Head of Communications for Essity. Today, our President and CEO, Magnus Groth, will go through the highlights of the report, followed by a Q&A session where we also have our CFO, Fredrik Rystedt, joining. With this, I hand over to you, Magnus.
Thank you, Joséphine, and good morning, everyone. On this first front page is a picture of our recent launch event of Libresse V-Comfort in China. We have the ambition of becoming the number one e-commerce brand in the premium towel 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 material sales in the quarter, and adjusted EBITDA margin that increased with 30 basis points to 11.6%. This came from better price mix and high volumes in all business areas. This high growth also comes with higher sales and marketing investments, and of course, the launch of Libresse V-Comfort is just one example of that.
Still, those investments are lower as a % of sales, important to note. We continue to see strong contributions from cost savings. 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. A significant negative impact from stock revaluation due to lower raw material prices. I'm sure we'll get back to that. On a very positive note, we more than doubled our operating cash flow to SEK 3.7 billion, and we also had the highest earnings per share in a quarter with SEK 3.24 that we have seen since Essity was founded a little bit over two years ago. Which brings me to my next slide, which actually shows a time series.
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? Based on this time series, I dare to say that we saw it now in the second quarter 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. I think that's one indication.
Another indication is that if you look down at the bottom to the right, adjusted EBITA margin, that we increased the EBITA margin to 11.6%, which is actually the highest margin since the last quarter of 2017. A turning point there also resulting in, if you look at the overall adjusted EBITA, which came out at SEK 3.7 billion, which is the highest adjusted EBITA in absolute terms that we've seen since Essity was born. Getting back to the two bridges that we always present.
It's positive that we see that the organic net sales comes from a good mix of price mix and volume, and we see improved price mix and volume in all business areas. The adjusted EBITA bridge looks a little bit different than we're used to. Very strong contributions from price mix and volume also to adjusted EBITA.
Still negative impact from raw material and energy, as I already mentioned, with an impact of almost 1% in the quarter, but this will change in the coming quarters. Cost savings, COGS. This is where we are committed and planning to see annual savings of around SEK 1 billion per year. SEK 175 million in the second quarter, which is then a little bit lower if you average the billion over four quarters.
We are very confident that we will be in the range of a billion by the year of the end, which means by the end of the year, which means that we will expect to see higher cost savings in COGS in the second half of the year than in the first half of the year. Moving to the cost savings program. We have a separate slide on that.
That's developing according to plan. Finally, the unusually high others, SEK 709 million negative, which consists of three 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, of course, growing at the rate that we've been growing now for three quarters, we need to fuel that with higher sales and marketing costs. The other big part, which accounts for about one-third of the other 709, is stock revaluation. 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.
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 second quarter last year, and are coming down throughout the end of the second quarter this year. I'm sure you have questions about that we'll get back to later. The third part, and also accounting for about one-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 second quarter, which actually now went away.
We will not see any negative trade tariffs that we know of anyway going forward, but we still had some impact there. Some other smaller other costs. Finally, a positive impact from currency. Just to reiterate, when it comes to the cost savings in COGS and the cost-saving program, we are fully committed to achieving savings of around SEK 1 billion on COGS, and to our cost savings program, where we have a plan to have a run rate of SEK 900 million at the end of the year, and savings in the P&L this year of around SEK 600 million. 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 has been a bigger fall than we expected. 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. In our usual prediction here for the next quarter, the third quarter of this year, starting then with the market pulp, which is very relevant for Consumer Tissue, we expect lower pulp prices quarter three over last year's quarter three, and sequentially significantly lower pulp prices.
When it comes to paper for 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. 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.
When it comes to energy, we expect lower energy costs and prices, both sequentially and quarter over last year's quarter. That is our expectations for quarter three. Quite positive from that perspective. 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, SEK 175 million. Those are the savings that we see from Tissue Roadmap, from ongoing operational efficiency improvements, material rationalization, and sourcing savings.
They are a bit lumpy in the first half of the year. We have actually been working intensely with Tissue Roadmap activities, but also with some startups of machines in Inco and in Mexico, a tissue machine and so on. All of this has resulted in slightly lower COGS savings in the first half of the year. Again, we expect that to improve in the second half. The cost savings program very much according to plan, mostly impacting SG&A. As I already mentioned, we expect to see the run rate of SEK 900 million that we have communicated by the end of the year. Already at the end of Q2, we have annualized run rate savings around SEK 690 million, so moving forward here. The headcount reductions to date are about 744 positions out of 1,000.
As you can see to the right, this leads to a reduction of SG&A's % 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 TENA brand there, it's modernized, completely new packs, completely new products. Our ambition is to own the skin health territory in incontinence care. We're very excited about this launch. Cutimed extending the assortment of our advanced wound care assortment. Libresse, I think I already mentioned, the big launch that we did in the second quarter in China.
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 FemCare, very much driven by innovation, but also from great advertising, actually. 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 dispensers and, of course, a lot of paper to be filled and refilled in those. It shows the benefit of having these very advanced products that we're continuously developing now in Professional Hygiene.
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. You can see the pink lacing there and some other features that, of course, is very important to make these products more attractive.
Just some examples of how we are improving wellbeing every day in Essity that we're very proud of. Moving over to the three specific business areas. Organic net sales in Personal Care increased with 3.1%, with most of that coming from emerging markets, 7.8%, and mature markets, 0.6%. This is actually the business area where we continue to see significant raw material and energy headwinds, up to 190 basis points. 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 % 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 products 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 second quarter 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. We had one less invoicing day this year than the second quarter last year. Baby care, flat.
We're focusing very much on margin improvements. I think that's okay. Continued excellent growth in feminine care, both in Latin America and in Europe. Really continuing to develop in an excellent way. Moving over to Consumer Tissue, where we also saw the best organic net sales in the quarter, 5.7%, 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 Madrid capacity. The negative impact this quarter was 70 basis points. 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.
As you can see in the upper right-hand corner, an improvement with 160 basis points of margin here compared to a year ago. Big improvements. This is an area 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 Two. That's done and according to plan. During the quarter, raw materials have moved down faster and more significantly than expected. 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.
How we move with prices going forward will very much depend then on where pulp prices are a quarter or two from now. Right now, we're 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. This comes from price mix 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 high volumes, but also the other improvements in prices and mixing cost savings. Another business area where we have 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. 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. 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. As you've seen, we've launched additional sustainability targets, especially for packaging and with a focus on plastics. If you have any questions, I'm happy to answer them. We're really, I think, ambitious in this area.
As you know, also during the quarter, we announced an investment in sustainable alternative fiber technology in Mannheim, SEK 400 million. 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.
With that, please operator, help us to open up the line so we can start the Q&A session.
Thank you. First question comes from the line of Martin Melbye. Please ask your question.
Yes, good morning. You stated that stock revaluations were like SEK 230 million in Q2. What will that number be like in Q3, given that the pulp prices continued down?
I hand over to Fredrik.
Yeah.
Please.
Yeah. 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. Of course, it was also a corresponding positive in Q2 of last year as pulp prices and other material costs increased at that time. If we look at Q3, we can see that pulp prices have continued down. We also saw in Q3 of last year that pulp prices went up at the time. 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. You said tissue prices, they will be stable in Q3 versus Q2, right?
We have most of the price increases in the second quarter. We continue in Europe. We're through Wave Two. 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. There could be some more price increases. The big Wave Two initiative, primarily in Europe, has come to an end, and we're very happy with the outcome. It's according to our plans.
Thank you. That's all from me.
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 SEK 350 million, and that was seen as abnormally high levels, and for it to fall from then. This time around, we're seeing over SEK 700 million. If the stock revaluation is around SEK 230 million, I'm just trying to understand the delta from the SEK 350 million to SEK 700 million.
Let's say the stock revaluation, I don't know, SEK 50 million to SEK 80 million higher than Q1. What explains the difference in the other line versus Q1? That's my first question. Secondly, going back to Consumer Tissue in developed markets, which is largely Western Europe.
Number one, 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? Is there something else? Could you just go into a bit more detail there, please? Thanks.
Faham, maybe I can start with the stock revaluation. I guess you'll come back to the price issue, Magnus. 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, raw material, and savings. It's everything that's in there. Other is just our way of lumping a lot of stuff together. Of course, the analysis is much deeper, which is exactly your point. What is it that actually has increased? Let me try and take you through that a little bit. First of all, 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, you acquire cost to do exactly that, to run that plant, 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. We have this line, stock revaluation. You can say stock revaluation is in to the absolute majority is, of course, materials. The reason we separated, Faham, is basically that this is forward-looking.
What we do, we purchase material, as raw material prices either increase or decrease, that will basically be revalued, and we do that at the end of the quarter. 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. 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. It is complicated because there are, of course, a lot of moving parts, all of them into others.
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 cost that we had in Q4 of last year and Q1. 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. That's part of the story, more going back to normal.
In addition, as Magnus alluded to, we have spent some additional funds relating to growth, primarily in Asia and in LATAM. You can see both the growth for both of these areas being very, very high. 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. 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 zero there. Once again, this is moving parts depending on the development. 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.
We have some other tariffs that's on that line, but largely it's something that will go away. The pulp mill and some other issues. These are perfectly explainable. It's just very difficult to explain every single line. We have chosen to put it in others and just make examples like this. It's not abnormal, 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. That was a long answer, Faham, but it's good perhaps to explain it.
Okay.
That was helpful. Can I just have two follow-ups on that, please? Number one, 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. Second follow-up would be, 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 should think about this particular line going into the second half?
Yeah, I can try and do that. First of all, rebates is typically not in other, that's in the cost savings in COGS. It's impacting, and as we've said in previous quarters, it's a little bit on lower levels, and that remains the case. 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, et cetera. 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. They're moving parts.
Okay. Should I continue with the Consumer Tissue pricing, which was your second question? I guess the difference compared to what we said and expected in the first quarter and also after the fourth quarter, is that mostly pulp prices actually have moved, but also to some extent, the recycled fiber price has moved down quicker than we had expected, which has this big impact through stock revaluation. Of course, the very positive part is that, over time, we will have lower costs, which helps our P&L. It's negative on the other line, but overall, it's positive. It's an indicator of a positive development going forward. This also is important for our pricing strategy going forward. As I mentioned, we are very happy with the pricing that we have achieved in Western Europe, and it's completely according to plan.
If you look back one and a half years, two years, we will improve prices actually with over 5%. We still have slightly higher pulp prices in the second quarter, but they are moving down. In some cases, we actually did three 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. We see higher shelf prices on our products in tissue all over Europe compared to a year ago. That's really having an impact. Now with the faster than expected decline in pulp prices, we just have to see where this ends up. Of course, that decline is positive for our margin going forward.
There might be a mixed 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. Of course, that impacts the margin development in Consumer Tissue, to some extent. I hope that answers your question.
Thanks.
Next question comes from the line of Iain Simpson. Please ask your question.
Thank you very much. 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 zero by year-end as you annualize last year's pricing? Secondly, on that step up in sales and marketing cost, 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.
The first question, we have continued to raise price also in the first half of this year. There will be some positive impact also going forward. We've actually finalized Wave Two during the third quarter, or during the second quarter, excuse me. When it comes to SG&A costs, they will follow, of course, our sales growth to some extent. What's important for us is 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 if, Fredrik, 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, a follow-up question on the raw material cost inflation, which was SEK 166 million year-on-year in the current quarter. How much of that was FX?
How much was?
FX.
Of the total number, you talk for the company as such? The whole company?
As a whole, exactly. Raw material cost inflation. I understand that part of it is the underlying local price cost decline, and part of it-
Dollar
is changes-
Dollar
in FX.
Yeah. It's about SEK 130 is the currency impact, roughly.
That's a negative?
Yes.
Excellent. 130 of 166. Great. I wonder on the stock revaluation, I know we've spent a lot of time on it already, and you're saying SEK 230 million. Would it be possible to split that between the divisions, roughly?
Yeah, I don't think we have. Have we done that?
It's one-third.
Yeah. One third. Yeah. Have we actually communicated that? I'm checking here just so we don't give.
Yeah, we said one-third roughly is stock revaluation.
Yeah, you're talking about for the different divisions, right?
Right.
The big impact is they are in Consumer Tissue?
Yes, of course. Because this is largely pulp. You have it in every area, so we also have it in Personal Care. Of course, as we saw in Magnus' presentation, Professional Hygiene is very much impacted by it. Of course, Consumer Tissue is the same because this is largely pulp related, but we also have it in Personal Care. The absolute predominant is in Consumer Tissue and Professional Hygiene.
Okay. One would maybe think that Consumer Tissue was most affected.
Yes, of course.
Yeah. Okay. 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?
Yeah, I think 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 underneath, we actually have good development in the sense that we are systemizing our approach here and actually saving. This is largely market driven. Of course, we operate very rarely with spot-related contracts. We have super high service levels to our customers, we work with long-term contracts. If you look at the recent development in the spot market, you will actually see distribution cost having actually come down a little bit. We are not able to benefit from that. Over time, of course, as we see, if this continues in terms of distribution, our distribution development should be actually positive coming both from market-related issues and from our own.
Of course, we have to wait for that to come in more to the contracts. 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 the 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. Of course, as you've seen these distribution costs being high a couple of quarters, you can see that it's still some time left.
Great. Thank you very much.
Next question comes on the line of John Ennis. Please ask your question.
Hello, everyone. A couple from me, sorry for coming back on the stock revaluation side of things. 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. If you could give us a rough sensitivity on the proportion of pulp declines. I.e., if pulp declines by 10% sequentially, this ends up being an X million offset.
That would be really helpful in helping us forecast that going forward. The second question is on medical solutions. 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 2Q. That would be really helpful. Thank you.
Yeah. John, thanks for the questions. Let me just start with the first one. Last year, this year. This is kind of tricky because last year, of course, the stock revaluation impact was the difference between Q1 - Q2, right? This year is between Q1 - Q2 of 2019. The stock revaluation number that you see, the 230 that has been alluded to in this call, is roughly the change of those two. If you want to separate those between the two years, it was, you can say more positive last year, and slightly less negative this year, if you put it. Of course, the combination of those makes up that number. The sensitivity is 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. Of course, it's 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 was actually, of course, positive, that revaluation. We can guess, I think it's fair to say that pulp prices will be lower in Q3. We will have that negative number, and it's difficult to say exactly, but it will be high as it has been here in Q2.
Okay, medical solutions. The difference has much to do with the comps that we had tougher comparables, both in the U.S., especially here now in the second quarter, 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. Those two 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. 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&A in that particular area?
We believe that we should achieve a run rate growth of 3%, that we will get there over time. When it comes to M&A, that's not related to the growth of medical, specifically in one quarter or the other. It has to do with the attractiveness of that business and the pricing, of course, and the synergies potentially that would have with If it would support our existing medical business, of course, we would still do it. 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 Oskar Lindström. Please ask your question.
Yes, good morning. I have a question around the distribution cost again. 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. One could speculate that the distribution cost or share of cost is higher there than in mature markets. Is that the case 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 a quite specific cost 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, some other issues, like a lack of capacity in the U.S. and in France specifically, some difficulties also actually in general, moving freight in France during the unrests and so on and so forth. Again, as Fredrik 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. 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? Then also, if the problems that you're experiencing now, is that something which impacts to an extent your interest in this segment, or is it more of a temporary issue?
It's not at all impacting our interest in the segment, most geographies and businesses are doing quite well and according to our plans. We've had areas where we've been making changes and improving performance throughout the last two years. Now lastly, 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 first one or two years. Since we were also working with the turnaround of our incontinence care business, we decided not to integrate them. Now that we took that decision six months ago, we can see that there are huge improvement areas in the U.S., we're starting to see some benefits, and I think we know exactly what we need to do.
This is very much based on our own performance and nothing else. 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. I'm convinced that we are fixing this now in the next couple of quarters. Very much related to the U.S. and to go to market.
All right. 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, et cetera?
No, we're not ending contracts. It more has to do with maybe handling stock situation, distributor stock levels, and also integrating the organization.
Is that number, the -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. Our plan is, of course, to grow in the 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.
Morning, Magnus. Morning, Fredrik. 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 +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? My second question is specifically on baby care. Obviously marginally positive organic sales growth in the quarter. Could you help us understand the breakdown there between both price mix and volume? Also the development between developing and emerging markets, and whether the trends are broadly similar to what you reported in Q1. Thank you.
Fredrik, you want to start with the pricing?
On the baby care?
On Personal Care in general, as first, and then baby care.
Yeah. 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 for baby and slightly higher price and mix. That's the split between those two, and that of course adds up to a total of slightly positive organic growth.
Of course, needless to say, part of our baby business is related to a couple of areas that we've talked about before. One, of course, being Turkey, that we have now exited and closed here, sold and closed in July.
That's part of that development in emerging market. Personal Care, I missed the question actually, Magnus, maybe you can take that.
Pricing was up in the quarter. 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-
Whether you were expected to take any further pricing in Personal Care this year?
Yes
Given the raw material development.
Absolutely. That's a good question because we don't talk enough about that. We're working to increase prices both in incontinence care and in FemCare. In baby, as we just discussed, it's always challenging. We're also relaunching in some countries in baby care, just to add to what Fredrik already said. 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 Sanath Sudarsan. Please ask your question.
Good morning, Fredrik. Good morning, Magnus. Just one quick question from me. More in relation to the 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? 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. As I mentioned, we've been able to raise prices three times in a year in some cases. That's been very encouraging, and right now I think 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. I expect a stable price development on Consumer Tissue specifically. 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.
It's still a strong focus for us, but the big Wave Two effort in Europe is done with a good result.
Sorry, Magnus. I was just trying to understand from the other participants' behavior.
Yeah.
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? Just wanted to understand your perspective about the other participants, not Essity specifically.
Yeah. That's of course then partly just my speculations. 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, but are all interested or asking for price increases. That's something that we've seen very clearly in the last year, which then indicates, I guess, that most players are quite rational because, as you know, we believe that many of our competitors, especially in Consumer Tissue, have about half the margins we have. When we were at all-time low in Consumer Tissue here a year ago or three quarters ago, many of them must have been in the red or, at best, breaking even. I guess that's an indication of rational behavior, that everybody needs price increases to improve their margins and their profitability.
Okay, thanks.
Next question comes from the line of Iain 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. 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 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, thanks. Good question. Starting with the incontinence care, we have seen a very good development in healthcare overall. 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 developments, 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 four or five 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. Margins are okay in North America retail, but we have slightly lower sales.
That's, of course, a smaller part of our business. Most of our Inco business is developing really well, both when it comes to volume, price, and mix. Second quarter, medical. Yes, when it comes to margins, we are quite happy. They are on the level we expected. In the integration work that we have moved forward with, we have identified issues over the quarters, I've tried to be as specific as possible, 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. Then there was maybe an issue that we caught too late in North America with how that business was operating, we're all over that now.
Maybe that's something we could have caught earlier, but that's something that we're very convinced will improve. We're number one 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. That's something that we caught now and which we maybe hadn't expected. 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.
Thank you.
Thank you. Once again, please press star and number one if you wish to ask a question.
Okay. Do we have any last questions before we conclude this press conference?
Your next question comes on the line of Guillaume Delmas. Please ask your question.
Good morning, gentlemen. Three questions from 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, 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. On this, my question is, what happened in Western Europe? Why has growth deteriorated there? 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. 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. This was a temporary decline, which of course doesn't mean that we can continue growing market share forever at very high rates. Maybe we will see a slightly slower growth in Europe, who knows? Eventually. On the other hand, we have actually gained a number of new contracts in North America, we will see a gradual improvement also going forward in North America.
I think going forward, we should see more of a balance maybe between our two big mature markets, North America and Western Europe, still a positive development.
Okay. My second question is actually relatively similar, this time on Consumer Tissue. 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, to 0.8%.
Any granularity you can give on your performance in Western Europe for Consumer Tissue, and as to why, despite mother being less of a drag, we've seen a slowdown. Is it more volume? Price mix 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. Also something that we've been willing to accept because the Wave Two price increase effort has been so important for us. 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 COG 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.
Also an area where we are looking to find a good balance of the price mix and volume going forward.
Thanks. My very last question is, if I go back to your Q1 conference call three months ago, I think at the time, you were talking about significantly higher raw material costs for Consumer Tissue in Q2. If I remember, 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 two moving parts, the way you were expecting it. My question is, why such discrepancy between the soft guidance you provided three months ago and the way Q2 actually played out?
Guillaume, you have a great memory, apparently. You're absolutely right. Clearly, I think it has been more difficult for us to forecast raw material development. Of course, both stock revaluation and raw material is very much related to the input cost line. 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, 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. It's basically related to these two factors. We did underestimate the decline of raw material. That's the biggest impact.
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 regarding-
In a world where raw material is absolutely flat, of course we got zero on both those lines, right? Unfortunately, even though we would like to have the crystal ball, it's super difficult to estimate. We don't. At the early part of or the latter part of last year, our guess would have been that raw material in terms of, we talk at least pulp cost, would have continued to move up. Of course, we've seen a very different development since then. Clearly it has not become exactly as we thought. The visibility, we believe we do our best to estimate that, but of course it's very difficult. With all those caveats, we do see significantly lower market pulp prices in the third quarter sequentially.
Yeah.
We are already a good way into July, and there are no indications that that would change. Even lower costs in China, actually, for pulp than we could have ever expected in the first quarter. As Fredrik says, big uncertainties and huge volatilities this point in time. Still for the third quarter that we're already into, we see significantly lower pulp prices.
Therefore we can also conclude that stock value adjustment will be correspondingly high or high exactly to in accordance with that.
Thank you very much.
Next question come from the line of John Ennis. Please ask your question.
Thank you for the quick follow-up. I just wondered, again, sorry for coming back to this, can you just give us the impact from stock revaluations in 3Q 2018, 4Q 2018, and then 1Q 2019 relative to the SEK 230 million impact you gave for this quarter? That would be super helpful. Thank you.
We do not do that, John. I alluded to it before, that this is just to explain to you the change between two quarters, right? 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. We have got a big negative in 2019, we got a positive in 2018. That number of the SEK 230, that is basically adding those two up. That positive was slightly bigger than the negative, of course it is a combination of those two.
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. Just to remember that overall the pulp price development is a positive for us.
Exactly
Of course, going forward. It is a good thing. It hits our margins with the 45-day delay that you are well aware of. Of course, even though it impacts negatively on this other line, it is still a leading indicator of where pulp prices are moving.
Okay. Thank you very much.
Next question comes from the line of Iain Simpson. Please ask your question. Hi, Laura, your line is now open.
Hello. It's Celine Pannuti from JP Morgan. Just a few follow-up on the raw material side. Last year, your raw mat bill was, if I remember correctly, more than SEK 4.5 billion. Could you say how much was the corresponding revaluation of stock last year to have an idea of the net impact? Also, I think earlier this year, you said that you were expecting for the full year that the raw material bill 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 pulp prices have come down, what do you think the number would be for the year? That's my first question. Then lastly, the second one is on Consumer Tissue. I understand that Wave Two is ongoing. However, sequentially, we've seen pricing decelerating in Consumer Tissue.
Could you explain why was that?
Yeah, let me start with perhaps the first question. Once again, the stock value adjustments that we talk about in the bridge here is just a difference between last year and this year. As raw material prices increased last year, it was positive all the time. Now, I think we've said 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. That is just kind of resetting the raw material to the incumbent levels. Inherently, it's just reflecting the fact that the margin is that much better as we go forward. 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. I think the number that you were alluding to was just a calculation, if numbers were staying where they were at the end of the year, I think that would have been the number. We normally just provide one quarter ahead, and this has to do with the fact that we don't have that much transparency more than that quarter.
Okay. Second question.
On the-
Yeah.
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?
As I mentioned, Celine, I can't do that because this is a change between two years. We have a reset of the value each quarter on the material. I cannot actually give you that number. This is a change between two years. The bridge is a positive and a negative. As I mentioned, it was slightly bigger last year. If you have the 230, a bit more than half of that number was a positive last year, then the rest is negative this year. It was a significant number also last year. We have not given the exact numbers.
Okay. Did you have an impact as well from holding a bit more of raw inventory than you would have, because you thought that the market would continue to go up?
No.
Okay.
No. Just generally, Celine, the absolute majority of this impact is related to finished goods, not actually pulp stock. 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, if you have long distances like Asia as an example, but normally this is fairly short lead time. This has nothing to do with inherent pulp hedging or adjusting inventories.
Okay. Over to your second questions about price.
Consumer Tissue pricing.
Exactly. Consumer Tissue. Wave Two is done, 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 Three. This is not what we're seeing. We're seeing that we have increased prices now in a number of ways to an extent that we see increasing shelf prices and market prices in general. Now pulp prices are coming down at a more rapid rate and to a higher extent than we had expected. Right now, we are satisfied with the price increases achieved. 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.
No, sequentially, what was the delta that the pricing slowed down in Q2 versus Q1?
Yeah, that's tougher comps. We made a lot of price increases already last year.
All right. Well, thank you.
Thanks.
Okay. We need to conclude today's press conference. Thank you all for calling in, and I wish you a good rest of the day. Goodbye