Essity AB (publ)

STO:ESSITY B

Earnings Call Analysis

Strong Profitable Growth and Positive Future Outlook for Essity

Essity reported a solid third quarter, achieving organic sales growth of 1.9%, with a stronger 3.4% when excluding restructuring effects. EBITA rose to SEK 5.097 billion, reflecting a margin increase to 14.1%. The company highlighted 20% of sales coming from its Health & Medical division, with a focus on scaling to enhance margins. Looking ahead, Essity anticipates strong pricing action in Consumer Tissue, contributing positively to margins, despite raw material pressures. The net-zero emissions target received validation, reinforcing Essity's commitment to sustainability while prioritizing profitable growth across its categories.

Essity's Robust Q3 Performance

Essity delivered a solid performance in the third quarter of the year, marked by an organic sales growth of 1.9%. Notably, when excluding restructuring impacts, the growth was even more substantial at 3.4%. The company's earnings before interest, taxes, and amortization (EBITA) stood at SEK 5.097 billion, reflecting a slight decline of 1% year-over-year, primarily due to significant currency translation effects. However, when adjusting for these, the EBITA actually increased by 6%. The EBITA margin improved to 14.1%, inching closer to the company's long-term target of over 15%.

Segment Insights: Health & Medical, Consumer Goods, and Professional Hygiene

Essity's three business segments displayed varied performance. The Health & Medical segment achieved an organic sales growth of 2.8%, driven by higher volumes, improved pricing, and better product mix. The segment's profitability was impressive, with a margin of 19.4%, an increase of nearly 3% compared to the prior year. The Consumer Goods segment, which represents the largest part of the business at 54% of total sales, saw growth primarily in high-margin categories such as incontinence and feminine care. Though there was a slight dip in price/mix, the volume growth of 5.3% indicated a recovering demand. The Professional Hygiene segment, still adjusting from prior restructuring efforts, reported a modest organic sales growth of -0.8% but showed healthy underlying growth when excluding the impacts of this restructuring.

Sustainability and Long-Term Growth Strategy

Sustainability remains a cornerstone of Essity's strategy. The company has had its net-zero emissions target validated, showcasing its commitment to achieving ambitious environmental benchmarks by 2050. Ongoing initiatives, such as the installation of solar panels at production facilities, highlight efforts to reduce carbon footprints while maintaining profitability. Essity is targeting significant geographical expansions, especially in emerging markets, and leveraging premium product offerings to drive future growth.

Profit Margins and Cost Management

In terms of profitability, Essity's overall EBITA margin rose to 14.1%, reflecting efficient cost management and operational leverage. The company's focus on procurement savings contributed over SEK 1.1 billion this year, showcasing its capability to manage costs effectively despite fluctuating raw material prices. Going into Q4, however, it anticipates higher cost of goods sold (COGS), mainly due to seasonal production fluctuations and inflationary pressures on energy costs.

Guidance and Market Outlook

Looking ahead, Essity expects to experience continued growth in Consumer Goods, particularly from price increases in the Consumer Tissue segment. The management indicated that these price adjustments would positively influence margins in Q4. Additionally, the company remains focused on maintaining market share across its product categories, aiming for a consistent upward trend in profitability as the business cycles through price adjustments and increased volume.

Earnings Call Transcript 2024-Q3

[Sandra Åberg, executive]

Good morning, and very welcome to Essity's presentation of the Q3 results. My name is Sandra Åberg. I'm Head of Investor Relations, and I will soon hand over to our CEO, Magnus Groth; and our CFO, Fredrik Rystedt. Magnus and Fredrik will take us through the highlights of the quarter. And after that, we very much looking forward to your questions.

With that, let's move on to the fun part. Magnus, please summarize the quarter for us.

[Magnus Groth, executive]

Thank you, Sandra, and good morning, everyone. And again, welcome to this press conference, where we're going to talk about the third quarter for Essity. And overall, we showed profitable growth; higher market shares; higher volumes in all our business areas, excluding restructuring; a continued very good pricing discipline and sequentially higher prices; strong EBITA and higher margins; and a record high cash flow. And we had our net-zero emissions target validated by the Science Based Targets initiative. So to summarize, Essity is in better shape than ever. And as you can see there on the picture, there's a sports tape, one of our products in our medical range.

Moving over then to the financial summary of the third quarter. Our organic sales growth was 1.9%. So very satisfying to now turn to a positive growth there. And excluding restructuring in Professional Hygiene, even better growth, 3.4%.

EBITA, excluding items affecting comparability, was over SEK 5 billion, SEK 5.097 billion. And actually, that's a decline compared to a year ago in the quarter of 1%. But we have to keep in mind that we have significant currency translation effects here. We only have 3% of sales in Sweden. So most of our sales are outside of Sweden. And excluding those currency translation effects, our adjusted EBITA was actually up by 6% compared to a year ago in the third quarter.

EBITA margin is also up to 14.1% and return on capital employed at 17.7%. And we announced new long-term targets early this year to have a margin above 15%, and 14.1% is, of course, not that far away. And for those of you who remember our previous targets to be above 17% ROCE, 18% excluding Vinda. At 17.7%, we are not far from that level.

Our business areas are all geared now to continue profitable growth. That's a theme that we really focused on earlier this year. It will be our theme for the next couple of years. It's turning out to be really successful, as you'll see in the presentation.

In Health & Medical, where we have a very -- where we have a smaller business, but with very, very strong brands, very strong market positions and good products. We just need to scale. We have high fixed costs here in our sales organization. And as we grow, we can see that we get improved margins and, of course, an accelerated opportunity to grow. So the focus is really to grow to scale, and Health & Medical in the quarter accounted for 20% of our sales.

Consumer Goods, our biggest business area, accounted for 54%, now excluding Vinda. And our focus here is to accelerate in the high-margin categories, and with the high-margin categories we focus on Inco Retail, incontinence care retail; on Feminine Care primarily; and, of course, in attractive, growing and high-margin parts of Consumer Tissue and baby.

Professional Hygiene, finally, 26% of sales. We are the global leader. We have a very, very competitive assortment with high margins. And our focus here is just to expand. And with a strong focus on emerging markets, we only have 20% of our sales here in emerging markets. So that's an area we're clearly focusing on going forward to accelerate growth also in Professional Hygiene.

Moving over then to the 3 business areas. Specifically, a continued strong development in Health & Medical. Organic sales growth of 2.8%. We had expected a little bit more in this quarter, and we expect higher growth here coming forward in the long term. The growth came from both higher volumes, higher prices and positive mix. So that's, of course, fantastic when you have it from all 3 different areas here. Incontinence Products Health Care grew 3% and Medical Solutions, 2.6%. Profitability, fantastic margin here, 19.4% and a huge improvement compared to a year ago, close to 3% margin improvement year-over-year.

On the picture here is one of our innovations in the quarter. It's Cutimed Sorbion. This is a dressing that's very absorbent. But the key improvement here is that it's now more flexible. So it's easier to apply. It's more comfortable for the patient. So a clear benefit, both for the patient and for the caregiver. And this is already a bestseller in our assortment. And with these improvements, we expect to do even better.

Moving on then to Consumer Goods. Higher volumes in all categories. Organic sales growth of 3%. As I said, higher volumes, 5.3%, so a huge recovery here. Price/mix still negative, 2.3%. This is all related to Consumer Tissue, where we had higher prices sequentially, Q3 over Q2. But compared to a year ago, when we took some price cuts when pulp prices were depressed, there has been quite some swings here in the pulp price, we still had lower prices. However, during the third quarter, we have been working actively to increase prices in Consumer Tissue. So we expect a better price development here in the fourth quarter going forward related specifically to Consumer Tissue.

And as you can see here, fantastic growth in Incontinence Products Retail, 6.3%; FemCare, 4.9%, very strong numbers. Baby Care, a bit softer. There are some variations here. We have a smaller number of big customers. So this could vary between the quarters, but underlying a very good performance, I would say. And Consumer Tissue, recovering with 2% sales growth in the quarter.

And profitability is slightly down for the reasons I mentioned. We have negative price in tissue in the third quarter while, at the same time, we had higher raw material costs, specifically then wood pulp. So that's the explanation. But still a very resilient margin, I would say, at 11.8% in the third quarter in Consumer Goods.

I mentioned the market shares here earlier, and of course, we follow market shares as best we can continuously, but it's easiest in Consumer Goods and in the branded parts where we, of course, we have really detailed data continuously week over week or even day by day. What we can see is that we are continuing to have 90% of our sales in category market conditions -- market combinations, where we are either in position 1 or #2, which is so important for us. But we also see that we are now growing our market shares in over half of our sales, and this was below 50% in the last quarter. So it's improving, and we are growing or holding our market shares in 71% of our business, which is also a clear improvement compared to where we were a year ago and also in the last quarter. So we're clearly growing market shares.

And we believe our estimates are that we are also growing market shares in our remaining Professional Hygiene business after the restructuring and in Health & Medical that we are mostly holding our market shares there in this quarter. But overall, we've had a good development also in Health & Medical in the first 9 months.

Moving then finally to Professional Hygiene. Strong growth in premium assortment. And of course, this shows in mix and also in margins. We had organic sales growth of minus 0.8%. But remember that we had this restructuring last year, both in the U.S. and Europe. So excluding that, very healthy underlying growth at 4.7%. Volumes were down minus 4.6%, positive with -- excluding restructuring and higher prices and positive mix, 3.8%. And of course, this positive mix comes very much from the restructuring we did and the focus we had since then on the premium strategic product ranges.

EBITA margin, up point -- or 10 basis points. And of course, another very, very strong margin quarter for Professional Hygiene at 18.6%.

So that was a brief overview of the 3 business areas. I'd like to say something about sustainability. We are very happy and proud that our net-zero ambition has now been validated by Science Based Targets. We are one of very, very few companies in our industry that have achieved this validation. That means that we have very good and robust plans to reach our net-zero ambitions by 2050 and our targets for 2030, and you can see them here.

So we're continuing on this path. We believe this is very value creating for the shareholders and that there are many opportunities here to reach the targets, not least as you can see here in the picture. This is our plant Suameer in the Netherlands, where we have then installed solar panels around the plant here on available land, just as an example of the many, many hundreds of efforts we're doing here to reach our targets.

Thank you for listening. With that, I'd like to hand over to Fredrik to dig into the details here of the financials. Fredrik?

[Fredrik Rystedt, executive]

Thank you, Magnus, and I will try and sum up the group numbers a bit. And starting with the organic sales growth, we had an underlying growth continuing to be strong and developing well, as you can see, 3.4%, excluding restructuring. We're very pleased with the volume growth in all our categories, actually, and particularly so with Inco Retail with feminine and Consumer Tissue.

And Professional Hygiene, if we look at the underlying growth, was also quite strong. We did, as we have reported many times here, restructuring of our European and North American business for Professional Hygiene. And that has still some impact on our overall growth. For Professional Hygiene on organic sales growth, roughly about 6%. And for the group as a whole, 1.5%. So if you disregard that restructuring that was -- that has been done, then underlying growth in Professional Hygiene is also quite strong. This restructuring impact will also remain in Q4 at a somewhat lower level than what you have seen now in Q3.

So we look at price and mix, minus 10 basis points, minus 0.1%. And that consists of a negative price of 0.6% and a positive mix of plus 0.5%. Now as we have said before, this price decline is relating to the price concessions that we did during last year for Consumer Tissue. And if we look at this quarter and sequentially Q3 versus Q2 of 2024, prices for the group is actually up by 0.7%. And this is predominantly the price increases that we have executed within Consumer Tissue for -- in the quarter. The positive mix component is basically related largely, I should say, to Professional Hygiene.

So if we look at our EBIT bridge, we continue to improve our gross profit margin in comparison to the same period of last year. We did that also in Q2 and Q1. And the pricing discipline remains strong. COGS was actually favorable. And there were a few moving parts that I'd like just to touch on briefly. Perhaps not surprisingly, raw material was negative. So we had a higher cost for raw material. This was driven by pulp, so a significant increase there. But we had some mitigating factors. So lower cost for oil-based material, and we also had positive currency or transaction currency impact that mitigated that increase of pulp cost.

We also had a fairly considerable positive impact from lower energy cost. And this is not so much related to the market movement in underlying prices. This is rather a consequence of the fact that our hedging prices or the prices that we have within our hedging contracts were much lower in Q3 of '24 versus the same period of last year.

Thirdly, as you can see from our report, we continue to have a high savings levels or COGS performance, and we're quite happy with that. So the whole -- if you look at the year as a whole, so far, we have reached SEK 1.1 billion in savings. So it's been a really good year from that perspective. And as before, it's very much related to procurement saving. It's also material rationalization that we continuously work on and just general efficiency improvements within our factory setup.

And finally, the fourth also positive component is that if you look at the production volumes in comparison to last year, they're significantly higher. And if you take all of these things together, COGS developed quite favorably.

So turning to A&P. I mean we talk a lot about profitable growth and volume growth. And of course, we fuel that growth with A&P, and that's up, as you can see, also in percentage of sales. So 40 -- 50 basis points. And we are now at roughly about 5.1% of sales. So this is fueling the growth, and we expect that to be -- continues to be higher than previously.

SG&A, same thing. It's a bit up in comparison to last year as a percentage of sales. And of course, partly, this has to do with the fact that our overall sales growth as a consequence of the restructuring has been a bit low. But there is also some other factors. Normally -- normal salary inflation is one of them. We have a bit of higher provision level for bonuses. And thirdly, we continue to invest quite a lot in the digital structure of the group. So those are the different components.

If you look at -- and this is perhaps more of a smaller topic. But still, if you look at number of employees, they're immaterially higher in number this quarter in comparison to last year. So we are not really growing the number of employees.

It was a good quarter in terms of cash flow. Obviously, the operating cash surplus was super positive. But as normal, you can say, we also had a good performance in terms of our working capital. So it's developed positively. And we remain, I think, in general, with a good capital discipline overall. CapEx was a bit lower this quarter. And we have previously guided between the SEK 7.5 billion to SEK 8 billion. We remain with that guidance. So it's going to be roughly a bit over SEK 7.5 billion for the year as a whole. And if you kind of look at year-to-date numbers, you will conclude, therefore, that we will see a step-up of CapEx levels in the fourth quarter. So clearly, if you just summarize all of this, quite a good cash flow generation from the group, and we've had that actually all year.

And then finally, as a consequence, the strong cash flow has continued to lower our net debt. We bought shares during the quarter in our share buyback program. So we -- in the quarter, we consumed 1.1 -- or purchased shares for SEK 1.1 billion, and we now hold 0.6% of the shares. It is our intention to cancel these shares at the upcoming AGM. So in summary, our net debt-to-EBITDA ratio, 1.1, so with a strong balance sheet. Thank you.

[Sandra Åberg, executive]

Thank you very much, Fredrik, for that walk through. Now it's soon time for Q&A. Magnus, would you like to join us? But before that, Capital Markets Day coming up.

[Magnus Groth, executive]

Yes. Very exciting. The theme is accelerating profitable growth. What else could we talk about? And we will not only talk. This an opportunity to really get an in-depth understanding of our company. So we will visit one of our most advanced multi-category sites. We produce all our categories on this site. It's growing very quickly. This is Valls in Spain, close to in Tarragona, close to Barcelona.

We will, of course, tour the sites. You will also meet many of our colleagues and employees. You can ask them whatever you want, of course, to understand the depth of our culture and how we work. And this includes also the full executive management team. They will also be present and present and be available for discussions. So I hope that you find this interesting and that you have the time and opportunity to join us. We are sure that it's worthwhile.

[Sandra Åberg, executive]

Yes. So with that, let's start the Q&A session. So operator, please open up for questions.

[Operator]

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

[Niklas Ekman, analyst]

Yes, first question, I just have to come back to the discussion about pulp prices because in the past, pulp has had a very strong impact on your earnings and not just Vinda, but even the underlying Essity business. And now pulp prices, they rose almost 60%, if I'm not mistaken, from mid-'23 to mid-'24, and your earnings are still surprisingly resilient.

Can you elaborate a little bit more on what are the mitigating factors here? Is it wrong to look at a pulp index? Are your contracts different? And -- or is it just that the oil-based materials have been moving so strongly in the other direction? If you could help clarify, that would be very helpful.

[Magnus Groth, executive]

Yes. Maybe, Fredrik, since you already spoke a little bit about COGS, you could give some more detail.

[Fredrik Rystedt, executive]

It will be my pleasure, Magnus. Thank you, Niklas. Pulp has actually had a quite negative impact. So there are a few mitigating factors, as I mentioned. The first one is that, as you already know, there is a delay in how they impact. So of course, you don't get the full impact immediately when pulp cost increases. But there is a significant negative impact from pulp in our result.

You mentioned 60%. The increase has not been that big. It's, of course, we have a mix of both soft and hardwood pulp, and the average increase is much lower than what you mentioned. But regardless of that, there has been a significant impact.

And then as I already mentioned, it was mitigated partly by oil-based material, and the fact that euro versus dollar was actually stronger in the quarter. So there were mitigating factors, but pulp had a significant impact. So it's not that.

[Magnus Groth, executive]

And you mentioned energy as well.

[Fredrik Rystedt, executive]

Yes. But I think you asked specifically about raw materials. So then there were the other issues. Of course, the savings that we had, the energy impact and not least, actually, very good production volumes. And of course, those production volumes just brings more efficiency and higher absorption costs. So operating leverage, if you will.

[Magnus Groth, executive]

But actually -- yes, thanks. We ask ourselves a little bit the same question because it's clear that with our lower pulp exposure, we are more resilient, and we are kind of getting more and more kind of used to that as well because of the history, of course. So really happy to be able to be this stable between quarters even when we have strongly underlying swinging raw materials and other costs. And of course, in addition, we are more agile now also in adjusting prices towards our customers. And this also helps and will also help further in the fourth quarter.

[Niklas Ekman, analyst]

Very clear. And very welcome to see more resilience here, of course. But following up on that, given that pulp has actually declined quite a bit in the past 4 months, is there a risk of lower prices? You mentioned here that you expected positive pricing in Consumer Tissue in Q4. Is there a risk that with the decline we see recently here that, that might be difficult to put through or that we'll see price cuts going forward?

[Magnus Groth, executive]

So when it comes to pricing for the fourth quarter, we will see benefits of higher prices, specifically in Consumer Tissue, again, because in the other categories, there's really not much change actually, either in the underlying or in the prices. However, in the fourth quarter, for reasons Fredrik has already alluded to here, we don't expect to have such a positive impact from the raw materials.

And Fredrik, maybe you want to get back to that -- or give more detail on that.

[Fredrik Rystedt, executive]

I think it's clear, Niklas, just maybe highlighting what you already know, but if you look at COGS development in Q3 versus Q2 was actually up, right? So the trend is actually up for the time being. Well, if you look at the full year, different. And if you look at Q4, we still expect COGS to be higher than what we have in Q3. So there is still, of course, reasons, obviously, to increase prices.

There is a delay as you have clearly noted here when pulp price hits our P&L. And this will, of course, also be the case as we go forward. So all the reasons to, of course, increase prices.

[Operator]

We will take the next question from line Oskar Lindstrom from Danske Bank.

[Oskar Lindström, analyst]

Three questions from me. First, on the price increases on Consumer Tissue in Q4. Could you say anything about the magnitude or any changes in contract structure for these? That's my first question.

The second question is on Professional Hygiene growth where you say you're focusing on emerging markets. My question here is, do you foresee that to be organic or more perhaps acquisition driven? What geographies are you looking at?

And then my third question, as always, has to be something about pulp. There's a significant difference now between hardwood and softwood pulp. What's your mix? And do you see that you could drive it further in the direction of hardwoods, which have a lower price point?

[Magnus Groth, executive]

Okay. Yes, starting with the first, the price increases. We can't really provide the magnitude. What's clear is that we are much, much more agile now that we have continuous negotiations with retailers on pricing in all our categories, not only on tissue, but of course, it's in tissue, we have the biggest impact from raw materials, typically. So more agile. It's a magnitude that we think is efficient and it's also a broad-based price increase, so covering many markets and most of our customers.

When it comes to Professional Hygiene growth, we think that being the global #1, having a very, very strong assortment, we have the right to grow faster than the market, both in mature markets and in emerging markets. And in emerging markets, we're primarily currently focusing on Latin America, where we are -- have a very, very nice underlying growth and huge opportunities to penetrate further.

There could be 1 or 2 acquisitions, but primarily, this is about organic growth, especially when it comes to the tissue part of Professional Hygiene. In other parts, as we stated many times, could be sanitizers, soaps, other adjacent areas. We could also be looking at acquisitions as we have stated many times before.

So -- and then when it comes to the hardwood and softwood and the mix, we, of course, continuously increase the use of hardwood here because of the price difference. And this is accelerating, and there's a lot of new technology that's actually developing here that makes it possible. There have been periods, I don't know exactly today, but when -- we've been running our tissue plant in Valls actually completely with hardwood without any softwood whatsoever. And the overall mix is slightly improving constantly, and we expect that to continue to improve. Where it is today, I'm not sure.

[Fredrik Rystedt, executive]

I mean we don't give the exact numbers, but let me just give you -- if you look at Consumer Tissue in general, the absolute majority is related to eucalyptus, so hardwood. But of course, there's still a meaningful component left of softwood.

When you look at Professional Hygiene, it's predominantly actually recycled but also some eucalyptus and softwood. But this is -- it's -- we're much more exposed to eucalyptus than we are to softwood in general.

[Operator]

We will take the next from line Patrick Folan from Barclays.

[Patrick Folan, analyst]

Just 3, if I may. So first, I just want to touch on Consumer Goods. It looks like volumes are much better, and FemCare and tissue were help driving that. Can you touch on what is driving the volume outperformance there? I guess with the Consumer Tissue and the pricing that will land in Q4, should we expect the price/mix to be positive then in the quarter? And will that have an impact on elasticity for tissue volumes?

Secondly, on the cost savings, as you said, Fredrik, the number's over SEK 1.1 billion now, which you guys highlighted H1, it would be over the SEK 1 billion mark. How should we think about the cost savings to land in Q4? Will it be similar to Q3? Or will we see it slow down sequentially?

And lastly, just on the bondholder situation. It would be just helpful maybe to know if anything has changed recently compared to when we last spoke in September. Would be helpful.

[Magnus Groth, executive]

Okay. So I suggest starting with question 1 and 3, and then I leave the question to you about cost savings.

Yes, so very nice growth in Consumer Goods and especially where we want to grow then in Feminine Care and incontinence care, very much driven by innovation, very attractive assortment and supported by strong marketing and A&P investments. So really, really working what we have set ourselves out to do. And of course, this is nothing that's been achieved overnight. We've been working with innovation and brand building for many, many years.

And now that we put kind of more support behind it and supported also by our strong go-to-market and sales force, it's really -- so it's kind of -- it's just operations. It's just there's no magic behind it, but of course, that's positive because that's something we can continue to do going forward. There's no big change in channel mix or anything like that. It's just hard work and good performance.

And in Consumer Tissue, and you asked about price and mix, of course, the price increases we put in place in Consumer Tissue in the third quarter will have a positive impact on price for Consumer Goods overall in the fourth quarter, and I'm not able to specify exactly to what extent.

What we've seen in terms of mix is as we have strengthened our tiering in our assortment, good, better, best, and since we have a somewhat subdued consumer sentiment, we see and have seen, it's not accelerated, but we have seen quite a lot of downtrading. Some of our sales growth and especially in tissue is coming from the lower tiers, so kind of the good or better assortment rather than the premium assortment. And that has a negative impact on mix. We still want to do it because it's still value creating, and it's really helping our operating leverage. But these are just some kind of factors you need to weigh in when you look at it.

So sometimes actually mix could be affected negative even though our strategy is working of growing volumes in a profitable way. It's just that they're growing in segments where the consumers are, where in -- specifically, in Consumer Tissue, we are recovering a little bit compared to the last couple of years when we lost some volumes there. So I hope that answers your question.

Then when it comes to the bonds, we issued a press release on the 17th of October because you mentioned if there's been any update since September. Essity has received a demand for early repayment of bonds. And just to summarize that we are confident that this demand is unfounded. So really nothing new from that perspective. But there is this press release from the 17th of October. Fredrik?

[Fredrik Rystedt, executive]

Yes. So your last question, Patrick, there was relating to cost savings in Q4. And I already mentioned that we expect cost of goods sold to be higher. And there are a few moving parts there as well. So we're expecting seasonally somewhat lower production volumes in -- if you compare Q4 to Q3, at least in some of our businesses. We expect somewhat higher cost also for energy.

And then finally -- and this is also mainly seasonal, and then finally, lower savings. And we actually said that. If you remember, perhaps in Q2, we said that the savings for the last half part of 2024 will be lower than the first part. So we expect Q4 to be lower than what you see now.

[Patrick Folan, analyst]

Okay. That's clear. And just one thing on just the bondholder situation, if I may. Just it looks like from a market perspective, you guys are well capitalized in a repayment situation. And I feel like there's been other companies that have went on with repayments in similar situations instead of disputing it. Is there something else we should be mindful of from your angle that -- is there a financing perspective we should be aware of or anything related to other financing agreements for the dispute other than the technicality of the Vinda percent of group sales?

[Magnus Groth, executive]

We don't have any more information to provide than what we said in the press release here of the 17th of November (sic) [ 17th of October ]. We have obtained professional advice, both legally and financially and feel that we are in a very strong position and that the demands are unfounded. And that's the update we have to give at this point in time.

[Fredrik Rystedt, executive]

Well, I guess, what we can add, and I think -- I'm not sure if I misunderstood your question there, Patrick, but when it comes to funding, just generally, we just don't have any funding needs. We have very strong cash flow, high liquidity, revolving credit facilities and other committed facilities. So we have a very, very strong financial situation in general, if that was your question.

[Patrick Folan, analyst]

Yes. No, that's clear.

[Magnus Groth, executive]

Thanks for -- yes, no, I think that's fairly clear. I took it for granted.

[Fredrik Rystedt, executive]

Yes, absolutely.

[Magnus Groth, executive]

Our balance sheet is really bulletproof now.

[Fredrik Rystedt, executive]

You shouldn't take it for granted.

[Operator]

We will take the next question from line Karel Zoete from Kepler.

[Karel Zoete, analyst]

I have 2 questions. One is a follow-up on cash flow and the balance sheet situation, which is very strong. How should we think about buybacks going forward? Will it become a recurring topic at Essity?

And the other point is on volume leverage. So we see a very good uplift of volume growth. How does this translate into leverage across your business? Obviously, it's very high in the medical space. But in the other businesses, how are you seeing the contribution to the operating margin?

[Magnus Groth, executive]

Okay. So I'll take the first question and hand over to Fredrik. Yes, the cash flow is very strong, and we stated clearly at the time of the announcement of the share buyback program that our ambition is to make this recurring. And the reason why we're saying the ambition is that it requires annual approval from the AGM, the Annual Shareholders Meeting.

And the program we're running now will actually then terminate before, and our ambition is to ask then for a renewal and to do this for a number of years because as the situation is we have the opportunity both to provide stable and rising dividends according to our policy, to have recurring buybacks and to achieve our M&A agenda. So we have all these opportunities to combine going forward with a strong cash flow and the strong balance sheet that we have currently.

[Fredrik Rystedt, executive]

Yes. On the volume leverage, maybe a couple of things. There are 2 different sides of the coin. First of all, there's production leverage. And you've seen that actually, and I think I mentioned it already in this quarter. So when production volume increases, of course, the absorption of fixed cost in our supply chain simply increases, and that has contributed quite a lot to the favorable gross profit margin comparison to last year. So it's already visible there. But of course, over time, you also have in -- to various degrees in our businesses, operating leverage in SG&A and A&P ultimately.

And we haven't seen so much of this, this quarter, but of course, this is behind our plans as we go forward as we push volume. And this is particularly noticeable you can say, in the medical area, but of course, it's existing all over. So there is a lot of operating leverage.

[Operator]

We will take the next question from line Mikheil Omanadze from BNP Paribas.

[Mikheil Omanadze, analyst]

I have 2 follow-ups really. The first one is on your pricing agility. You have recently been emphasizing how you have reduced this time lag between pulp moves and your pricing actions to only 1, 2 quarters. Can you please specify what changes the organization has undergone to achieve this?

And my second follow-up is on the share buyback. Is -- just keeping in mind how cash generative you are and how underlevered you are and how you have been emphasizing that large-scale M&A is probably not on the top of your agenda, is SEK 3 billion kind of a ceiling that we should be thinking of for share buybacks going forward?

[Magnus Groth, executive]

Yes, starting with your second question because I can't answer -- or I can answer. The question is -- the answer is no. The SEK 3 billion is what we have agreed for this program. And remember, this is the first time ever that Essity -- or previous to that, SCA has actually provided the share buyback program. So there's -- there are no ceilings or any considerations regarding that. And as we get into next year, we'll just have to see where we are. So that's regarding the share buybacks.

Then when it comes to -- yes, the pricing because that's very interesting. During the pandemic, of course, and after in the ensuing then, raw material and energy kind of caused shocks from our perspective, price shocks, as you remember. We were forced to go back to our retailers specifically, but we did this also in Professional Hygiene and Health & Medical and say that we need dramatic price increases now basically. And it turned out that we had to come back every quarter for 1.5 years because of the raw material shocks and that this worked. Our brands are strong. Our relations are strong. We provide typically good services, high quality. It worked.

In the meantime, we also actually developed specific our systems, our kind of IT interfaces with retailers but also with other customers in the other 2 business areas to make it much easier because it's quite cumbersome when we implement a price increase. Of course, it's not just a price increase on one SKU. It's hundreds of SKUs. It's different store formats in different geographies, different markets. And it could also be different types of promotions related to this. So there is a degree of automation that makes it possible to do this much quicker than what we could before.

And my absolute perception is that our customers, they are also more happy to have a continuous dialogue about pricing depending on not only raw materials but, in general, of course, product launches and so on than doing it once per year. We still need to do it once per year, specifically in France because there's a legal obligations. But in other markets, it's much more ongoing continuously now. And of course, our sales force is also now more confident and more used to this. So it's become, which we also hope after the pandemic, a new way of working together with the customers that, I think, is to the benefit of everyone.

[Operator]

We will take the next question from line Charles Eden from UBS.

[Charles Eden, analyst]

Just a couple of quick ones, please, and they're probably both for you, Fredrik. Firstly, on the SEK 552 million of COGS in the Q3 EBITA bridge, could you split that out between raw mats, energy and the COGS cost savings, please?

And then the second one I'll ask at the same time, just to clarify, when you said somewhat lower COGS in sort of somewhat less of a benefit from COGS in Q4, were you saying just less of a benefit? Were you saying you expect it to be a headwind in that bridge in Q4? It wasn't clear.

[Fredrik Rystedt, executive]

Right. Good questions. Let me start with the last question first, Charles. If we look at Q4, COGS will be up. So there is an overall negative impact on the group, just to be perfectly clear. And part of that math is lower COGS savings or performance, if you will, so just to be clear.

And then your first question, the different components. So if you take -- starting with the raw material in total, the negative raw material impact, and then, of course, it's all of our raw materials is SEK 260 million. If you take the positive energy, it's roughly about SEK 350 million, give and take. And then you had the cost savings of about SEK 280 million or SEK 276 million, to be specific. And then you have the higher production volume absorption, which is roughly about SEK 200 million. So if you actually sum that up, it gets to your number.

[Operator]

It appears no further question at this time. I'll hand it back over to your host for closing remarks.

[Sandra Åberg, executive]

Thank you, operator. So time to end the session. But I leave over to you, Magnus, for some final remarks. If we can have that slide, please.

[Magnus Groth, executive]

Sure. And I realized, Sandra, I actually missed to present some of our innovations that we have here behind us, not least our new baby diapers, which are the best baby diapers that we ever produced. So they're softer and more leakproof than ever before. We have a pack here. And the pack is quite interesting because what we're doing also now with the baby assortments, that we're compressing it. So these packs are now 20% smaller than the previous packs. And of course, this reduces then transport cost, and it reduces carbon footprint. And inside beautiful, soft, leakproof product that we expect will be very much appreciated.

And then we're launching this all over in baby right now, has some impact on also the numbers you saw in the third quarter because that was during the launch period, and of course, expecting this to do really, really well. So just to bring up one of the innovations I forgot. I'll put it here.

Okay. To summarize, Essity is in better shape than ever. We will continue to prioritize what has been very successful this year, accelerating profitable growth. And just to leave this kind of an impression behind, we, for fun, put in this box to the right here with the actual growth that we already presented, but in different slides, organic sales growth for the different categories. And I think it's interesting because it also gives the relative size of the categories here. And of course, what I really like is that it's green everywhere. This is Professional Hygiene, excluding restructuring. But having said that, it's a very, very nice picture and coming from the strong development that we saw in the quarter.

So with that, thank you very much for listening to our Q3 presentation.

[Sandra Åberg, executive]

Yes. Thank you, and take care.