lot of value for our customers and where we have high gross margins.
And the new mix or improvement that you see in the margin jump that you see in Professional Hygiene is, to a large extent, related to shedding the restructuring that we did a year ago, but also now focusing all our resources in Professional Hygiene on the remaining higher margin business. And I mean, we'll just see how that plays out going forward, but that's what we're striving for, to have growth, both the organic sales growth and volume growth in Professional Hygiene.
Capital Markets Day. That we'll be back, of course, with a more detailed agenda. I think the plan right now is to cover the entire company since we'll have time, it's a face-to-face meeting on a site, and also give time for you to meet and talk to many employees in the company and EMT and other experts. But we'll get back with more detail on the program. And of course, appreciate any input you might have.
And we'll now move on to our next question from Victoria Nice of Bernstein.
I just wondered if you could come back to better help us understand the impact in the EBITA deviation from raw materials specifically. Just how can we reconcile that with the higher pulp prices year-on-year, which typically hit the P&L with a 45-day lag, I think, based on what you said previously? The remainder of your inputs are seemingly quite stable, or perhaps was there some benefit when it comes to oil-based input? Or is it actually that the lag on pulp has increased from when it hits the P&L? Or are you actually just working through some lower-priced inventory? So just trying to reconcile the delivery in the quarter with the prices that we see.
And then just wanted to clarify, did you say that raw materials will turn into a drain on the EBITA deviation year-on-year from Q3? If you could just sort of help us with that.
And then just how we should be thinking about that pricing in Consumer Tissue? Is that something that we will start to see building from Q3? I appreciate, obviously, it's a lot quicker than it was previously, but basically could it be something that we might have to wait until Q4 to see?
I'll take your last question and then leave the first kind of 3 to Fredrik. So we should start seeing some benefits from price increases in the third quarter, but most of it in Q4. That's when we finished, which is very, very fast considering that raw materials, in this case, relating to Consumer Tissue has kind of gradually increased now for a few quarters. So that's our plan, to be fully back in Q4. I hand over to you, Fredrik, to answer about the EBITA bridge again.
Yes. Thanks, Magnus. Victoria, I'll be happy to try at least. But it's generally, of course -- it's always a bit trickier to explain the differences, because last year we had a falling trend of pulp, which kind of continued throughout the year. And this year, it's just vice versa. So when we compare quarter-to-quarter, of course, you got to kind of think of what actually happened last year. So to give you a bit of perspective, we had more or less, you can say, in comparison then to Q2 2023, not that much impact from pulp actually. It was rather the same level.
Now obviously, as I already mentioned, if you compare Q1 to Q2 or Q2 to Q1 this year, then pulp price is obviously up a lot. So in comparison to last year, pulp is really not a major factor. We also had a positive impact from, as an example, recycled fiber. Oil-based material was very positive. There was a lot of positive impact, as I already mentioned, from energy, and on top of that, the cost savings. So there is no magic to it. And obviously, as you already mentioned here, we see now pulp cost, of course, coming through very much sequentially, and that will further then impact in Q3. So if you look at Q3, in Q3, generally COGS will be higher. It's as simple as that.
Just if that would turn into a drain on the EBITA bridge?
Yes, yes. That's exactly right.
And we'll now move on to our next question from Niklas Ekman of Carnegie.
I'm sorry to follow up on -- there's been a lot of questions here on raw material prices into H2. I'm just wondering, because you sound very confident on margins here. But given the quite massive increase -- I mean, when I look at the pulp prices, they're up some 50% compared to the trough 1 year ago, we're close to peak levels as far as I can see. So you talk about the quite stable environment. Isn't there a clear risk that you could see temporary margin pressure in H2? Or can you please just elaborate a little bit more on that? And are these price hikes that you're talking about, are they sufficient to kind of mitigate this given that you're coming from a fairly high starting point here in Q2 with a 14.7% margin?
Yes. I mean, I think you're describing the challenge in a good way, and we'll do our best to manage the price/cost gap. That's all I can say. And I also mentioned, I think, to Victoria here that we still have a lag not only in how input cost actually affects us, but also in our ability to bring that forward to customers, especially when there is a gradual increase that we see now over a couple of quarters. So yes, that's the challenge, and that's what we'll do our best to mitigate. And feel confident that we are much better in doing that than we have been historically, and that the overall exposure from a group perspective is less than it has been.
Secondly, any news on the bond dispute? Any claims that have come through or anything else that we need to know?
There is nothing more than what we have previously communicated there.
And we'll now take our next question from Linus Larsson of SEB.
If I may, just one more follow-up on Consumer Goods. If we look on a sequential basis, do I understand you right that you are indeed expecting input costs to increase compared to Q3 and Q2, but price compensation, you are rather seeing the impact in the fourth quarter? That's my first question.
And then secondly, on volumes, I was positively surprised actually both in Health & Medical and Consumer Goods. Both grew by 3.2% year-on-year. And I just wanted to understand the drivers behind that and where we are in terms of advertising and promotion? Anything suggesting that we're above some kind of short-term trend or below some kind of short-term trend in terms of volume growth? If you could just put some color on that would be very helpful.
Fredrik, do you want to talk about cost in Q3 and prices and kind of...
I think I'll be happy to, Magnus. And Linus, I think actually Magnus said it before, and we've said it many times. Now we're talking about a lot of raw material here. There's so much other things to talk about. But we've said it many times, we always compensate cost increases, and we will do that this time as well. There is a time lag. And historically, that's been 3 to 5 quarters now with 1 to 2. So obviously, there is always a bit of time lag, but we always compensate cost increases. So I think we've already said it, basically.
Okay. Your second question, if I understood it correctly, is growth by the volumes, price/mix in the other business areas. And thanks for talking about the fantastic development in Professional Hygiene and not least, Health & Medical. Maybe I would even mention Health & Medical as a golden egg, since I've seen that term being used sometimes about other med-tech companies. But of course, great development there.
I mean, I can only reiterate that our ambition is to grow volumes and market shares with the healthy margins that we have and there would be a balance going forward. And we will have A&P levels, which we see today, because we see where it truly drives growth. And we also invest in our sales and marketing performance, in digitalization and so on. And we think we can do that with the margin levels that we have. So it's very difficult to be more specific.
[Operator Instructions] We will now move on to our next question from Oskar Lindstrom of Danske Bank.
Two questions from me. The first one is on pricing. Now you've said that you're currently raising prices for Consumer Tissue to compensate for higher costs which are coming from pulp during H2. But earlier on, you talked about sort of a positive price momentum, and I understood that to be generally. So could you perhaps say something a little bit more about sort of what's happening with pricing in your business outside of Consumer Tissue? Is it price, mix, other factors? So that's my first question.
And the second question is on Professional Hygiene, which has seen quite a bit of volatility with the restructuring that you had last year. And should we view the current margin level as the sort of new normal or base level with the restructuring completed. Yes, those are my two questions.
Yes. I can start and hand over to you about PH, Fredrik. Pricing outside consumer goods, in general, we're quite happy with the current price levels. Maybe there was some misunderstanding. I wasn't talking about strong price momentum maybe specifically outside of Consumer Goods. I was talking about a good management of the price/cost gap, so really adapting pricing to the circumstances in each area. And I don't see a big need for price increases actually outside of Consumer Tissue and any of our other businesses. It's pretty good.
Of course, we will continue to, through innovation and new launches, achieve higher pricing and better mix also going forward for the long term. And then in the short term, it's of course the pricing impact, so more of that's promotion. I think the teams are doing this in a very responsible way. And so I'm happy how that's developing, but it's not a strong focus right now on increasing prices outside of Consumer Tissue.
Fredrik, over to you about PH and current margin level and is that sustainable and so on.
Yes. Oskar, you started by saying it's been a bit volatile. And of course, it's related partly to the restructuring and the impact there. But generally speaking, I think the Professional Hygiene business has been very stable. Now obviously, the margin we have in the second quarter is historically very high. And I think you used the word, Magnus, firing all the cylinders. So it's very difficult to give forecast on margin. We're very happy and pleased with the Professional Hygiene margin. And of course, it's been further helped this quarter by very good savings in COGS, as we have already talked about. But of course, margins are very high and time will tell as we go forward.
Maybe a third question, if I may. Again, just following up on pulp to clarify this. Did you say that there was no quarter-on-quarter impact from higher pulp prices on your costs in Q2, and that we should instead expect this to hit during Q3? Is that...
Yes. No. Oskar, I said, when you look at this quarter, Q2 versus last year the same period, so compared to 1 year ago, the impact was pretty flat. When you look at the sequential impact, it was quite significant.
Right. So it's still the 45-day delay in the fixed price hitting your costs that you've had historically?
Yes, pretty much. You've got a bit of process time, but largely yes.
Yes. And there is no inventory that you're using up or having costs impacted by any such volatility?
Yes, there is always that -- you're referring to inventory revaluation, I guess, Oskar. And of course, that's just a delay in the impact. And of course, we have that. That happens every time cost goes up. You've got a bit of a kind of mitigating or positive impact. And when pulp cost comes down, you've got the opposite. So there is always that delay in the cost impact. Of course, that's part of the movement that we see now in Q2 versus Q1, but we'll also see that in Q3 versus Q2. So obviously, sequentially higher pulp cost.
And we'll now take our next question from Jeremy Fialko of HSBC.
A couple of questions from me. First of all, just a clarification. When we look at the profit bridge for Q3, were you saying that, that SEK 1.6 billion would swing into a negative number, or are you simply saying that it will be a smaller positive year-on-year in Q3? It just was not clear from the previous answer to your question what you had meant.
And then the second question is on the mix that you're getting in Professional Hygiene. That does look very, very good. So perhaps you could go into a bit more detail on that. And whether you think that the fact that basically the price/mix was mostly coming from mix, that type of 3% number, whether you think that is genuinely quite sustainable given the sort of innovations that you are bringing into the market at the moment?
Fredrik, do you want to start, and I'll take the next question.
Yes. I'm not really exactly sure what was unclear there. As I said, we have sequentially -- and that's basically what we're guiding on, we are sequentially going to see higher cost. And of course, we'll have a year-on-year negative impact. But largely, sequentially, it's what we typically guide on, and COGS will be higher in the third quarter versus the second. I mean, I think you're asking, if I get your question right, exactly how is Q3 2024 versus Q3 of 2023. Was that your question specifically?
Yes, that was right. Exactly. Just some color on that.
Exactly. And it will turn slightly to the negative or stable, but sequentially significantly then higher on COGS, as I've said before. Is that clear? Because I got the question now a couple of times here.
Yes, COGS is not only pulp prices, it's also energy.
Exactly. We are guiding on COGS. And of course, a big part of that change of COGS is relating to pulp. So let's just be super clear. If you look at sequential, COGS will be higher, mainly driven by pulp. And then if you look at it year-on-year, so Q3 2024 versus Q3, slightly negative. And of course, the shift there also mainly driven by pulp.
Okay. But then maybe potentially energy could still be a positive in Q3 year-on-year?
Yes.
Okay. That's much clearer.
Yes. I appreciate all these questions when you have big swing and short cycles. Again, you mentioned this, Fredrik, that, of course, last year, pulp prices started coming down significantly. Now they're coming up again. So it doesn't make it easy with the year-over-year comparisons. Yes, it's almost easier to talk sequentially. But of course, we need to look at it year-over-year also, but it's a bit complicated in specifically Consumer Tissue. I think in the other category, it's much more stable, as I mentioned several times.
When it comes to Professional Hygiene, we had a big one-time mix improvement by the restructuring. Because if you remember, the capacities that we took out were all kind of low margin businesses, some even unbranded or very basic qualities with the low gross margins and lower operating margins. So just the restructuring, we said at the time, would have a significant contribution to margins of Professional Hygiene. And that's exactly what we're seeing. So it's a big onetime step-up of a few percentage points. Then our ambition is to continue to grow the high-margin strategic parts of the business, even if it's a higher share now. But that will be more of a kind of step-by-step process going forward.
And we'll now take our next question from Karel Zoete of Kepler.
I have two questions and one follow-up. The first one is on your retail Inco business growing at 10% in the quarter, so quite strong. Can you comment on some of the regional trends where you've been doing well?
And then the other question is basically on the focus on growth. We see now growth coming through. It's been a priority, as you set out at the start of the year. What changes have you made when it comes to targets for the sales teams, speeding up innovation, et cetera? We see the marketing investments, but what other changes have been instrumental here? So those are the questions.
Okay. Yes. Starting with retail Inco, we see positive development across the geographies in Latin America and the U.S. And we have a strong focus on pants. We have been now #1 in Brazil that I mentioned before. Maybe. I mean, Brazil, we entered 10 years ago, we've grown organically now to be the #1. It's the world's sixth largest hygiene market, and we just now recently also became the #1 in Brazilian pants, which again is a top priority, just as an example.
We're also seeing some positive signs for the first time in a long time in the U.S., where we are doing really well online and at least on Amazon. And then in the EU, we are really, really recovering from a tough number of years with intense competition both from branded and private label competitors. And this is really that we have continued to upgrade our assortment, our go to market, our pricing strategies all over. So it's a very good feeling to see that that's paying off actually everywhere. But I would say the biggest improvement in this quarter comes from the EU, and we also see positive development in that time in the U.S.
And then when it comes to growth, it has very much to do with incentives. We make sure that our sales incentives and so on then are more towards growth. But of course, always with the caveat that it has to be profitable growth with retained margins. We can see that the investments we're doing in A&P, and we've done a lot of other changes in our go-to-market. In Health & Medical, we've done a complete revamp of the entire organization, entire go-to-market. So we are a much faster and more agile, but also actually leaner organization than before, that has also done extensive sales training. And it's all these things combined that's helping us currently.
We have better system support. I mean, we do thousands of tenders in health care and medical every year. And we have better system support to make sure that we are getting prices correct and that we are competitive. Also, of course, the pickup in Medical. I mean, we haven't spoken about that specifically, but especially in Wound Care, Advanced Wound Care and in Orthopedics, we are doing really, really well. Again, the result of a lot of hard work over several years.
All right. Interesting. And then I have one follow-up question, because we had a lot of questions already on pricing, on lag, on cost, et cetera, et cetera. But you also started by saying that you're in a more stable environment nowadays. Does that kind of suggest that your gross margins quarter-over-quarter, we should see far less swings than before? And can you say much about the anticipation for margins in the coming 1 to 2 quarters? I know it's a bit specific, but yes...
Yes. I mean, I think we have tried to provide as much color as we can for the next couple of quarters. And of course, my job is to be very much focused also on the long-term trend. And I showed some longer-term developments that are quite positive, then it could always swing between individual quarters. And that's why we don't give forecast depending on timing of pricing and costs and so on. So I don't really have more color to give there. Our long-term focus, our long-term investments and efforts are clear, and I'm sure they will continue to pay off year over year over year going forward. But of course, it could be very [indiscernible] quarters.
We'll now take our next question from Tom Sykes of Deutsche Bank.
Just a follow-up on the Professional commentary you've made, please. I mean, the drop-through was very high, 440 basis points in gross margin, 360 in EBITA. I think your EBIT -- sorry, your SG&A is up maybe a couple of percentage. Are there any costs that you need to put back in to boost the growth in the Professional Hygiene business? Or for the next 6 to 12 months, is the SG&A level going to see limited increase?
And then, obviously, you're expanding the categories there. You seem to maybe be providing some things that you don't actually manufacture yourselves. So when you do that, do you always take inventory? Or are there any elements of the incremental business which are just agency sales where the gross margin would be quite considerably higher therefore than if you were taking inventory?
Okay. Starting with the [indiscernible], it's a good question. I don't think I can answer that. But what I can say that when it comes to bought in finished goods, it's still a quite small part of our business and I don't think that, that would have any impact on the overall kind of gross margin development. Fredrik, you have to help me here.
No, I guess, Tom, your question was specifically related to Professional Hygiene on bought in products. Was that right? Or was it a general question on the group?
Well, I mean, we can extend it to the group. It was more directly related to Professional because of the expansion of the categories that you've done there.
Yes. No, it's actually a very minor impact from that perspective in Professional Hygiene. We have a little bit more in Health & Medical. But from a gross profit margin perspective, it doesn't really have a big impact.
And when it comes to your first question on Professional Hygiene, yes, margins are historically very, very high currently. And I'm happy with that. And I'm again convinced that the team, our colleagues will manage the price/cost gap and the margins in relation to growth going forward in a good way. And of course, that could lead to variations over time, but the long-term trajectory, I feel very confident about.
In terms of your SG&A in Professional Hygiene, is that a base that only has to modestly increase?
I couldn't say. I think it's difficult to answer. Not that I'm aware of.
Maybe I can fill in there, Magnus. Just generally, there is no particular shortage on spending in Professional Hygiene. So we are at good levels there. We will see higher cost for SG&A in the third quarter more as a general. I referred to it during my comments there or during my presentation that we'll see the growth rate come down, but we will see sequential SG&A costs come up in general, of course, but not specifically overbalanced towards Professional Hygiene. So it's more as a group comment.
Okay. Perfectly on time. Yes, it's 10:00. So with that, we end the Q&A session of today and our Q2 presentation for Essity. And it's a busy day from a reporting perspective. I'll let you go. I just want to thank you for participating, and wishing everyone a very good summer, and hope to talk to you and see you soon. Thank you.