Earnings Call: Q2 2019

Jul 18, 2019

Head of Communications for Essity. Today, our President and CEO, Magnus Groot, will go through the highlights of the report, followed by a Q and A session where we also have our SIFO, Frederic Ruestep, joining. So with this, I hand over to you, Magnus. Thank you, Josephine, and good morning, everyone. On this first front page is a picture of our recent launch event of Librece V Comfort in China, and we have the ambition of becoming the number one e commerce brand in the premium towels segment, a big investment for the future where we are very excited about growing our Personal Care business in China going forward. Moving on to the numbers. We saw strong organic net sales growth with 3.9%, including lower mother reels sales in the quarter and an adjusted EBITA margin that increased with 30 basis points to 11.6%. And this came from better price mix and high volumes in all business areas. But this higher growth also comes with higher sales and marketing investments. And of course, the launch of Librece Viki is just one example of that. But still those investments are lower as a percent of sales, important to note. We continue to see strong contributions from cost savings. And something I'm sure we will discuss later is that we still have higher raw material and energy costs in this quarter, even though we expect that to reverse going forward and a significant negative impact from stock revaluation due to lower raw material prices. And I'm sure we'll get back to that. On a very positive note, we more than doubled our operating cash flow to SEK3.7 billion and we also had the highest earnings per share in a quarter with SEK3.24 that we have seen since Essity was founded a little bit over 2 years ago, which brings me to my next slide, which actually shows a time series. And the reason why we put this slide is that we have discussed now almost since the birth of Essity When will we see the turning point that the headwinds from raw materials decline and the benefits from price increases and cost savings and efficiency programs when will we see the impact. And based on this time series, I dare to say that we saw it now in the Q2 of 2019. Starting down in the left hand corner, you can see the organic net sales development and that for the last three quarters now, we have had growth above our long term target of 3% with a nice development there, 3.3%, 4.3% and now 3.9% in the quarter. So I think that's one indication. Another indication is that if you look down at the bottom to the right, adjusted EBITDA margin, that we increased the EBITA margin to 11.6%, which is actually the highest margin since the last quarter of 2017. So a turning point there also resulting in, if you look at the overall adjusted EBITDA, which came out at SEK3.7 billion, which is the highest adjusted EBITDA in absolute terms that we've seen since Essity was born. Getting back then to the 2 bridges that we always present, it's positive that we see that the organic net sales comes from a good mix of pricemix and volume, and we see improved pricemix and volume in all business areas. The adjusted EBITA bridge then looks a little bit different than we're used to. Very strong contributions from price mix and volume also to adjusted EBITDA. Still negative impact from raw material and energy, as I already mentioned, with an impact of almost negative impact of almost 1% in the quarter, but this will then change in the coming quarters. Cost savings COGS, this is where we are committed and planning to see annual savings of around SEK1 1,000,000,000 per year, so SEK175 1,000,000 in the second quarter, which is then a little bit lower if you average the SEK1 billion over 4 quarters. But we are very confident that we will be in the range of SEK1 billion by the year of the end, which means by the end of the year, which means that we will see expect to see higher cost savings in COGS in the second half of the year than in the first half of the year. Moving then to the cost savings program, we have a separate slide on that. That's developing according to plan. And then finally, the unusually high others, SEK709 1,000,000 negative, which consists of 3 parts of equal magnitude. The first one is higher sales and marketing costs, which is important for driving the growth in the company. Still, it's lower as a percentage of sales, but of course, growing at the rate that we've been growing now for 3 quarters, we need to fuel that with higher sales and marketing costs. The other big part, which accounts for about 1 third of the other NOK709 is stock revaluation. And stock revaluation is simply that at the end of each quarter, we value our stocks and compare to the stocks we had at the beginning of the quarter. And when you then compare that with the same difference last year, you arrive at a quite big number and this is because raw materials increased quite dramatically in the Q2 last year and are coming down throughout the end of Q2 this year. And I'm sure you have questions about that that we'll get back to later. And the third part then also accounting for about 1 third of this other line is a mix of different other components, and we're just mentioning a few here. Somewhat lower profitability in the pulp mill that we still have integrated in Mannheim due to lower pulp prices, higher distribution costs, which has been a theme now for a number of quarters and still some trade tariffs in the Q2, which actually now went away. So we will not see any negative trade tariffs that we know of anyway going forward, but we still had some impact there and then some other smaller other costs. And then finally, a positive impact from currency. So just to reiterate when it comes to the cost savings in COGS and the cost saving program, we're fully committed to achieving savings of around SEK 1,000,000,000 on COGS and to our cost savings program where we have a plan to have a run rate of SEK 900,000,000 at the end of the year and savings in the P and L this year of around CHF600,000,000. Raw material development and as we can see from this slide, it looks as if most of these lines are pointing down. This is very unpredictable. As you know, we expected pulp prices to come down a little bit in the middle of the year and then move up again. This is still the case, but the fall, especially in pulp prices, has been quicker and there's been a bigger fall than we expected. And now we expect that to last also for longer, even though most market reports still show an increase in pulp prices towards the end of the year. So in our usual prediction here for the next quarter, Q3 of this year, starting then with the market pulp, which is very relevant for Consumer Tissue, we expect lower pulp prices quarter 3 over last year's quarter 3 and sequentially significantly lower pulp prices. When it comes to paper recycling, which impacts professional hygiene, we expect lower prices quarter over last year's quarter and sequentially stable prices because they have already come down quite significantly. And finally then, oil based raw materials, which is the main cost driver together with fluff pulp for Personal Care, where we expect stable prices quarter over last year's quarter and sequentially slightly lower raw material prices. And when it comes to energy, we expect lower energy costs both and prices both sequentially and quarter of last year's quarter. So that's our expectations for quarter 3, so quite positive from that perspective and then who knows going forward. Some more detail about the additional cost savings program and the regular COGS savings. Starting with the regular COGS savings, SEK175,000,000 Those are the savings that we see from Tissue Roadmap, from ongoing operational efficiency improvements, material rationalization and sourcing savings. And they are a bit lumpy in the first half of the year. We've actually been working intensely with tissue roadmap activities and but also with some startups of machines in INCO and in Mexico, a tissue machine and so on. And all of this has resulted in slightly lower COGS savings in the first half of the year, but again, we expect that to improve in the second half. And the cost savings program very much according to plan, mostly impacting SG and A. And as I already mentioned, we expect to see the run rate of SEK900 1,000,000 that we have communicated by the end of the year. And already at the end of Q2, we have annualized run rate savings of around €690,000,000,000 so moving forward here. And the headcount reductions to date are about 7 44 positions out of 1,000. And as you can see to the right, this leads to a reduction of SG and A as a percent of sales, even though we are also investing in this area for growth. Innovation, of course, the heart of what we do and here are some examples. To the left, a complete relaunch of Tena in the healthcare part of our business. There's a new trademark. If you look at the TENNA brand there, it looks it's modernized, completely new packs, completely new products. And our ambition is to own the skin health territory in incontinence care. So we're very excited about this launch. Cutumed extending the assortment of our advanced wound care assortment. Librece, I think I already mentioned, the big launch that we did in the Q2 in China and some examples of more everyday innovations where we have upgraded our base assortment in tissue in Europe with additional layers, improved softness and some other features. Adding to that, to give you some flavor of what we're doing in the business and these are just some examples that we're quite proud of, starting out with the great growth we're seeing quarter after quarter after quarter in fem care, very much driven by innovation, but also from great advertising actually. And we won 13 Lions at the Cannes International Advertising Festival, which is the big annual event for advertisers. This means not only that our advertising is great, but also we can actually attract the best marketing teams to work for Essity going forward. Another achievement in the quarter is that we won a contract for the Changi Airport in Singapore, which means not only that they will install sensor enabled dispensers in this new airport all over, but it's also then 1,000 dispensers in one deal, which is a lot of dispenser and of course a lot of paper to be filled and refilled in those. And it shows the benefit of having these very advanced products that we are continuously developing now in professional hygiene. And finally, to the right, an example of how we're working here in medical with a compression stocking for a little girl that needs this because she has a heart condition and how we are tailor making these products for every size and also every design. And you can see the pink lacing there and some other features that, of course, is very important to make these products more attractive. So just some examples of how we are improving well-being every day in FAD that we're very proud of. Moving over to the 3 specific business areas. Organic net sales in Personal Care increased with 3 0.1%, with most of that coming from emerging markets, 7.8% and mature markets, 0.6%. Percent. We saw high volumes, higher prices and cost savings in Personal Care. But this is actually the business area where we continue to see significant raw material and energy headwinds up to 190 basis points. And this is, of course, fluff pulp. It's oil based material, but it's also negative currency impacts. In this area, as I already mentioned a number of times, we have invested in higher growth, but lower as a percentage of sales. This is also a business area we've seen quite significantly higher distribution costs in the quarter. It's very important that we deliver on time and according to our agreed service levels with our customers and this is leading to higher distribution costs. Looking down at the bottom right hand corner by product segment, you can see that incontinence product is having another great growth quarter, 5.5%, growing in most areas. Medical solution was weak, minus 2.2%. There are some specific reasons. We are still working on the turnaround in the U. S. This will take another couple of quarters. We also had to some extent tough comps when the Q2 last year was the strongest of the year and we also had fewer invoicing days. We typically don't talk about invoicing days in Essity, but actually for our medical business it has a big impact and we had one less invoicing day this year than the Q2 last year. Baby Care, flat. We're focusing very much on margin improvements. I think that's okay. And then continued excellent growth in Family Care, both in Latin America and in Europe, so really continuing to develop in an excellent way. Moving over then to Consumer Tissue, where we also saw the best organic net sales in the quarter, 5.7 percent with volume accounting for 2.7% coming very much from emerging markets and price mix coming from all parts of the business, but primarily Europe and mature markets. Again, we have to remember this is the last quarter, but we still have a quite negative impact from closure of mother oil capacity. The negative impact this quarter was 70 basis points. But overall, a very good development, higher prices, higher volumes, better mix, stable raw materials, which will then move to lower raw materials in the next quarter and cost savings. And as you can see in the upper right hand corner, an improvement with 160 basis points of margin here compared to a year ago, so big improvements. This scenario where we have significant negative impact from stock revaluation due to lower raw material costs and higher energy costs we still saw in the quarter. When it comes to raw materials and pricing, we have done all the price increases that we plan to do in wave 2. So that's done and according to plan. During the quarter, raw materials have moved down faster and more significantly than expected. So looking forward, we are happy to stabilize pricing in the market for the next couple of quarters in preparation for the annual price negotiations, while we follow the development of the pulp prices. And how we move prices going forward will very much depend then on where pulp prices are a quarter or 2 from now. But right now, we're very, very happy with what we have achieved in price increases and of course with the development of pulp prices. Moving to the bottom right hand corner. Western Europe, which is most of our mature markets, had a slight growth, which is then mostly price, some mix, while emerging markets, we saw actually fantastic growth everywhere, 15% in Asia, 12% in Russia, 10% in LATAM. So and this comes from pricemix and volume, very much volume also. Finally, professional hygiene with organic net sales increasing 2.1% coming from both volume and price mix. The highlight this quarter in Professional Hygiene is actually that North America turned to growth and had an accelerating growth throughout the quarter with both higher volumes, but also the other improvements in prices and mix and cost savings. Another business there where we have a significant negative impact from stock revaluation. We saw higher energy costs in the quarter, but actually slightly declining raw material costs already in this quarter. And when it comes to the adjusted EBITA margin, which is actually down 80 basis points from 14.1% to 13.3% year over year, this is mostly due to stock revaluation has the biggest impact here. And down at the right hand corner, you can see again that most of the growth is coming from emerging markets with price mix and positive volumes. While in mature market, it's all coming from price and mix actually. With some variations in North America we had positive volumes as well. We work hard to stay at the forefront when it comes to contributing to a sustainable and circular society. And as you've seen, we've launched additional sustainability targets, especially for packaging and with a focus on plastics. And if you have any questions, announced an investment announced an investment in sustainable alternative fiber technology in Mannheim, SEK 400,000,000. So to summarize, strong organic net sales with 3.9% and an increased adjusted EBITA margin to 11.6%. Price increases have had a positive impact on both growth and profitability. Our investments in sales and marketing are contributing to higher growth. We see a less negative impact from raw material prices in the quarter, even though they're still negative. Our efficiency efforts are according to our plans, and we continue to focus on innovations to strengthen our offering and improving our mix for the future. Thank you for listening. Thank you. First question comes from the line of Martin Melbaj. Please ask your question. Yes, good morning. You stated that stock revaluations were like $230,000,000 in Q2. What will that number be like in Q3 given that the pulp prices continue down? I hand over to Fredrik, please. Yes. It will remain on a high level. We don't give an exact number, but it will remain on a high level. This is basically a negative for this quarter in Q2, but of course it was also a corresponding positive in Q2 of last year as pulp prices and other material costs increased at that time. And if we look at Q3, we can see that pulp prices have continued down and we also saw in Q3 of last year that pulp prices went up at the time. So we have a similar situation exactly the amount will depend on the market development of pulp and other materials, but it will remain on a high level. Okay. And then you said tissue prices, they will be stable in Q3 versus Q2, right? We have most of the price increases in the Q2. We continue in Europe, we're through Wave 2. We will continue as we see fit to adjust prices and increase prices in other markets depending then on inflation and specific cost developments in those markets. So there could be some more price increases. But the big Wave 2 initiative, primarily in Europe, has come to an end, and we're very happy with the outcome. It's according to our plans. Next question comes from the line of Faham Baig. Please ask your question. Hi, guys. Thanks for the question. I'm going to come back to the other line and stock revaluation. If we could get a bit more clarity on this, it would be helpful because I think at a Q1 stage, the similar number was €350,000,000 and that was seen as abnormally high levels and for it to fall from then. But this time around, we're seeing over €700,000,000 Now if the stock revaluation is around €230,000,000 I'm just trying to understand the delta from the €350,000,000 to €700,000,000 So let's say the stock revaluation, I don't know, €50,000,000 to €80,000,000 higher than Q1. Then what explains the difference in the other line versus Q1? That's my first question. And secondly, going back to Consumer Tissue in developed markets, which is largely Western Europe. Number 1, the pricing decreased sequentially for me was slightly more than I thought it should have been. Is that largely due to you having to pull back on some of the prices taken in Q1? Or is there something else? Could you just go into a bit more detail there, please? Thanks. Yes, Fahim, maybe I can start with the stock revaluation. I guess you'll come back to the price issue, Magnus. But first of all, it's kind of complicated when you call a line other because it's really not other. It's everything else than what we have in volume and price and mix and raw material and savings. So it's everything that's in there. So other is just our way of lumping a lot of stuff together. So of course the analysis is much deeper, which is when we look at this in normal circumstances, as I said, we're going to have a when we look at this in normal circumstances as we grow and as we pick up more sales and marketing expense, you'll see exactly that happening in coming into the line other. One other very typical line that you also will see being related to the other line and also to growth is when we for instance invest into a new plant as an example. You build a plant and you acquire cost to do exactly that to run that plant, but you don't initially have the volume. Of course, that difference when we expand capacity as we for instance have done in incontinence where we most commonly do also in China, you would see an under absorption coming in that line. These are just examples. And then we have this line, stock revaluation. And you can say stock revaluation is in to the absolute majority is, of course, material. So it's we could actually put that stock revaluation to material. But the reason we separated Faham is basically that this is forward looking. So what we do, we purchase material. And as raw material prices either increase or decrease that will basically be revalued and we do that at the end of the quarter. So inherently, if you have a very negative, as we have in this case, stock revaluation in a specific quarter, that is actually you could argue positive for the future because that basically suggests that you have a lower input cost factor. So with that background, so it's basically a lot of different things. And then you may have other things like in this particular case, because also of falling raw material prices, we have a lower result from the pulp mill. These are just examples, as I mentioned. We have also Magnus mentioned I think tariffs and other things. So it is complicated because there are of course a lot of moving parts all of them into other. So let me just allude to exactly where that difference comes from. First of all, we do spend more on sales and marketing than we anticipated at the end of Q1. That's clear. And I think we have talked a little bit about the very, very low underlying costs that we had in Q4 of last year and Q1. So of course, the cost saving program is part of the story, but we also took costs down for things like consultants and traveling and all sorts of things. They're still on low level, but as we said in Q1 and Q4, we had a very, very sharp decrease and we're back now more to normalized levels. As we said, it would be difficult to sustain that kind of level. So that's part of the story more going back to normal. And in addition, as Magnus alluded to, we have spent some additional funds relating to growth primarily in Asia and in LatAm. And you can see both the growth for both of these areas being very, very high. So this is a big, big part. Stock revaluation to your point is a little bit higher or a lot higher actually, a lot higher than we saw in Q1. And of course, this is inherently just the same thing. We have an accelerating decline of raw material and correspondingly last year. Now in a world where raw material is absolutely flat, you will see 0 there. So once again, this is moving parts depending on the development. And then the other parts being tariffs and this is predominantly between U. S. And Canada that we have and that will go away in coming quarters. But we and we have some other tariffs that's on that line, but largely it's something that will go away. And then the pulp mill and some other issues. So these are perfectly explainable. It's just very difficult to explain every single line. So we have chosen to put it in others and just make examples like this. So it's not our normal and it's not bad performance. It's just a result of the things we actively do plus external things like raw material changes and distribution costs. So that was a long answer, Faham, but it's good perhaps to explain it. Okay. So that's helpful. Can I just have two follow ups on that, please? Number 1, I know historically we've spoken about rebates and how it's helped the other line. Are we now seeing a negative impact from that as pulp prices fall down? First question. And second follow-up would be, it becomes because there are so many moving parts in there, it becomes very difficult to forecast going forward. Are you able to give us any help how we think how we should think about this particular line going into the second half? Yes, I can try and do that. First of all, rebates is typically not in other. That's in the cost savings in COGS. So it's impacting. And as we've said in previous quarters, it's a little bit on lower levels and that remains the case. So of course that's impacting but not this other line. When you look at the stock revaluations or if you take the other line in general, I alluded to before, we expect sales marketing costs and growth to continue to be high. We expect stock revaluation to also be high and the pulp mill, etcetera. It's really difficult to forecast exactly, but it will remain on a high level given what we now can estimate relating to the raw material and distribution cost. Tariffs will go away to some extent. So they're moving parts. Okay. Should I continue with consumer tissue pricing, which was your second question? And I guess the difference compared to what we said and expected in the Q1 and also after the Q4 is that mostly pulp prices actually have moved, but also to some extent the recycled fiber price have moved down quicker than we had expected, which has this big impact on other through stock revaluation. Of course, the very positive part is that over time, we will have lower costs, which helps our P and L. So I mean, it's negative on the other line, but overall, it's positive. And it's an indicator of a positive development going forward. And this also is important for our pricing strategy going forward. And as I mentioned, we are very happy with the pricing that we have achieved in Western Europe and it's completely according to plan. And if you look back 1.5 years, 2 years, we've improved prices actually with over 5%. And we still have slightly higher pulp prices in the Q2, but they are moving down. And in some cases, we actually did 3 price increases in a year, which also has led to higher shelf prices all through Europe, the price increases that have been put in place. So we see higher shelf prices on our products in tissue all over Europe compared to a year ago. So that's really having an impact. But now with the faster than expected decline in pulp prices, we just have to see where this ends up. But of course, that decline is positive for our margin going forward. And then there might be, I don't know, a mix issue here in your expectations because a lot of the growth comes from emerging markets where we, on average, have slightly lower margins than in mature markets. So of course, that impacts the margin development in Consumer Tissue to some extent. So I hope that answers your question. Thanks. Next question comes from the line of Ian Simpson. Two questions, if I may. Firstly, on pricing. Have you taken any incremental pricing thus far this year? Or should we expect your pricing to go to 0 by year end as you annualize last year's pricing? And then secondly, on that step up in sales and marketing costs, you flagged that 4Q and 1Q had very low sales and marketing expenditure. Is your sales and marketing now at a level where you feel that you're supporting your brands adequately? Or could we perhaps expect a further step up in coming quarters? Thank you. So the first question, we have continued to raise prices in the first half of this year. So there will be some positive impact also going forward. So we've actually finalized Wave 2 during the third quarter or during the Q2, excuse me. And then when it comes to SG and A costs, it's they will follow, of course, our sales growth to some extent. What's important for us is that they grow less than that we have a scale benefit here that they grow less as a percentage of sales. Exactly where that's going to be, I think it's difficult to give an estimate. I don't know, Frederic, if you have anything to add there. No, not really. I think it's More questions. Next question comes from the line of Linus Larsson. Please ask your question. Yes, thank you very much. First follow-up question on the raw material cost inflation, which was €166,000,000 year on year in the current quarter. How much of that was FX? Of the total number, you talk for the company as such, the whole company? As a whole, exactly raw material cost inflation. And I understand that part of it is the underlying local price cost decline and part of it is changes in FX. No. It's about SEK130 1,000,000 is the currency impact roughly. So that's a negative? Yes. Excellent. €130,000,000 of the €166,000,000. And then I wonder on the stock revaluation, I know we spent a lot of time on it already and you're saying SEK230,000,000. Would it be possible to split that between the divisions roughly? Yes. I don't think we have done have we done that. Yes. 1 third Yes. But have we actually communicated that? I'm checking here just so we don't give It's done 1 third roughly. Yes, but you're talking about for the different divisions, right? Right, right, right, right. But the big impact is they are in consumer cases. Yes, of course. I mean because this is largely pulp. You have it in every area. So we also have it in Personal Care. But of course there's as we saw in Magnus' presentation, professional hygiene is very much impacted by it. And of course, consumer tissue is the tissue is the same because this is largely pulp related, but we also have it in personal care. But the absolute predominant is in consumer tissue and professional hygiene. One would maybe think that Consumer Tissue was most affected? Yes, of course. Okay. And then also in the other cost context, distribution costs, how do you see that develop going forward? What's the market situation when it comes to distribution, if you like? Yes. I think it's we've had a higher distribution cost now for some time and this is not due to our own actions. In fact, if you look the underneath, we actually have good development in the sense that we are systemizing our approach here and actually saving. So this is largely market driven. And of course, we customers, so to our customers. So we work with long term contracts. So if you look at the recent development in the spot market, you will actually see distribution costs having actually come down a little bit. And we are not able to benefit from that. But over time, of course, as we see, if this continues in terms of distribution, our distribution development should be be actually positive coming both from market related issues and from our own. But of course, we have to wait for that to come in more to the contracts. So it's difficult to say, but the increases you've seen in distribution overall is related more to the past than year on year, so to speak, than sequential. Great. That's very helpful. Is there a quarter that you would maybe pinpoint as the quarter when you might expect year on year easing on distribution costs? I think it's difficult to do that, Linus. It's a good question, but I think it's difficult because it will, of course, remain on whatever contract discussions we have with our suppliers in this area and it's difficult to pinpoint. But of course, as you've seen these distribution costs being high in a couple of quarters, you can see that it's still some time left. Great. Thank you very much. Next question comes from the line of John Ennis. Please ask your question. Hello, everyone. A couple from me. And sorry for coming back on the stock revaluation side of things. But I just wondered if you could tell us how much of a positive this was in 3Q and 4Q last year? Because I guess our starting point assumption should be that this fully reverses and more so I suppose. And then if you could give us a rough €1,000,000 offset, that would be really helpful in helping us forecast that going forward. And then the second question is on Medical Solutions. So the growth clearly deteriorated quite significantly on a sequential basis. I just wondered if you could help us bridge that slowdown from plus 3% in 1Q to minus 2% in sorry, plus 3% in 1Q to minus 2% in 2Q? That would be really helpful. Thank you. Yes. John, thanks for the questions. Let me just start with the first one last year, this year. It's this is kind of tricky because we last year, of course, the stock revaluation impact was the difference between Q1 and Q2, right? And this year is between Q1 and Q2 of 2019. And the stock revaluation number that you see the €230,000,000 that has been alluded to in this call is roughly the change of those 2. So if you want to separate those between the 2 years, it was you can say more positive last year and slightly less negative this year if you put it. But of course the combination of those makes up that number. The sensitivity is really, really difficult to say and we don't provide that number. It depends a little bit on the nature of the stock where we buy it, when we buy it during the quarter and the development of the stock price within that given quarter. So of course, it's really, really difficult to say, but we will have a high stock revaluation also in Q3. I think that's safe to say given the fact that we know the raw material development during Q2, Q3 last year. And we can see that that was actually of course positive that revaluation. And we can guess, I think it's fair to say that pulp prices will be lower in Q3. So we will have that negative number and it will be it's difficult to say exactly, but it Okay Okay. Medical Solutions, so the difference has much to do with the comps that we had tougher comparables both in the U. S, especially here now in the Q2 and also when it comes to invoicing days, where, of course, one less invoicing day, so a little more than that has a quite significant impact on sales. So those 2 combined and the tougher comps regarding the U. S. Is partly related to the fact that we are making big changes. And I think we're starting to see some benefits there, but it will take another couple of quarters before we're through that. So that's the explanation regarding Medical Solutions. I guess just as a quick follow-up on Medical. Is there a level of growth you would need that business to get to on a sustainable basis before you would consider more M and A in that particular area? We believe that we should achieve a run rate growth of 3% and that we will get there over time. And when it comes to M and A, that's not related to the growth of Medical specifically in 1 quarter or the other. It has to do with the attractiveness of that business and the pricing, of course, and the synergies that potentially that would have with so if it would support our existing medical business, of course, we would still do it. But again, we expect to have better growth in Medical going forward than what we've seen here in this last quarter. Okay. Thank you. Next question comes from the line of Oscar Lindstrom. Please ask your question. Yes, good morning. I have a question around the distribution cost again. And I'm wondering if there's a structural element to distribution cost inflation for you in that most of your volume growth is happening in emerging markets and one can speculate that the distribution cost or share of cost is higher there than in mature markets. Is that the case and that we should sort of expect a permanent or structural increase in distribution costs for you going forward? No, we don't really see any structural difference there. This is quite specific costs that are, to a large extent related actually to Europe and North America where we've over a long time seen increasing distribution costs due to a lack of transport capacity, I think we've spoken about that, and some other issues like a lack of capacity in the U. S. And in France specifically and some difficulties also actually in general moving freight in France during downrests and so on and so forth. But again, as Frederic mentioned, what we're seeing as a leading indicator is now that the spot prices are coming down on distribution, which indicates that over time also our fixed contract costs will come down following that. So no, I'm not concerned about the structurally higher distribution cost. My second question is also around Medical Solutions and the weaker performance there. Could you be a little bit more specific about exactly what is it that's being problematic? Is it only a certain geography or a segment of the market? And then also if the problems that you're experiencing now, is that something which impacts your to an extent your interest in this segment? Or is it more of a temporary issue? No, it's not. It's not at all impacting our interest in this segment. And most geographies and businesses are doing quite well and according to our plans. And we've had areas where we've been making changes and improving performance throughout the last 2 years. And now lastly, and maybe that's something we should have done in hindsight earlier, we have turned to the U. S. Where we actually hadn't integrated the business because it was doing okay, but not fantastic for the 1st 1 or 2 years. And since we were also working with a turnaround over incontinence care business, we decided not to integrate them. And now that we took that decision 6 months ago, we can see that there are huge improvement areas in the U. S. And we're starting to see some benefits and I think we know exactly what we need to do. But this is very much based on our own performance and nothing else. But of course, we continue to have our brands are just as strong, Our offering is just as strong. And we think that it's very much go to market related. And we think we are I'm convinced that we are fixing this now in the next couple of quarters. So very much related to the U. S. And to go to market. All right. And the negative organic growth that you had in this quarter, especially compared to what you had in the previous quarter, is that a consequence of the actions that you're now taking, like you're ending certain sales contracts and moving out of certain contracts, etcetera? Or is it No, we're not ending contracts. It's more has to do with maybe handling stock situation, distributor stock levels and also integrating the organization. So is that number, the minus 2.2 in this quarter, is that something that should get worse before it gets better or? No, we expect that that should not get worse. We our plan is, of course, to grow in medical and that this is a one time impact even though I believe that our U. S. Business will actually weigh on the overall growth for a couple of more quarters going forward. All right. Thank you very much. Next question comes from the line of Charles Eden. Please ask your question. Good morning, Magnus. Good morning, Frederic. Two questions for me, please. Firstly, just looking at Personal Care and the pricing trajectory there, is the pricing you sort of see in Q2 of plus 0.9%. Is that sort of what we could expect for the balance of the year given your commentary on further price increases given the raw material move? And then my second question is specifically on Baby Care. And obviously, it's marginally positive organic sales growth in the quarter. Could you help us understand the breakdown there between both price mix and volume and then also the development between developing and emerging markets and whether the trends are broadly similar to what you reported in Q1? Thank you. Felix, do you want to start with the pricing? On the Baby Care? On Personal Care in general is first and then Baby Care. Yes. I can start specifically because I guess they're both related. If you take that division, you asked about mature markets and emerging markets. If you take baby care in mature markets, the volumes were slightly higher, but a little bit negative price and mix or rather actually price was still negative in the baby care side if you look at the mature markets. If you take the emerging markets, we had a negative volume development in for Baby and slightly higher price and mix. So that's the split between those 2 and that of course adds up to the total of slightly positive organic growth. And of course, needless to say, part of our Baby business is related to a couple of areas that we've talked about before. 1, of course, being Turkey that we have now exited and closed here in sold and closed in July. So that's part of that development in emerging market. And then personal care, I missed the question actually, Magnus, so maybe you can take that. Pricing was up in the quarter. And my understanding was that you wanted a breakdown of pricing. Sorry, maybe I can clarify. I'm just sort of asking whether your commentary around the raw material price development, specifically you were talking, I think, about consumer tissue at the time, but whether you were expected to take any further pricing in Personal Care this year given the raw material development? Absolutely. So and that's a good question because we don't talk enough about that, but we're working to increase prices both in Continence Care and in Fem Care. So in Baby, as we just discussed, it's always challenging, but and we're also relaunching in some countries in Baby Care. I'll just add to what Fredrik already said, but we're definitely focusing on increasing prices to compensate for raw materials in the other Personal Care categories. Perfect. Thank you. Next question comes from the line of Sannath Sudarsen. Please ask your question. Good morning, Frederic. Good morning, Magnus. Just one quick question from me. More in relation to the industry behavior or industry participants' behavior in terms of pricing and their profitability levels in Consumer Tissue, How have you seen that evolve over the last two quarters? And what do you expect this behavior to be more rational, more profitable or driven by more pricing? We've seen a very strong price increase momentum, specifically in Europe over the last year. And as I mentioned, we've been able to raise prices 3 times in a year in some cases. So that's been very encouraging. And right now, I think there's there will be a little bit of a lull when it comes to price negotiations because pulp prices are continuing down at a faster rate than expected and because annual negotiations are coming up in a quarter or so. So I expect a stable price development on Consumer Tissue specifically. But as always and as we just discussed here in the previous questions, we are looking at improving our margins in many areas in Professional Hygiene, in Personal Care, especially in emerging markets where you have the big fluctuations also in currencies and so on. So it's still a strong it's still a strong focus for us, but the big Wave 2 effort in Europe is done with a good result. Sorry, Magnus. I was just trying to understand from the other participants' behavior. Have they been more price rational? Are they now profitable because there was a stress on profitability from them, from their perspective? Are they now in a position to maybe start cutting prices ahead of competition or ahead of you guys maybe? So just wanted to understand your perspective about the other participants, not SITs. Yes. And that's, of course, then partly just my speculations. And that's why what I can refer to is that we've had strong price momentum in the last year, which means that all major participants are equally, of course, or equally, but are all interested or asking for price increases. So I mean, that's something that we've seen very clearly in the last year, which then indicates that, I guess, that most players are quite rational because, as you know, we think that believe that many of our competitors, especially in Consumer Tissue, have about half the margins we have. So when we were at all time low in Consumer Tissue here a year ago or 3 quarters ago, many of them must have been in the red or at best breaking even. So I guess that's an indication of rational behavior that everybody needs price increases to improve their margins and their profitability. Next question comes from the line of Ian Simpson. Please ask your question. Thank you very much for allowing me a follow-up. Within incontinence care, I just wondered if you could talk separately about how both the retail and the institutional channel were doing. And then just to come back to Medical Solutions, That business has perhaps not performed as well as you might have liked it to have done when you bought it. I appreciate it's early days, you're kind of bedding it in and all that. But I just wondered if you could perhaps give some color on why Medical Solutions has perhaps been slightly slower to start performing than you might have liked? Thank you. Okay. Good question. So starting with incontinence care, we have seen a very good development in health care overall. So that's really growing and gaining market share both in Europe and in North America. In retail, we're seeing a positive development in most emerging markets, very good strong development, including Latin America, which is our biggest emerging market for incontinence care. In Europe, we are growing, stabilizing market shares. As you know, since our competitors launched 4 or 5 years ago, we've seen declining market shares. They are now stabilizing, and we have high hopes for the recent launches that we've done that this will be a turning point also from that perspective in Inco Retail in Europe. In North America, we've had slightly lower sales in the quarter, which we are addressing. So margins are okay in North America retail, but we have slightly lower sales. So but that's, of course, a smaller part of our business. So most of our Inco business is developing really well both when it comes to volume, price and mix. 2nd quarter, medical. Yes, when it comes to margins, we are quite happy. So they are on the level we expected. In the integration work that we have moved forward with, we have identified issues over the quarters. And I've tried to be as specific as possible, so as transparent as possible with those issues where we were doing some restructuring in Latin America initially, then in Asia Pacific. That's now doing quite well. We were really working to improve the growth in Europe, and that's developing step by step. And then there was maybe an issue that we caught too late in North America with how that business was operating, and we're all over that now. And maybe that's something we could have caught earlier, but that's something that we're very convinced will improve. We're number 1 in compression. We have a very nicely growing small Advanced Wound Care business in the U. S. And we see huge opportunities for those businesses. But that's something that we caught now and which we maybe hadn't expected. So that's why growth hasn't been as expected. There's nothing new when it comes to the underlying market growth or our market positions really. It's all mostly based on our internal performance and improvements that we need to make. So do we have any last questions before we conclude this press conference? Your next question comes from the line of Guillaume Delmas. Please ask your question. Good morning, gentlemen. Three questions for me. The first one is on your Professional Hygiene business. I think, Magnus, in your prepared remarks, you mentioned that the U. S. Was back to positive growth territory, so that's good news. Yet if I look at your organic sales growth in mature markets for this division, there is a sequential slowdown in Q2 to a very modest 0.5% organic sales growth. So on this, my question is what happened in Western Europe? Why has growth deteriorated there? And what could be the outlook for Professional Hygiene in Western Europe for the second half of the year? No, that's absolutely the right analysis and conclusion that we had a declining growth in Western Europe in Professional Hygiene after a number of quarters of incredible growth with the market share gains. So I don't see this as a concern at this point in time. It's just something that happens certain quarters. We still have great momentum and a very, very good setup in Europe. So this was a temporary decline, which of course doesn't mean that we can continue growing market share forever at very high rates. So maybe we will see a slightly slower growth in Europe, who knows, eventually. But on the other hand, we have actually gained a number of new contracts in North America, and we will see a gradual improvement also going forward in North America. So I think that we'll going forward, we should see more of a balance maybe between our 2 big mature markets, North America and Western Europe, but still a positive development. Okay. And my second question is actually relatively similar, but this time on Consumer Tissue, because despite the fact that mother reels had a slightly less negative impact on your Q2 performance relative to Q1, There was also a slowdown in mature markets in the second quarter, I mean, to 0.8%. Again, any granularity you can give on your performance in Western Europe for Consumer T shirt? And as to why, despite Model Yield being less of a drag, we've seen a slowdown? Is it more volume, pricemix led? This is very much volume, and it's a consequence of the ongoing price negotiations also during the second quarter when, as you know, typically during negotiations, there's a negative impact on volumes as the retailers that we negotiate with tend to put pressure on us by delisting or boycotting volumes for a certain period of time. And also something that we've been been willing to accept because the price the Wave 2 price increase effort has been so important for us. But of course, going forward, we will need to find a good balance there to get back to volume growth because that's important for our COGS savings and cost development that we can utilize the capacity that we're freeing up in our remaining assets as they become more efficient with higher machine efficiency and fewer stops and so on. So also an area where we are looking to find a good balance of the price mix and volume going forward. My very last question is, if I go back to your Q1 conference call 3 months ago, I think at the time, you were talking about significantly higher raw material costs for Consumer Tissue in Q2. If I remember, well, I think you were also talking about trying to bring down this other line, which was unusually high in Q1. Clearly, Q2 didn't play out, at least for these 2 moving parts, the way you were expecting it. So my question is why such discrepancy between the soft guidance you provided 3 months ago and the way Q2 actually played out? Jurgen, you have a great memory apparently and you're absolutely right. And clearly, I think it has been more difficult for us to forecast raw material development. And of course, both stock revaluation and raw material is very, very much related to the input cost line. So you can derive from exactly these two comments that raw material has come down to a larger extent than we did expect at the time of the call. That's clearly the case. I think the other thing we and this is a decision that we have taken to spend more in terms of marketing and sales costs for the very strong growth that we have. So it's basically related to these two factors. But we did underestimate the decline of raw material. That's the biggest impact. And do you feel you've got a higher level of visibility for Q3? Or there is still a great level of volatility at this stage? I mean, in a world where raw material is absolutely flat then of course we don't have we got 0 on both those lines, right? So unfortunately it's even though we would like to have the crystal ball, it's super difficult to estimate. We don't. We at the early part of or the latter part of last year, we our guess would have been that raw material in terms of we talk at least pub costs would have continued to move up. And of course, we've seen a very different development since then. So clearly, it has not become exactly as we have we thought. And the visibility, we believe we do our best to estimate that. But of course, it's very, very difficult. But with all those caveats, we do see significantly lower market pulp prices in the 3rd quarter sequentially. And we are already a good way into July and there are no indications that, that would change and even lower costs in China actually for pulp than we could have ever expected in the Q1. So as Frederic says, big uncertainties and huge volatility at this point in time. But still for the Q3 that we're already into, we see significantly lower pulp prices. And therefore, we can also conclude that stock value adjustment will be correspondingly high or high exactly in accordance with that. Next question comes from the line of John Annis. Please ask your question. Thank you for the quick follow-up. I just wondered and again, sorry for coming back to this, but can you just give us the impact from stock revaluations in 3Q 2018, 4Q 2018 and then 1Q 2019 relative to the CHF230,000,000 impact you gave for this quarter? That would be super helpful. Thank you. We don't do that, John. We I alluded to it before that this is just kind of explaining the change between 2 quarters, right? So and as I alluded to before, the positive development that we had in Q2 of 2018 was slightly bigger than the negative impact we have in 2013. So we have got a big negative in 2019 and we got a positive in 2018. And that number of the $230,000,000 that's basically the adding those 2 up. So that positive was slightly bigger than the negative, but of course, it's a combination of those 2. And Frederic, of course and John, of course, this is an issue for the modeling and the higher also stock revaluation than we had expected due to these fluctuations in pulp prices. But just to remember that overall, the pulp price development is a positive for us, of course, going forward. So it's a good thing and because it hits our margins with the 45 days delay that you're well aware of. So of course, even though it impacts negatively on this other line, it's still a leading indicator of where pulp prices are moving. Okay. Thanks very much. Next question comes from the line of Zara Simpson. Please ask your question. Hi, Laura, your line is now open. Hello. It's Selene Panuti from JPMorgan. Just a few follow-up on the raw material side. Last year, your raw med bid was, if I remember correctly, more than SEK 4,500,000,000. Could you say how much was the corresponding revaluation of stock last year to have an idea of the net impact? And also, I think earlier this year, you said that you were expecting for the full year that the raw material build would be less than half of what it was last year. Now having seen what you've seen in H1 and with your views that the market the pulp prices have come down, what do you think the number would be for the year? That's my first question. And then lastly, the second one is on Consumer Tissue. I understand that Wave 2 is ongoing. However, sequentially, we've seen pricing decelerating in Consumer Tissue. Could you explain why was that? Yes. Let me start with perhaps the first question. Once again, the stock value adjustments that we talked about in the bridge here is just a difference between last year and this year. So as raw material prices increased last year, it was positive all the time. Now I think we've said a couple of different in couple of different occasions that we are just actually adjusting the value of the inventory at the end of the quarter reflecting the movement of the price. So that's it's just kind of resetting the raw material to the incumbent levels. So inherently, it's just reflecting the fact that the margin is that much better as we go forward. But it was very negative this year. It was positive last year. We don't give a forecast Celine, on the full impact of raw material for the year. We normally just give it for the next quarter. We do it sequentially and year on year, so to speak. We give a forecast there. And I think the number that you were alluding to was just a calculation kind of if numbers were staying where they were at the end of the year, I think that would have been the number. So we normally just provide 1 quarter ahead. And this has to do with the fact that we don't have that much transparency more than that quarter. Okay. 2nd question. I'm trying to understand last year. Could you give us the net impact of your raw mat plus revaluation? What was it in 2018? No. I mean, we the as I mentioned, Celine, I can't do that because it's this is a change between 2 years. So we have a reset of the value each quarter on the material. So I cannot actually give you that number. This is a change between 2 years. So the bridge is a positive and a negative. And as I mentioned, it's slightly it was slightly bigger last year. So if you have the €230,000,000 a bit more than half of that number was a positive last year and then the rest is negative this year. So it was a significant number also last year. But we don't have the we have not given the exact numbers. Okay. And then does it I mean, did you have an impact as well from holding a bit more of room inventory than you would have because you thought that the market would continue to go up? No. And does this No. Typically, there just generally Celine we have a fairly this is actually the absolute majority of this impact is related to finished goods not actually pulp stock. So it's the pulp component within the finished goods that we have. That's actually the majority of it. Normally our pulp stock is quite low or we try to keep it as low as possible. There are a couple of exceptions. Of course we have long transportation or lead times for if you have long distances like Asia as an example. But normally this is fairly short lead time. So this has nothing to do with inherent pulp hedging or adjusting inventories. Okay. Over to your second question is about Consumer tissue pricing. Exactly, consumer tissue. And Wave 2 is done, so according to plan and with the results we had expected. If pulp prices had remained on very, very high historic levels, of course, we would have immediately started a wave 3. This is not what we're seeing. We're seeing that we have increased prices now in a number of waves to an extent that we see increasing shelf prices and market prices in general. And now pulp prices are coming down at a more rapid rate and to a higher extent than we had expected. So right now, we are satisfied with the price increases achieved. And what happens then is that, of course, quarter over quarter, we will have tougher comps as the price increases that we did throughout the last year move into the comps. But sequentially, what was the delta that the pricing slowdown in Q2 versus Q1? Yes. That's tougher comps. We made a lot of price increases already last year. Okay. Then we need to conclude today's press conference. So thank you all for calling in, and I wish you a good rest of the day. Goodbye.