Hello, and welcome to Essity's Q4 and year-end report for 2019. I'm Joséphine Edwall-Björklund, head of communication, and today our CEO and President, Magnus Groth, will go through the highlights in the report, followed by a Q&A session where our CFO, Fredrik Rystedt, will join on stage. With this, Magnus, I hand over to you.
Thank you very much, and welcome to this conference. In summary, we had the strongest results ever in a year and also in quarter four. Strong organic net sales 4.5% for the year, and adjusted EBITDA margin improved to 12.3%, and this came from higher volumes, higher prices, better mix, and cost savings. For the full year, we also had an impact from lower raw material costs offset by stock valuations. Actually, for the full year, this is close to zero. The positive impacts from raw materials we saw mostly in the second half of the year. We made significant investments in growth, in increased sales and marketing costs, which actually paid off, as you can see, in both Latin America and in Asia, we grew by over 10% through the year.
Earnings per share increased 17%. The board of directors proposes an increase of the dividend with 9% to SEK 6.25. To summarize our focus during 2019, even though we worked very hard with our cost savings program, we kept our long-term strategy of investing behind our brands and market positions. I think it shows in the numbers that this paid off since we could see positive volume, price, and mix. Actually, from a market share perspective, we strengthened our market shares in many more markets than the opposite. We were successful also out there in the market. Online sales is an increasing part of our business now, adding up to SEK 13 billion. That's 10% of sales and an increase with 16% compared to the previous year. Cost savings amounted to SEK 1.1 billion. I'll get back to that in a short while.
Our initiative that we sometimes call Cure or Kill has continued to increase profitability in many country category combinations. I already mentioned the strong performance in Latin America and Asia that we will see later also is now increasingly contributing to our margin development. Improved cash flow and strengthened balance sheet. This has been an issue ever since we acquired BSN medical close to three years ago. We're out of that. We are back to a very solid financial strength, and we are able to look into growing not only organically, but also through acquisitions going forward. We continued to work throughout the year on our contribution to sustainable society, and of course, our very ambitious targets to reduce greenhouse gas emissions in line with the Paris Agreement is a highlight there, and also more ambitious packaging targets.
Moving on then to Q4 specifically, where we had organic net sales growth of 3.6%, adjusted EBITDA margin of 14.1%. Maybe the real highlight here in the quarter is that for the first time, we achieved our target on return on capital employed. Our target is 15%, we achieved 16.4%. In the fourth quarter, we were above our targets both for growth and return on capital employed. In this quarter, we had a big positive impact from raw materials, as you will see then in the EBITDA bridge in a minute. We also had significant investments in the quarter for growth, also for incentive programs. Just to give a timeline, put this in perspective, this is how net sales and organic net sales growth has developed to the left there over the last couple of years.
As you can see, growth has been quite high now the last year. This is a mix of volume and price and mix. Going forward, we will see less of a pricing component as raw material prices come down. A very positive trend, of course, overall in this picture. To the right there, adjusted EBITDA and EBITDA margin, you can see the actual dynamics throughout last year, how both EBITDA and EBITDA margin increased significantly throughout the quarters there from Q1 with 10.4% and then ending at 14.1%. The net sales bridge. We see organic net sales coming from both volume and price mix. Just that's a positive note. The divestment impact there is from moving out of a joint venture in Turkey in the fourth quarter, had a minor impact on overall net sales.
Maybe more interesting, the adjusted EBITDA bridge, where we see positive contributions, again from volume price mix, and a significant contribution in the quarter from raw materials and energy. The next two bars there relating to cost savings, the ongoing cost savings in COGS and the cost savings program, I'll get back to in subsequent slides here. I thought I'd focus here very much on the big other bar here, which is negative SEK 1.34 billion. This consists of a number of components, the biggest being higher sales and marketing costs. Altogether amounting to SEK 875 million. Breaking that down, SEK 175 million is actually advertising and promotion to support the growth that we've seen, and that's really paying off. The remaining SEK 700 is partly the incentive payouts that we had in the company. As you know, we have short-term and long-term incentives.
We also have all employee bonuses, and we're very happy about that impact over 17,000 of our employees. This is now excluding our joint ventures. Compared to last year, when we had a very low incentive payout, this year we had a quite high incentive payout. Shows that the system works. This had an impact in the quarter and on this line here with approximately SEK 200 million. In addition to that, we did many growth-related initiatives, especially again in Latin America and in Asia, and also in different digital initiatives. In addition, of course, we have the normal inflation here. Stock revaluation in the quarter was SEK 180 million negative, and the rest consists of high distribution costs and a number of smaller cost items, of which some were related to the quarter because of year-end effects.
Raw material development, the only slide where we look slightly into the future, at least into the next quarter. What we foresee here, as you can see overall, of course, it's been a very positive development over the last couple of quarters. Starting with consumer tissue, which is mostly affected by the market pulp prices, we foresee quarter over last year's quarter, significantly lower raw material costs in the first quarter, and sequentially, actually stable raw material costs. The outlook for pulp prices at this point is a stable outlook for the next couple of quarters, and then towards the end of this year, rising pulp prices. Stock levels in China are coming down and demand is increasing slightly.
When it comes to professional hygiene, which is affected, of course, both from market pulp, but also to a high degree from recycled fibers, we foresee, again, a significantly lower raw material prices quarter over last year's quarter and stable sequentially. Finally, personal care, where the raw materials consist of the oil-based materials. We expect lower prices year over last year or quarter over last year's quarter, and again, stable. Very stable sequentially. I think that's the easy message going forward. We will have to see. I think this slide is good news, especially in the light of the good growth we see in emerging markets. Not only are they growing well, but they are also increasingly contributing to the margin development. Going back from 2015, margins have improved significantly in emerging markets, the light blue bar there at the bottom.
Looking at the group margin, we ended up at 12.3% for the full year, as I already mentioned in the last quarter, 14.1%, moving in the right direction there. I said I was going to get back to the two bars in the EBITDA waterfall related to savings, starting with the ongoing savings in Cost of Goods Sold, where we saw full year savings of SEK 465, and in Q4, very small savings of SEK 4 million. Many of you remember that we actually guided for the fourth quarter to have savings of between SEK 150 million and SEK 250 million in the fourth quarter. In the end, it was close to zero. Behind this development, we actually see good productivity improvements from all the points you have here on this slide. Tissue Roadmap, operational efficiency improvements, material rationalization, and sourcing savings.
All that continues to deliver and was actually in the middle of this range, around SEK 200 million. This was nearly completely offset, since we are very tough on ourselves when it comes to measuring COGS savings. We only look at the net savings, not at gross savings. This was offset to a high degree of all employee incentive programs related to cost of goods sold, very much in our supply chain, changes in our pension schemes, and some higher distribution costs that we had not expected. The underlying savings continue to be good, but in the quarter, we achieved the target but not the numbers that we presented in the last quarter. Going forward, what can we expect? We've had quite some volatility here between quarters. Historically, we have had ongoing savings of around SEK 1 billion per year.
This year, it comes out then at SEK 456. Going forward, I would suggest to look somewhere in between here, SEK 500 million and SEK 1 billion. We see big opportunities for continued savings and efficiency and operational improvement in all the areas that you see here. That work continues. We expect to see less cost savings in COGS from restructuring, which was very much related to Tissue Roadmap. When we closed sites and made major changes to our footprint, we will not see as much of that going forward. That's why I propose that you look somewhere between SEK 500 million and SEK 1 billion for ongoing COGS savings going forward. Maybe in the higher end of that range, but still lower than SEK 1 billion.
The cost savings program that we announced in the fall of 2018, and that finished at the end of the year, which is exactly in line with what we expected and slightly better. For the full year, we guided savings of SEK 600 million. We came out at SEK 637 million impact on P&L. Q4, SEK 202 million, and a run rate that's slightly above the SEK 900 million that we guided. The headcount reduction is also slightly above the 1,000 employees that was in the program. Restructuring costs are slightly below SEK 700 million that we expected. The impact here on SG&A as % of sales on the year, as you can see, looks quite small, 10 basis points. It's always good that the SG&A goes down year-over-year, but this is maybe a slight decline than expected when looking at the cost savings program.
Impacting here when we look at this program which mostly impacted SG&A, there is an impact from actually our incentive programs again, which is approximately 40 basis points, so 0.4%, which of course has an impact specifically very much in the fourth quarter, but also for the full year. That's again because we had very low incentive payouts in 2018 and quite good in 2019. That explains some of that difference. The growth investments that we are doing that I already mentioned in order to continue the good momentum we have in many markets and categories. We always talk about innovations, and this is just summing up the year. Maybe just one or two highlights. We refreshed the TENA brand, not only the logo, but also relaunched many of the products.
I think we entered 2020 with a very strong product assortment and a very strong offering in incontinence care with the TENA brand. Feel good about that. During the year, we also worked hard with our medical brands to reduce the number of sub-brands and to start to relaunch under a number of the umbrella brands that you see some of them here, Leukoplast, Cutimed, Jobst. That will continue throughout the year. Moving over to the individual business areas. The bullet points to the left there will be quite similar for the different business areas, with organic net sales being positive at 2.5% coming both from volume and mix when it comes to personal care. Contributing here is high volumes, higher prices, better mix, and cost savings. We see this in all three business areas, actually.
In Personal Care, we saw a lower raw material costs, not as much, of course, as in the pulp-related business areas, but still. Investments in growth and costs related to medical device regulation, which impacts our medical business, but also actually our European Incontinence Care business. Higher distribution costs, which is something that we are working very much to improve going forward. This has been a theme throughout the year, at the beginning of the year, partly because of issues that we had with some warehouses and the different supply issues. Now we're getting out of that. We're in good shape for 2020. Actually underlying distribution costs are in general rising still in many markets in North America and in Europe. Going through the different categories, looking down at the right-hand corner there.
Well, first of all, of course, emerging markets continues to grow incredibly well, while in mature markets, we had an impact from medical and from baby, which also is visible here. Incontinence products had a very good quarter and a very good growth throughout the year, primarily in healthcare, where we have been growing market shares in almost all markets, but also in retail, where we are now stabilizing market shares and the launches we did throughout last year are really having a positive impact. Very good development for Incontinence products. Medical, we're not happy with that. Flat growth in the quarter. I stated earlier that this will take time. We are in the middle of this improvement program that's very much focused on sales growth because we know that once we have sales growth, we have margin improvement.
It's again very much related to North America and the United States. Many of the medical markets are growing really well. We feel very confident that we have strong brands, strong products, and that we have the plans in place to get the growth up for next year. Overall growth for the year in medical was about 0.5% during 2019. Baby Care, we are still working in the strategic direction of improving margins before growing volumes, as you can see here. As before, in Europe, we are doing extremely well on margins, a little bit slower on volumes. Malaysia is doing better. This is, of course, part of Vinda. In Latin America, we are just in the relaunch of our baby assortment, which had a negative impact on volumes, but something we think will be positive going forward.
Feminine Care, year after year, quarter after quarter, we continue to see these fantastic growth numbers. This is volume mix and to a high extent, price also on the back of innovation. A very positive development that just continues here in Feminine Care. Again, Latin America is a big part of this, but actually the launch of Libresse that we did in the middle of the year in China is also having a positive impact here. Moving over to Consumer Tissue, where we had a significant growth, 4.9%. Of course, a lot of this comes from emerging markets again. Volume, price, and mix. Significant positive impact from lower raw material costs. A slight negative impact, again, from stock revaluation. This will now eventually become a smaller number in 2020. Overall, of course, a huge improvement compared to last year.
A margin going from 6.9% to 13.3%, we're starting to get to the margins levels where Consumer Tissue needs to be in the long term. As you can see in a previous slide, we're very much focused on getting margins up, not only in Consumer Tissue Europe, but also in Asia and in Latin America. All need to contribute, especially since the emerging markets are growing faster. Of course, this has been a big question, what about price pressure now that raw materials have really come down? What we state in the report is that in the fourth quarter, we have negotiated slightly lower prices in Consumer Tissue in Europe. It's low single digits. We think that's a good outcome. It means that we feel that Consumer Tissue in Europe will be able to contribute from a margin perspective.
We also had a very good mix improvement through the last quarter in Europe, focusing on our brands and again, being very selective when it comes to private label. As you've maybe had the time to see from the Vinda's number, they had a fantastic margin uplift, not only from lower raw material costs, but also from a big mix improvement. As they state, they have not done any major price decreases. However, they had additional promotions at the end of the year, which they frequently have. They also had a very tough comps with the year before, so continuing to do well, both on sales and on margin. That's looking quite encouraging for the rest of the year. Now we have to see, of course, what happens with pulp prices and ongoing negotiations.
We have come quite a far way, actually, in the ongoing annual negotiations in Consumer Tissue, and so far, looking good. Professional Hygiene finally continues to steam ahead. It had a fantastic quarter, benefiting again from volume price mix and all the different components that we've seen before. We think we have so much innovation here and so much going for us, both in the mature and emerging markets, that we're actually really investing here in AMP, in SG&A to grow this. We see this as an opportunity to really strengthen our leading market position here globally. 3% growth here is quite nice, considering that we have 80% of sales here in mature markets and only 20% in emerging markets. Of course, the challenge and opportunity going forward is to grow faster in emerging markets so that becomes a bigger part of the business here.
Just to note that in Professional Hygiene, adding to the strong margin development, we had a one-time impact from pension, reduction of pension liabilities in the U.S. We can take that out when we compare next year. We have to look forward here. Final slide, priorities 2020. To continue to invest in our strong brands. Of course, price management remains a big theme for the year now that raw materials are coming down. Efficiency improvements to have a high pace of efficiency improvement, and not least also manage SG&A costs. Even though we want to continue to grow at a high pace and grow market share, we need to do this in an efficient way, of course. According to our strategy, focus on the high-margin categories. I think we have good momentum in Latin America and in Asia to continue to leverage that.
Accelerate the digital transformation in all parts of the business, also when it comes to internal efficiencies, where I see that we have big opportunities going forward. Not the least, continue to contribute to a sustainable society. As you know, this is something that's at the heart of what we do at Essity, very important for us, and we expect to stay ahead in this area also in the next year. Thank you for listening.
Okay, let's start with the question. Let's take Magdalena, start there with Linus.
Thank you very much. It's Linus Larsson with SEB. Broad picture, looking into 2020, it sounds and seems as if price as a component of organic growth is slowing. I wonder more about the volume component of organic growth. It was 2.3% in the quarter, and the same for the full year. Will you be able to maintain or even accelerate that in the year ahead?
Yeah, we don't make forecasts. You're right with your first statement. Of course, we will work hard to grow both with volume and actually improve mix, which has been quite a success also in this year. What that will bring, we will have to see. There are areas also where we have to keep on increasing prices, especially in personal care, where we still need to get back to margins that we had one or two years ago.
Just to follow up on Personal Care, you have two sub-segments within Personal Care, which are a bit of a drag on the average in terms of organic growth. When do you expect them to be on par or contributing to the average for Personal Care as a whole?
Medical, as I mentioned, we have plans in place. This is going to take some time. I'm not going to make any exact predictions. We have successfully just turned around the North American professional hygiene business a few years ago, the North American Incontinence Business. We know that we're good at this. When it happens, difficult to say. Baby, we will focus on margin improvement also going forward, even though we see positive and encouraging signs in Malaysia with the Drypers brand, and also have hopes related to the relaunch that we're doing in Colombia, Ecuador, and Peru. Let's see how that develops. I don't think that we should have a negative development in Baby in the next year.
Great. Thanks.
We'll still have some impact from Russia still. As you will recall, we left the segment of Drypers and of course, that has had an impact also going forward in the next couple of quarters.
Thanks. Just finally, for clarity's sake, if you could just say again, maybe on the inventory revaluation, what the absolute effect was and what the year-on-year effect was in the fourth quarter, those two numbers, please.
If you take Q on Q or compare to last year, it was SEK 180 million, roughly. Most of it was related to either Tissue or Professional Hygiene. Actually, Professional Hygiene being a fairly significant part. Personal Care was about SEK 20, roughly.
The absolute revaluation in the quarter?
Yeah, that's a good question. Let me come back on that, Linus.
Excellent. Thank you.
In the year, this negative impact from stock revaluation was almost completely offsetting, actually, the lower raw material prices in the year, so significant impact.
Yes. Hi, Stellan Hansson with Nordea. Looking at the higher A&P spending, particularly in the fourth quarter, could you give us an indication if this is an increased level that you will maintain? Also, given that volume growth was maybe only 2%, or do you see this as a low payoff payback on this investment? Is this a sign of increased competition?
We on average have had, during the year, I believe, AMP of 5.2%, and that could be slightly higher in 2020, maybe 2.3% or something like that. Partly because of high competition, especially in Incontinence retail, but also behind a lot of product launches and innovations that we have planned for the year and where we see that it's really paying off. This is mostly then a positive investment rather than a defensive one.
Okay. Could you give some indication on what you're seeing on pricing in Professional also maybe for Q1?
We don't give pricing forecasts, but I think you've seen a positive price component for Q4. Of course, we think the pricing is fair at this moment, given the market situation. We hope for a good development also going forward, but it's very difficult to predict.
What we see is, as I already mentioned, that also recycled fiber prices are flattening out.
We think that's a good reason to hold on to the prices we have on the products we have. Of course, every time we launch new innovation, we work with the mix and also with a positive pricing component.
Just a final one also on the increased payout for incentives. Just to understand it, is it related to the delta of profits or is it more the absolute level?
In what way, Stellan?
The increase in incentive payouts, is that related to the increase in profit or the absolute level of the profit, so to say? How recurring is it?
No. What we do, basically, we set targets every year. Before the start of the year, we set targets for all our incentive programs, so to speak. Of course, depending on the delivery of the full year, there is a payout. If you take 2018, the total payout was actually quite low for all the programs, basically. Very low. Just the opposite in 2019. Without giving the exact range, we were in the 25%, 30s, 2018, and above 80% in 2019. Of course, that big swing caused this effect to happen. Just perhaps on your specific questions on Q4, what we do is we provide throughout the year based on our forecast for the year.
Obviously here what we have seen is, of course, the cost for Q4, but also the fact that Q4 was actually better than what we estimated.
Good.
Hi. Niklas Ekman here from Carnegie. A question on the price adjustments in consumer tissue. First of all, raw material prices now are basically back to where they were at the start of 2017. If I look at your price mix effects over the last two years, they are around 6% aggregate. Given that you're now looking at price adjustments of low single digits, do you think there's a risk if pulp prices were to stay at these levels, that you would have to make further downward adjustments of prices?
There's always a risk, but to some extent in Europe, we have annual negotiations, especially for the branded part of our business, and a big part of that is actually done, and that's why we are able to state this number. Customers could always come back and ask for more. What we currently see is that this range is where we are. Of course, during this period, we have also improved our cost position through the Tissue Roadmap program and Cure or Kill and so on, and that's why we are seeing this significantly improved margin. It's not only the low raw materials, it's a combination, of course, of all these different positive factors.
We can add, Niklas, because it depends a little bit on. You mentioned the number. First of all, there is a positive mix, so the price component is smaller than that. I think it's also depending on when you start the comparison, because if you recall, we actually had a decline if we look at the European market of pricing in 2017, despite the fact that raw material went up. If you start 1st of January 2018, you've got absolutely a valid point. We think still, if you look at the total period, we think there is reason for having this current price level.
Okay. Very good point. Thanks. Another question is the other line in general, obviously has increased significantly now in Q3 and Q4. Where do you see that in 2020? Do you see a big catch up in cost now that you are at a higher margin level, now that pulp prices are back to lower levels? Do you see a lot of costs continuing to increase in 2020?
The entire organization is incredibly aware of the importance of staying cost conscious. I don't want to see this high other line going forward, of course. The cost improvements that we achieved, especially in SG&A, are hard-earned in the organization. I don't think anyone wants to give that away in the short term. Cost focus throughout all parts of the organization remains very, very strong. We are planning to invest more behind growth. Those are very specific initiatives to continue to grow market share and of course, behind value-creating, high margin parts of the business. It's, I think, a valid growth in SG&A digital initiatives, emerging markets and so on and so forth. You want to add something here, Fredrik?
Yeah, maybe a couple of things, the other line here is both SG&A and also other stuff. Linus, you had a question before, what's the impact of the SEK 180 million? What's the distribution? Roughly SEK 130 relates to Q4 of 2019, so negative. The rest, of course, is last year. That SEK 180, if we go into Q1 of 2020, this quarter, basically we had last year a negative SEK 60, which will basically then be a positive in comparison. Of course, whatever happens in 2020 or this quarter, we don't know yet. That is a positive swing versus last year.
On stock revaluation.
On stock revaluation.
Yes.
If we talk about, of course, the incentive programs, Magnus mentioned roughly SEK 200 million or a little bit above that. That is, of course, also something that is more of a, hopefully not a temporary nature, but in comparison over year, that will actually change the story. There is one maybe additional remark about the very significant increase versus 2018 Q4 in this quarter. You will remember that last year we just launched the cost savings program, and we made a very, very rapid stop to basically all costs in the organization. As we actually said in the Q4 and the Q1 report, we said we had exceptionally low cost, non-sustainable levels. What you see now is much restored cost levels. They will actually be there.
Thank you. Just the final question. You mentioned the balance sheet being strong again, and looking at acquisitions. In the past, you've talked about medical solutions being the most interesting area in wound care in particular. Is that still a priority for you? Not least in light here of the slightly weak trend we've seen in medical solutions organically. Is that still a key priority to expand?
That's still a key priority. Our strategic priorities are to grow faster in the most value-creating parts of the business, which are the parts with the highest margins, the lowest capital intensity, and where we see the underlying strong market trends. This definitely applies to Medical, it applies to Professional Hygiene, Incontinence and Feminine Care. As you know, in Incontinence and Feminine Care, those categories are highly consolidated, even though we would be interested in looking at growing in those areas as well. That means that in Medical, and that was also the strategic logic for the acquisition, we did buy a platform where we said that we would eventually then bolt on smaller acquisition, which reduces the integration risk, increases the potential synergies, and grows then the scale of that business. That's definitely the plan.
Excellent. Thank you.
Any more questions from the room, then? Yes.
Yes. Good morning. It's Karel Zoete with Kepler Cheuvreux. Coming back to the integration work or the works to be done in the U.S. medical business, what is it precisely that you want to fix here or what you should do in order to improve performance?
Yeah. More precisely, it's the sales engine, our go-to market. We have good customer relations, we have strong brands, and we have a good assortment. We see that in parts of the U.S., in many other mature markets, we're being very successful against exactly the same competitors, same situations, that we see where we're underperforming in the U.S. We made some big organizational changes last year in the U.S. business, and it's those plans. Very much rebuilding the sales force, the sales incentives, the CRM systems, very basic stuff, actually, and that makes me more confident because it's not that we're not competitive or we don't have the right products or anything like that, but we need to get the fundamentals in place.
Right. The second question is coming back to consumer tissue and pricing. You specifically highlight for the annual negotiations with the branded business in Europe, you have accepted slightly lower prices, but how much is that of the total consumer tissue business? You also say that in Asia, the pricing trends are better.
We haven't seen any major price cuts in Vinda, only promotional impact then on pricing levels, which varies over the quarters, of course, and could move either way. Europe, what % is that now of our overall tissue business?
You were asking about branded. If you take the European business, about 50% branded, 50% retail brands.
How much is that of total consumer tissue then?
60%, roughly. Approximately.
Thank you.
Any more questions? Okay, operator, please open up the telephone lines.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, star one if you wish to ask a question. Our first question is from the line of Iain Simpson. Thank you. Please ask your question.
Thank you very much. Good morning, everyone. Just looking at your personal care business, I noticed that organic sales growth in each one of the subcategories, so diaper, Feminine Care, Incontinence, and medical solutions, appears to have deteriorated in Q4 versus Q3. I was just wondering if that was just a coincidence and there were sort of subcategory-specific issues, or whether you'd had any sort of retailer issues or similar that have been a drag on all four subcategories. That was my first question. Secondly, just thinking about that consumer tissue pricing, you've very helpfully talked about how consumer tissue pricing in Europe will turn negative in Q1 2020. I just wondered if there were any areas of your consumer tissue business where we might see positive pricing early this year, perhaps just as a rollover from pricing that you took last year, or similar.
Did you have hope for any positive pricing to offset what's happened in Europe? Thank you.
Yes. Regarding your first question, Personal Care development sequentially, that's a pure coincidence. It's a variation that we see typically between quarters. Actually, when we follow our market shares, it looks quite positive in Personal Care in general. I think that's just following the market. Consumer Tissue, positive pricing, I would say that that could potentially be LatAm, where we are very flexible in pricing very much then responding to currency fluctuations. We also, as you know, started up ahead of schedule a new paper machine in Mexico second half of last year, that's a premium product machine that should lead to better pricing opportunities in LatAm. Fredrik, you want to add something?
No, I think that's.
Thanks very much. Could you just remind us how much of your consumer tissue business is LatAm, please?
12%.
Thank you very much.
Thanks.
Our next question is from the line of Celine Pannuti. Thank you. Please ask your question.
Yes, good morning. I would like to come back on the pricing in Europe and elsewhere. On consumer tissue, you said that there's annual negotiation. I think there was as well a summer negotiation. How often effectively do you negotiate? Importantly too, do you think that there will be promotion on top of the price decline? If you could discuss about the competitive environment that you think you will see, given that the pricing year-on-year are down, prices are down substantially year-on-year. I was wondering as well on the rest, you just mentioned LatAm will be potentially positive with inflation, but wondering whether promos should continue to as well be there in Vinda and for the remainder of 2020. On pricing, I'm also a bit surprised at your commentary on professional hygiene.
Why is it that pricing will be positive in 2020 given that the raw mat will be significantly lower? My second question is on others, just to try to iron out what you said. You would add a positive benefit from savings, and then did I understand well that incentive should be a neutral? If you could confirm that. What do we expect in terms of distribution costs for 2020? I would expect, then we'll still have the negative impact from A&P. If you can comment on the other line, that would be great. Thank you.
Okay. Thanks, Celine. That was a number of questions. Let's see. Please help me if I don't get it all. Starting with consumer tissue, we don't know what will happen throughout the year, and we know that it's a category that's subject to a lot of price pressure. What we've seen so far, and we're now at the end of January, is actually low single digit price declines. I think that's actually a positive and maybe better than we had expected. I feel more confident in our strong brands, in our strong product offering than I've done before. I think they have proven to be very solid throughout these last very volatile years. This goes as well for European brands as Latin America and Vinda. Actually, in China, we have higher prices than the competitors and consumers still seem to prefer our brand.
I'm sure that promotional pressure will vary through the year. I think that everyone in the tissue business looks at the raw material development and what we expect right now, or what the experts expect, I would say rather, is for stable pricing for the next couple of quarters, and then increasing pulp prices again towards the end of the year. To start taking lower prices now could potentially end up in a kind of quite bad situation towards the end of the year. I don't think that's a good strategy. Promotions, of course, could vary throughout the year, so I can't really give any update or any views on that. Professional hygiene, positive pricing. We've seen a decline also in recycled fiber prices.
The Tork brand and the Tork offering is more than just tissue, it's solutions, it's the dispensers, it's the sensor-enabled cleaning solutions and so on. We are less price sensitive in general in this category than in consumer tissue, and I think we have a bigger competitive advantage compared to the other suppliers of these products. That's why typically we enter every year with a view to increase prices. Let's see what we achieve. I mean, the margin development has been very positive here. Even though, as you know, it's very seasonal. I just want to point that out. It's been an issue a couple of previous years that the first season typically sees lower margins.
First quarter.
First quarter, yes, in Professional Hygiene. Other than that, I think we're just going to leverage our brand and our innovation and also have that in the pricing. Remember also that some of our Professional Hygiene products are not really volume driven. Many of our promises is actually reduced consumption, so it's a win-win, which means a pricing advantage for us compared to a lower value product, but also then a cost saving and a sustainability improvement for our customers. Incentives. Fredrik said we had approximately 80% incentive payout altogether in the group last year, and of course, that means that I'd love it to be 80% for this year as well. Let's see. Of course, it's probably not going to be much higher because I don't think that ever happened. Distribution cost and raw mats. You want to talk about that, Fredrik?
You were talking specifically on the other issue. Of course, if you look at this year, the major items, of course, as Magnus already said, the SG&A part and the incentive part, which we have, I guess, discussed. Then you have the stock revaluation. I think Magnus actually mentioned that if you look at the year as a whole, 2019, we have a stock revaluation of roughly about SEK 670 million, I think, in negative stock revaluation. Out of that, about SEK 370 or so is relating to specifically the negative impact this year. If you compare 2020 to 2019, that turns positive. What's going to happen to raw material this year? It's very difficult to say. What that number will be, but it's very likely, of course, stock revaluation, if you look at the other line, will be much more favorable.
That's of course much more the predicted outcome. Of course, incentives, just the same. The total negative impact this year in comparison to 2018.
Last year.
Yeah, sorry. Of course. Last year. 2019 compared to 2018, it's about SEK 500 million roughly in SG&A totally. Of course, as Magnus said, that's likely not to be there next year. If you look at the overall level, other, of course, is expected to be lower. It's very difficult to predict exactly the components.
Distribution cost?
Yeah, it's hard to tell. We've seen distribution costs come up a lot this year, and it's coming from many different sources. It's been shortages, road fees. We've also seen fuel cost increases and just a general kind of tough climate, I think. We're doing a lot of initiatives in distribution in various ways. We're working with much more efficient sourcing and other kinds of activities, and also savings within our warehouse management and planning, et cetera. Of course, the ambition over time is to become more efficient. What you see is mainly market related, or it's all market-related issues, and it's difficult to predict. Hopefully it will be much better next year, but it's really difficult to predict, Celine.
Just to make sure that I've understood well, it seems that all the components of others are going to turn positive in 2020. Others will come from a big negative to potentially quite a nice positive on the end.
No, it will never be positive, I think, Celine. I hope not, really. The other line contains all the cost that's basically not related to Cost of Goods Sold. Basically what happens there in the EBIT bridge is that if we grow, we need to, of course, invest more into A&P. We need to invest more into SG&A or selling expenses. All of that will, of course, be negative in the other line.
Annual inflation, of course.
Yeah. We have a few other things. If we, as an example, we continue to invest into our business. Just imagine that we invest into a new production line, as an example, then the running end cost of that before we have filled it fully, that will also be there. Of course, you have the normal inflation in all our cost base. If that turns kind of flat or positive, that means that we have basically stopped grow. I hope it will not be positive, but it will not be as negative as this year. That's of course our assumption at this time.
Just one last thing on Vinda. I saw that the growth rate has decelerated in the quarter from, I think, mid-teens to 6%. Can you say what was the impact of promotion on the top line?
I don't know that. What I know is that it was a very tough comparable compared to 2018 when growth was very high in the fourth quarter. I don't know the impact of promotion.
Okay. Thank you.
The next question is from the line of Namita Samani. Thank you. Please ask your question.
Good morning. I have a question on the wording of the press release related to the price decreases in Europe. Does the wording that we have finalized some negotiations, and in particular the word some, imply negotiations have been done with your largest customers and there's just a tail left? Or can we expect to see some further negotiations and some further guidance on this in the Q1 results? My second question is related to the ongoing cost savings. Magnus, you talked about some big opportunities in your initial remarks. Could you give us some additional color on this? Thanks very much.
Yes, some customers, as we stated, in Europe, we're approximately half private label, half branded, and many of the branded negotiations are actually done at this point in time. Parts of the negotiations regarding private label, when it comes to private label, some of those can be opened at any time. This is more of an indication. Again, we don't know if there will be renewed negotiations or not. For that to happen, I think we would have to see even lower pulp prices. That's my view on things, but that's not what we're expecting at this point in time. We're expecting stabilizing, and then at the end of the year, increasing pulp prices again. It's more of an indicator where we are at this point in time, and it's difficult to give any more guidance.
The indication is, yes, there are some price decreases, but at a level where we still see good margin development, taking all the other things into account, like cost efficiencies and also, of course, the starting point with the price levels. Again, it's not that price levels from a historical perspective are high. They are, as Fredrik said, back maybe around where they were in 2017. Then ongoing cost savings. Yes. Actually, in cost savings this year or last year, 2019, the biggest part was actually improved efficiencies in material purchasing.
Higher rebates, being able to actually approve more suppliers so that we can have more suppliers compete for volumes. Very much purchasing related, and then material efficiency related. We improved our pulp mix significantly. We have actually individual tape machines now that run entirely on hardwood, which is quite amazing. This was deemed impossible a couple of years ago. A lot related to materials, material rationalization, using less material in our products, very much in that area. What we saw less of last year, but the big opportunity going forward is actually improving efficiencies in our plants.
We see that every year, but because we've had such quick growth in personal care and added a lot of equipment in the plants over the last couple of years, and since we've been doing so much restructuring in consumer tissue, we haven't really had the kind of peace and quiet to work on the efficiencies in more stable operations. That's the opportunity we see going forward. That's a lot about increasing machine efficiencies, both in paper making, in converting, improving output, reducing waste, reducing energy usage, and also distribution, as we spoke about. Many opportunities in all our production facilities. They all have individual targets that are very clear, it's those targets that are then specified in these different components that we work towards.
Thanks very much.
Thanks.
Next question is from the line of Faham Baig. Thank you. Please ask your question.
Hi. Good morning, guys. Thank you for the question. A couple from me as well. Firstly, on consumer tissue, and margins in that business. I guess pricing and negotiations and raw mats are a part and parcel of your business, therefore you may or may not see price decreases or increases going forward. In the medium term or steady state, what margins do you think, or what returns do you think the business should be able to make? I think earlier in the call you mentioned that we should see progression in margin in 2020 despite some of the negotiated price increases. Steady state margins in returns and consumer tissue would be my first question. The second question is really a housekeeping one. Maybe for Fredrik, actually.
Fredrik, could you just give us a sense of where we should expect cash restructuring to end up for 2020, CapEx for 2020, the interest finance cost for 2020, and also the tax rate for 2020? Thank you.
You want to start, Fredrik?
Yeah. On the cash restructuring, if I start with the 2020 questions, lower than this year. We don't give a forecast there. We have a fairly big impact in previous years, as you know, from restructuring. There is much less, as Magnus alluded to, going forward. We also have this finished year of 2019. We had quite some cash restructuring from our cost-saving program. Of course, as you know, there are no such things announced. Therefore, we expect cash restructuring to be lower. If we look at CapEx, as you have seen now from our 2019 report, we were quite low on CapEx. Actually, if you look at in percentage of sales, we were roughly about 4.4%, which is really low in comparison to previous years. As a reference, I think we were at 5.7% or something like that in the year before 2018.
Next year, we expect to increase CapEx to approximately SEK 7.5 billion in that order of magnitude, which is more normal levels for us. Of course, this is a couple of things within that CapEx. We have already announced the alternative fiber investment, which is part of that, and there is also quite a few, what we would define as strategic growth-related high-value investments that we also intend to do during 2020. Roughly about SEK 7.5 billion. I think the question on finance net, no significant change. We have a lower debt level as you have seen, and therefore, of course, as far as we can see at this point in time, we would see slightly lower costs, but this will, of course, depend on the interest rate levels as we go forward.
Finally our structural tax rate, roughly about 25%, perhaps is slightly lower than that. That's come down. We have previously historically talked about 25%-26%. The structural tax rate is perhaps more like 25% or slightly lower. This is of course the expectation then things may or may not happen in individual quarters, but roughly the structural is 25%.
Okay. Faham, your first question about consumer tissue pricing, negotiation of raw materials, and margins, difficult to predict. One thing I didn't mention maybe here in the last question was that supply-demand balance is slightly improving, I would say, both in Europe and quite balanced in China. We don't see at this point in time any announcements for new capacity in consumer tissue in Europe. As I said, in China, it seems to be fairly balanced because there's quite a lot of capacity being shut down in China. Actually, in many parts of the market now, after the restructuring we have done with Tissue Roadmap, we are balanced or even to some extent short, which is where we want to be, because then I think we can be even more focused on innovation and margin enhancement.
I didn't say that I foresee a progression in margins in the short term because we don't give any such forecasts. What I would like to say is that since we aim to reach our return on capital employed targets of over 15% also in the longer term, this requires, of course, consumer tissue being a big part of the business, nearly 40%, to be well over 13%. Otherwise, it doesn't add up. We can see that on the levels we have now, we're actually achieving over 15% return on capital employed. That's more of a kind of an ambition than to give any forecast for this year, which is of course not possible to do. I don't know if that answered your question, but trying to give some flavor for where we see the consumer tissue part of our business going.
Yep, that helps. Thank you.
Next question is from the line of Oskar Lindström. Thank you. Please ask your question.
Yes, good morning. I have three questions. The first one is, you're guiding for less restructurings in 2020 as part of the Tissue Roadmap, and I guess also the Cure or Kill programs. Those have had a negative impact on organic growth throughout 2018 and 2019. Does that mean that we should expect less drag on organic growth from closures of businesses or exits of businesses in 2020? That's my first question.
Yeah. Oskar, I can answer that real quick. I think this year we've talked a little bit about in the early part of the year, the first two quarters, we talked about the negative impact from materials sales, and of course, that drag, if we put it that way, is not a drag on margins, but drag on organic growth. Of course, that is not going to be there for next year. Then I think we have mentioned, which is much smaller, but nevertheless the open diaper in Russia, and that will be there for another couple of quarters, and then after that fade away. Short answer is yes, basically, will be slightly less drag. Not material, but slightly less.
All right. Second question is on personal care price increases, which you talk about now this morning, but you've also talked about it in previous quarters.
Could you maybe provide some more details about sort of the magnitude and the timing and perhaps also in which segments you foresee these price increases?
The area where we've been working with actually improvements quarter-over-quarter, mostly with this is in the Incontinence part of the business, and especially in healthcare, where margins were really depressed by following low materials a couple of years ago. As you know, only one-third of the volume is TENA every year. It takes a long time to regain pricing here. That's the Incontinence healthcare, which is a big part of Personal Care. In retail, it's going to be down to the competitive level. What's different this year is that I feel that our assortment based on the product launches we've done over the last year is very strong, which should make us more competitive than with less pricing pressure. Let's see where that leads. That's impossible to say today. That's an area where we are definitely focusing on pricing.
Medical prices aren't really changing that much. I think prices are at quite good level, and in baby, we have increased prices in some markets slightly recently, but don't expect any major changes. Actually mostly Incontinence in Femcare, we typically have a quite big pricing component already. I think we're quite happy with how that category is managed.
All right. Thank you very much. My final question is more of a clarification to understand the guidance that you're giving on consumer tissue. When you say low single-digit price declines, am I correct to understand that that is for Europe?
Yes.
Which is 60% of your business.
branded portion of Europe, which is roughly half of that.
No, this is for the entire European consumer tissue business.
Yeah, but-
Both branded and private label.
Okay. The private label side, on the branded side, it's most of your customers. On the private label side, well, it's not decided because it depends on when contracts come up for renegotiation. Is that the fair understanding?
In some cases, in private label, it's easier just to reopen negotiations again, kind of at any point in time. There's not a set term to those contracts in many cases.
Have you seen any opening of contracts on the private label side?
We have renegotiated also private label contracts to some extent, and that's kind of included in this Guidance where we stand at this point in time when it comes to consumer tissue pricing.
This concerns the pricing component of price mix.
Do you foresee pushing harder on improving the mix, or do you see that you have an ability to improve the mix?
in consumer tissue in 2020?
This is a constant push. It's a very important part of our long-term strategy to make consumer tissue a value-creating category for us and for our shareholders, which it hasn't been just a year ago or two years ago. That's a very strong focus to increase the branded part of our shares, and in that part, focus on the sub-segments that have the highest margins, and adding on top of that, innovations. That's a very clear strategy of ours since many years, and that we are seeing is paying off here, but gradually, of course. This takes time.
In the past, when you've had price declines, have you been able to offset those through mix improvements or?
Historically, the consumer tissue industry, especially in Europe, has not been good at managing quick reductions in pulp prices. I think everyone that's been involved in a couple of cycles has seen that. In this cycle, I already mentioned that supply and demand balance is a bit better than it has been previously. We have done a lot of restructuring. We have reduced our cost position. We have better mix. We have invested in our brands. I feel that we're in good shape to manage the current market situation in consumer tissue in Europe.
All right. Thank you very much.
Thank you.
Next question is from the line of Charles Eden. Thank you. Please ask your question.
Hi, good morning. My question is on Vinda specifically. Obviously very strong growth there through 2019, and it has been a story of very strong growth for several years. Just sort of thinking about how you see the competitive landscape in that market and the opportunity for further product expansion for Vinda in 2020, and whether it can continue to be a strong driver of the overall growth. You noted that there's not been any pricing rollback there yet, certainly increase in promotion, but is that likely to something that we'll see if pulp prices, as you say, meet the current market expectation for flattish for the first half or first few quarters of 2020? That's my first question. Thank you.
Okay. Yeah, again, I don't know about what will happen with pricing going forward. If you read Vinda's report, it's very clear that they have been very successful in improving their product mix in tissue. Actually, the Tempo brand, the Tork brand, is growing exceptionally well and with great margins. Also, the 4D Deco, which is the high-end premium toilet tissue that's now a high volume but also a premium product, continues to grow year-over-year. That's, of course, really helping them from a pricing position because the competitors don't offer these types of products. In addition, there's a very strong focus this year on the personal care categories, and there was good growth in the fourth quarter, both in Incontinence and FemCare in China, and a slight improvement also in our professional hygiene or personal care business in Vinda outside of China.
That's clearly a focus area for Vinda going forward. I think that from a competitive performance, Vinda improved market share with approximately 1% last year. It was primarily the second and third player that lost this market share, so doing really well also in the relative game.
Thank you. Then just one follow-up quickly, if I can. Just on consumer tissue in Europe, and I know you've had a lot of questions on it this morning, but is it too early to sort of see competitive responses? I know Essity market leader, probably price leader in the market. Are you seeing any competitive response, i.e., is low single digit looking comparable? Just any commentary you can give us in terms of-
No, I don't have any further comments really at this point in time.
Okay. Thank you.
Thanks.
Operator, I think we can take the last question, and if there are more question, you can follow up with Sandra and Johan in the investor relations team.
Will do, ma'am. Our last question is from the line of Karri Rinta. Thank you. Please ask your question.
We take another one.
Hello, Karri, you can now go ahead and ask your question. Okay, the next question is from the line of Iain Simpson. Thank you. Please ask your question.
Hello. Yeah, can you hear me?
Yes.
Yes.
Hello. Yep. I have a few questions around the consumer tissue business. Just one quick word on rationale behind the same. Is it because of passing on the RM benefits that you're seeing to your suppliers as well and competition, or is it something of competition induced that your competitors have done that before? What I know is Essity, the price better in the European context, at least. Maybe a quick clarification on that front.
Okay, quick clarification. Historically, the European market was quite commoditized and with also some overcapacity on average. We worked very hard over the years to get out of that and focusing more on our brands, on innovation and on making sure that at least we are not have an overcapacity. That has improved over the last number of years, and that's kind of why I would like to see a different dynamic this time around when we see lower raw mats.
Okay. Just another one. While the repricing frequency you mentioned is annual in terms of contracts going to negotiations, the frequency is annual in Europe, what's it like in other geographies?
It's not only annual, it's actually the longest contracts we have in Europe are annual. Many contracts are actually without term and can be renegotiated at any time, especially in private label. I don't know about Vinda actually. I think that's similar.
Okay. There could be a potential, if the raw materials do not exactly pan out like what you see today, there could be further pricing negotiations even in the European business.
There could always be, yes. That's not something that we know today.
Okay, perfect. Thank you very much.
Yes. Now we need to conclude this conference. Do you want to conclude it, Magnus?
Thank you, Joséphine. Strong quarter, strong year. I think we have a good momentum. Of course, there are always challenges and improvement areas, but we are working very hard on all those areas while keeping our long-term strategy to grow in the value-creating parts of the business. Thanks.
Thank you, and thank you for joining. Have a good day.