Hello, and welcome to Essity's press conference about our year-end report 2022. I'm Joséphine Edwall-Björklund, Senior Vice President Communications, here as with you today, we have Magnus Groth, our President and CEO, and he will join us from our office in Ismaning in Germany. In Stockholm, our Executive Vice President and CFO, Fredrik Rystedt, will also join. In the end, as usual, we will have a Q&A session. With this, I hand over to you, Magnus.
Thank you, Joséphine, and good morning, everyone, to this Q4 full year report, but also with a focus on the Q4, of course. To summarize the Q4, we saw record high sales, both in growth and sales in total. Our adjusted EBITA was in line with 2021 despite significant cost inflation. Of course, the massive price increases that we put through played an important role there, but also efficiency improvements and higher volumes. We were able to combine throughout the year price increases with a continued volume growth. We did three acquisitions during the year, so I'll talk a little bit more about them, and a very high pace of innovation, higher than in the years before. E-commerce grew with 20% to 15% of sales.
The financials for the full year, net sales increased with nearly 30%, and the organic sales growth, including M&A, was 17.7%, of which acquisitions amounted to 2%. Adjusted EBITA, as I mentioned, almost in line with the year before, thanks to the top line growth in combination with efficiency improvements. Adjusted EBITA margin 8.4% and ROC at 9.7%. With all of this combined, the board suggests to the annual shareholders meeting an increase in the dividend from 7 SEK per share to 7.25 SEK, which means that we continue on a nice gradual increase here in the dividends provided an increase if that is approved by the annual shareholders meeting by 4% compared to the year before.
I mentioned three acquisitions, Legacy Converting, which strengthens our offering in North America in wiping and cleaning, and Knix and Modibodi that we've spoken about before that saw significant growth here in the Q4, giving us a leading position in leak-proof apparel in the world. Very exciting, very sustainable, very much in line with what our consumers and customers are looking for. I mentioned that our pace of innovation was higher than in previous years. We have launched over 30 new products, and some of them you can see here behind me, which is 20%-30% more than the year before. In spite of the difficult and challenging market conditions, this is important to us, and we can continue to invest here.
E-commerce, SEK 23 billion of e-commerce sales, a growth with 20%. This is in a year when many e-commerce and sites or e-commerce businesses have been struggling coming out of the pandemic. We still grow slightly faster in e-commerce than we do as a whole. You can see the split here, what we expect going forward is that direct-to-consumer, which is currently 2% of sales, will be a higher, gradually a higher share going forward with the acquisitions of Knix and Modibodi, also with other initiatives that we are doing in the company. Something that's really key to us is to remain in the lead in sustainability. We saw a lot of progress also in 2022.
We were able to continue our path to achieving a reduction of our Scope 1 and 2 emissions to 2030 by 35%. We're now at minus 18%. Today, I only present Scope one and two. Scope three, we're still waiting for those numbers. It takes some more time, but we expect to see good progress in that area as well. You can see a list of awards and recognitions there from very reputable institutions. This is something that's so appreciated by our customers, our consumers, our employees, and other stakeholders. Moving over to the Q4 of this year, which might be the part that's of most interest. Again, very strong sales growth.
Net sales 28%, and the sales growth in the quarter organically with acquisitions of 16%, and as an adjusted EBITA that grew over the same quarter of last year with 33%. You might wonder, of course, how can this be when the margin is only up 30 basis points from 9- 9.3%. This is of course due to the huge growth in top line. Overall, if margin is increasing slightly, which we're very happy about, we're even more happy about the fact that overall the EBITA profit is growing by 33%. Adjusted ROC improves with 130 basis points and earnings per share by 20%. A very strong development in the Q4.
The adjusted EBITA bridge, where we saw a support from Gross profit margin of 70 basis points in Q4. This was in spite of headwinds from raw materials, energy and distributions of 950 basis points. We are now, through our price increases and other initiatives, overcompensating for that for the first time. We are really moving here. AMP in line with EBITA growth, which means that AMP is increasing, but not as % of sales. While SG&A, which is lower as % of sales for the year, increased in the Q4. This is a combination of salary inflation, higher payout on incentive programs in 2022, travel costs.
It's more of normalization effects than, but also some salary inflation rather than that we're taking on actively more cost, which we are not. That's the overall bridge. Another way of looking at presenting that was much discussed in the last quarter is this input cost increases versus implemented price increases. After Q3, we presented that we were catching up with the cost inflation in energy, raw materials, and distribution, and we were less than 2 quarters behind. I'm really happy to announce that we have now caught up with these costs after having a sequential price increase from Q3 to Q4 of 6%. As you can see, a really steep uptick there in the curve when it comes to price increases.
Looking forward, even though we see stabilizing input costs in these areas, we expect to continue to have inflation, salary inflation, and an inflation environment, in maintenance, in our SG&A costs, sales administration, which is particularly when it comes to sales force, important for health and medical. This is something that we will have to continue to compensate with price increases. Price increases is still high on the agenda, even though we have caught up in this area. With that, I will hand over to you, Fredrik, to talk about our three business areas, which have all of them grown through the year. Over to you, Fredrik.
Thank you, Magnus. I will start with health and medical. We achieved a good growth, organic sales growth in Q4 with 4.6%. All of our business areas are affected by lower activity in Russia, including health and medical. As you know, we are in the process of exiting our Russian business. If you exclude that for health and medical, organic growth amounted to approximately 5.1%. This is mainly driven by pricing. You all know that pricing in comparison to our other business areas is a bit of a slower process. Reimbursement systems, tender business in Inco are the main explanations to that.
Despite that, Q4 of 2022 in comparison to Q4 of 2021, we increased prices with over 7%, and sequentially just from Q3 with 1.7%. Really, really good progress there on the pricing side. You can see that volume was slightly negative, and this is predominantly driven by the fact that we abandoned a few loss-making or non-profitable contracts in incontinence healthcare. Cost inflation continued to be very severe. If you look at the margin impact, just in comparison to the same quarter of 2021, the margin impact was 6.6 percentage points, 660 basis points. The main drivers there being superabsorbent fluff and actually negative currency transaction impact. Now we expect as we go forward that input cost for health and medical will largely stabilize.
I think you mentioned that previously, Magnus, if you look at indirect cost, inflation is quite significant. Not least for medical, this is a major factor. Of course we will need to continue to increase prices as we progress in coming quarters, of course to compensate for that, but also to restore the margins of the business area. Just a final couple of comments on the acquisitions that we've made. Hydrofera, AquaCast and the sports tapes business with several brand names, they all have been well integrated now into the rest of our business, strengthening our offering or performing very well. Just take that as an example of Hydrofera in Q4 with a growth of 11.4%. Really a good progress on the acquisitions.
Now turning to consumer goods, really excellent growth, as you can see, nearly 16% here organic. Of course, the same as for health and medical has also been impacted by the lower activity in Russia. Here also the exit of the baby diaper business in Colombia. If we kind of adjust for those two, growth was actually roughly about 17.5%. Really strong. Same here, the main driver was actually pricing. We achieved a kind of year-on-year in Q4 of roughly about 20%, and sequentially a bit over 6%. Very strong progress. We had that pricing increase in all our categories and all our geographies.
Of course, as we have seen also before here, consumer tissue was the main driver. You can see here that volume actually was down, and this is new because we have seen volumes previously during 2022 actually being positive. Here are the main drivers. If you disregard here Russia and baby, approximately 3% down in volume. The main drivers being consumer tissue and baby. If you take consumer tissue as a start, then of course, this was impacted by the very significant price increase. Actually to an extent also that price negotiations were ongoing during the Q4 impacting that. It's our actual belief here that...
It's absolutely our belief that as competitors catch up in the balance between input cost and pricing, volumes will pick up in the coming quarters. Of course, when it comes to baby, the impact was there beyond last time, also the fact that we also in this area left an unprofitable retailer contract. This was the main explanation. If you look at the input cost, starting with energy, it was actually much lower in the quarter than we anticipated, and this had to do with a couple of different things. First of all, generally pricing levels in the spot part of our energy consumption was lower. Secondly, we had subsidies in the European system and also a couple of one-offs.
In terms of the energy price, it was much lower. You can still see that the input cost was the impact from that was very severe with 1,130 basis points, so really very significant. That's exactly the same as for health and medical. We see inflation in indirect costs. Basically, in coming quarters, we'll see input costs actually stabilize, with the exception of one thing, and that is the energy that will significantly increase. A couple of reasons for it. The prices in our hedging contract will be significantly higher, and the one-offs and the subsidies that I mentioned earlier will not be there in Q1. We will see that increasing. The same goes for indirect costs that will increase.
Overall, of course, we will continue to work extensively with price management. Finally, a couple of comments on the acquisitions of Modibodi. It's early days there, but it's a good progress and progressing in line with our plans. As an example, Knix had a growth in the Q4 of 28%, so we were really happy with that. It was specifically in the United States that was the main driver. Very much in line with our hopes for the company. Performing well. Turning to Professional Hygiene. We've been really pleased with the performance of Professional Hygiene throughout this year, and Q4 was really no exception. If you exclude Russia here, the organic growth was pretty close to 20%.
PH, or Professional Hygiene, is the area where prices have increased the most. Q4 versus Q4 of 2021 was increasing with about 23%. Sequentially, we increased prices with approximately 8.5% between Q3 and Q4. Now, volumes were negatively impacted, as you can see here, and the price increases played a part of that. I mentioned Russia earlier, and we also had a quite challenging market in Asia. You can actually see this very clearly from this slide when you compare the organic sales growth in mature versus emerging market.
Also and pretty much the same story in terms of Professional Hygiene input cost inflation was very severe and input cost increased or had a margin impact of roughly about 690 basis points. So very severe. As you see, and this was also the same for consumer goods, that overall EBITA is much higher. Here we also see, and it was slightly so also in consumer goods, but here a very significant margin improvement. We are quite happy with the performance, as you can see here from Professional Hygiene. The cost outlook remains pretty similar to the other. Energy will increase significantly indirect costs. Although margins have picked up here, it is definitely our view that prices need to stay and potentially even increase further.
Just as a final comment, also in this area, we made an acquisition at the early part of 2022 with Legacy Converting, really strengthening our offering in the wiping segment in North America. Also Legacy has performed well in the Q4 with strengthening margin and good growth. If you look at the total wiping and cleaning business in Q4, it actually increased with a bit over 12%. Good progress in general for Professional Hygiene. With those words, Magnus, over to you.
Thanks, Fredrik. After having listened to that, it's quite clear what our priorities are for the year ahead. Price management will remain very important for us and a strong focus, but also our longer-term efforts to innovate, to strengthen our brands and to launch products and solutions that our consumers and customers appreciate. We also will have a strong focus on cost efficiency to manage also the increases that Fredrik referred to in indirect costs. That's an important focus for the year. As always, working with the overall mix to grow faster in the high margin businesses and continuing our very important sustainability journey. Very clear priorities for this year, and we're already one month into it and working hard in all these areas. Thank you for listening.
Let's open up for questions. Thank you.
Thank you, Magnus. Thank you, Fredrik. Let's invite our audience for a Q&A session. Operator, can you please help us open up the lines?
Thank you. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question from the queue, it's star two. Again, please press star one to ask a question. We will take the first question from Victoria Nice from SG. Please go ahead.
Hi there. Good morning, everyone. My first question is on other costs which stepped up sequentially again by around another SEK 900 million. What is driving that other than the more negative cost savings? Could we assume that there's some location energy cost disadvantages within other costs versus underlying cost allocation? The second question is on volume drop in Professional Hygiene, in part driven by the sequential step-up in pricing. Was the volume reaction more than anticipated? Are you seeing greater elasticity in Europe as we're hearing from some other companies? Perhaps, is there an element of forward buying by distributors ahead of anticipated or planned price increases? Thanks very much.
Fredrik, if you want to start with the first question, I will take the second about Professional Hygiene.
Basically, thanks, Victoria, for your question. I'll give a brief answer. We can provide more details should you want that. If you take the overall cost increase, it's mainly related to distribution cost overall being higher. It's also actually a inflation in our product or our COGS relating to inflation in salaries. The rest is largely actually due to SG&A. If you look at that SG&A, it's driven by many factors. Salary inflation. We actually have a bit of higher bonuses this year and general inflation. It is a cost increase that we see that's generally driven off off the market market conditions, and to some degree, as I mentioned, also bonuses.
Regarding the second question about Professional Hygiene, we have a very strong performance in Europe and an improving performance in the US and a quite weak development in Asia in the quarter, as you could also see from the much lower sales in emerging markets. Nothing specific. No news about any pre-buying in anticipation of higher price or anything like that. I think it's just one of those variations. In general, I feel very confident about our Professional Hygiene business that will continue to develop really well as it did in the Q4 and throughout the year, actually.
Thank you.
The next question comes from Charles Eden from UBS.
Hi, good morning. Thanks for taking my questions. My first one is on price increases. You mentioned the need to take incremental price increases again in 2023. Fredrik, are you able to give a magnitude of sequential increase you're looking for in Q1 like you did with respect to Q4 with the Q3 results last year? My second question is on energy costs. Obviously it's not an insignificant number for Essity. You are normally, I believe, on average 70% hedged entering the year. Just wanted to clarify, is that still the case for 2023, i.e. the variable impact, depending on where energy prices go from here, is gonna be on the 30% that is unhedged?
If I could sneak a third one in, could you talk a little bit about your private label consumer tissue business in Europe, and give some details on the organic growth and margin there relative to your overall consumer tissue business? I guess I'm asking, is the business gaining volume share as consumers are trading down, and how does that impact the margin? Thank you.
Fredrik?
Yeah. I didn't actually get your second question there, but I'll start with the first one. I think it was regarding generally energy cost. Yes, they will be significantly higher. I think I mentioned that already, that if we look at input costs, they will be largely stable with the exception of energy, but the energy will increase significantly. It's not really spot rate related. We don't know the spot rate, of course, the part that is unhedged. That's roughly... The unhedged portion is roughly about 30%, you can say, for electricity and for gas. It's actually, you can say, more for electricity, but if you include the regulated market, is roughly to that extent.
We are not speculating on the spot price. We hope it will stay low, but we can see that for the 70% that we have hedged in gas and electricity, prices are significantly higher. I mentioned that we had subsidies.
One-offs. We are not, for commercial reasons, exposing that number. We cannot do that, but you can get a kind of a lead if you look at the Q3 energy cost versus Q4. It's about SEK 500 million or so lower in Q4 versus Q3. Of course, that was about much better than we expected, although prices were super high in Q3, it was still much better than we expected. This is, of course, the subsidies and the one also that I was referring to, and they will not be there in Q1. In reality, we will see Q1 being much, much higher in terms of energy cost and I also mentioned indirect. Okay. I can answer the question.
Maybe I could answer the question, first question you had about price increases if we're giving in any indication regarding the Q1, and we're not. As you remember, Charles, we expected price increases going into Q4 from Q3 to be on a similar level of about 3.5% as we saw from Q2 to Q3, then it turned out to be much higher. Of course, there will be a positive rollover effect, but so we will see price increases also in Q1, but we're not providing a number there. When it comes to private label, yes, we are seeing some downtrading still very much in the U.K. and to some extent in Latin America, but also in some other markets. That is benefiting our private label division.
It's interesting to see that even though we have raised prices more towards the retailers on the private label products than on our branded products, just to a large extent for cost reasons. The cost impact on the private label products is much higher. The retailers have not raised prices on private label as much as on branded. That's a specific situation. But that's what we're seeing, downtraining that we are picking up by having a tiered good, better, best assortment with our brands, but also by having strong position in private label.
Thanks so much. Speak later.
The next question comes from Faham Baig from Credit Suisse.
Hi, guys. Good morning. Thank you for the questions. A couple, one for Magnus and one for Frederick, if that's okay. Magnus, I want to discuss the environment in China in as much detail as you can. Vinda, I think, reported a loss in Q4 after already seeing a sequential slowdown in Q3. If I remember the discussion we had at Q3, I think the focus was going to turn on recovering profitability, potentially at the expense of losing the number one position. Could you discuss the operating environment in China, the pricing landscape, the excess supply potentially in the market that is impacting pricing ability there? Secondly, housekeeping for Frederick.
Could you help us with the likely net interest cost for 2023, particularly as it stepped up in Q4? If you can explain why the cash flow interest charge is much lower than the P&L, that'd be good. As well as touching upon CapEx expected for 2023, as well as the tax rate. Thank you.
Okay. Thanks, Faham. I will talk to China as much as I feel I can as a board member. Of course, Vinda is a listed separate company where Essity is the majority shareholder. Q4 was challenging because of partly the reopening of the markets with the high infection rates that had an impact on throughout the supply chains in our plants and also in our ability to supply products. There were a number of specific issues for the Q4. Having said that, Vinda did raise prices not sufficiently. There is price competition, especially than on the basic grades, less so in the premium grades where Vinda is moving.
Especially in the Q4, it was a challenging environment because of an anticipation of lower pulp prices coming in 2023, so made it more difficult to raise prices. Vinda has launched a number of new products in the premium part of consumer tissue to move away from the areas that are and have been commoditized for a long time and where there is an oversupply, the flat products, and more into products like the 4D-Deco, the embossed, the four-layer product, and of course, the Tempo assortment. This shift towards more premium products is successful and is ongoing, and we'll see more of that next year. Vinda has continued a clear focus to raise prices going forward. That strategy hasn't changed.
I think that's as much as I can say about China and Vinda's performance and plans for now, Faham. I hand over to Fredrik for the housekeeping questions.
Housekeeping. Thank you, Faham. I will try and do a bit of that. I think your first question related to the net interest cost, and it's difficult to give a forecast there. The reason is quite simply that we got a lot of floating. If you take very much in line with our policy, but if you look at the proportions of fixed of our debt is roughly about 30, and if you take floating of course obviously then 70%. The average maturity, if you look at interest rate fixing, is about 40 months or in that order of magnitude.
Clearly when you look at that, you can see that we are quite dependent when it comes to the finance net of the floating rate. To just give you a bit of proportion, if you take Q4 here, we had an average interest of 3.1%. If you look at the corresponding period in 2021, we had 1.3%. It's been a very significant increase of the floating rates. Of course, we have the flexibility to go into more long-term, and we can do that, but of course it will be much higher. We kind of work our debt down a bit, then that's a positive impact.
Of course, it's not expected to be lower than what you've seen here in Q4. When you come to CapEx, we're quite close to our estimate in 2022, as you have seen. It's always difficult to judge exactly with timing. When it comes to 2023, roughly about SEK 8 billion or in that order of magnitude. I think the final housekeeping question you had, Faham, was the tax rate, and here it's always difficult to give an exact forecast of the reported rate 'cause that's impacted by all sorts of different movements back and forth. Structurally, if we just take our structure rate, it's roughly between 24% and 25%. It's in that order of magnitude.
That will vary a bit depending on country mix, et cetera, but roughly 24%-25%. That way is what you should expect for 2023.
Thank you very much.
The next question comes from Fulvio Cazzol from Berenberg.
Good morning, and thank you for taking my questions. The first one is on plans for 2023. I understood your comment during the call regarding the priority being the recovery of input costs and essentially margins. We heard from one of your competitor yesterday signaling that they intend to raise AMP or advertising costs specifically by about 100 basis points for this year to invest behind innovation and growth in the brand. I was just wondering if you can sort of share what your intentions are in terms of planned investment levels this year versus last year, whether you also intend to invest a little bit more than you did last year?
My second question is on the cost-saving program, which had a pretty significant step-up in the Q4. I think it was just over a billion. If you can just give some color on how you managed to unlock those savings so late in the year and how that should impact the next couple of quarters. My last question, if I could, is whether you can provide any sort of indicative inflation guidance for the all-in costs, COGS, I should say, for 2023, given that you've got, you know, flat pulp but still rising energy, still some inflation on labor charges. Should we expect mid-single digit, high single digit, low single digit COGS inflation for 2023? Any guidance there would be great. Thank you.
Okay. I can start with AMP. Yes, we are planning on higher AMP levels. We're not giving the detailed guidance on the number of basis points, but we are planning to do more AMP this year because we have a lot to talk about, and we're coming out from a very, very challenging year. Expect a step-up in overall AMP investments for 2023. Fredrik, do you want to talk about the cost savings programs and all-in COGS inflation?
Let me start with the last question first. I can't really give you more guidance than I've already did, Fulvio, because in essence, we can only kind of look at one quarter ahead. As I have already mentioned there, we see stable, largely I should say, stable the cost on input factors, with the exception of energy, which will increase a lot. Of course, longer than a quarter is quite cumbersome. We can make all sorts of assumptions, but in the end, it's about adapting to a bit to the surrounding world with being agile in terms of pricing, et cetera. We can't give you much more guidance.
When it comes to the cost savings, I'm a bit unsure there what you actually mean, Fulvio. It's a bit tricky when you look at cost savings. We constantly save costs and become more efficient in general, and Q4 was no exception. If you look at the way we look at productivity, you will remember that we look at our cost savings or cost picture in terms of total productivity. We look at it on a net basis, all the positive savings that we do, and of course, also the negative impact which comes Well, as an example, with inflation in maintenance or productivity loss from other factors in the surrounding world. You know, it was actually quite negative for us, the total productivity in Q4. There was no savings.
I'm a bit unsure what you're referring to. Underneath the surface, the savings continued to be good in terms of material rationalization, in terms of yield improvement, in terms of how we become more efficient in the plant. On a net basis, with all the kind of negatives that were existing in Q4, it was in total negative. I can't really answer your question there, Fulvio.
thank you for that. I think we can pick it up later. That's fine.
No problem.
Yeah.
No problem, Fulvio.
Thanks for that. Thank you.
The next question comes from Celine Pannuti from J.P. Morgan.
Thank you. Good morning, everyone. My first question, in fact, is coming back on the cost inflation. You said that you expect stable input. I'm a bit surprised about this. Excluding energy costs, what are your expectations for the different input costs you have, and especially on top the US dollar as we can? Could you explain why we're not seeing lower input costs there? The second one is on... As well, can you on SG&A, I understand there is inflation in salary. What kind of inflation shall we be talking about? Is it a mid-single digit rate that we should factor in? My second question is on pricing negotiation.
I mean, first of all, why was it that you were able to get a better pricing in Q4? Importantly, you just had a pricing negotiation in the autumn. Are you able to right now go back to the tables with retailers for further pricing? Are we expecting that further pricing increases to be later in the year? Are you finding the discussions to be tougher? We were mentioning cost, sorry, de-listing. Are we expecting some of that to persist in the Q1? Thank you.
Starting with the last question regarding pricing environment, that has been very challenging all along, I would say. In spite of this, we have been successful also protecting volumes and our number one and number two positions. That will continue. The discussions, negotiations with a, to some extent, negative impact on volumes that we had in the Q4, we will see the positive impact now in the Q1. We will have more pricing going forward. When it comes specifically to health and medical, that's just an ongoing process because it takes longer, as we always say. That will continue throughout the year.
Then as Fredrik mentioned earlier, we believe that some of our competitors need to catch up and that this will provide a favorable pricing environment also going forward. Then exactly how that comes into the different quarters this year, I can't really say. That's about the third question, price increases. Fredrik, do you want to talk about cost inflation? Yeah, I can give that a shot, Celine. If we look at the different areas, starting with health and medical, we expect about stable input costs there.
Basically higher cost when it comes to superabsorbent, a bit lower cost when you look at nonwoven as an example, and roughly about similar for fluff or sorry, a bit higher for fluff. Overall, you can say roughly stable as far as we can see at this point of time. When you take consumer goods, a bit more uncertain there. We expect. I'm talking sequentially now, because if you compare the kind of Q1 a year ago, of course it will be a lot higher. If you look at it sequentially, we expect slightly, with the delays we have, slightly lower pulp costs. That's at least our hope.
Perhaps a somewhat better currency conversion there, but it's a bit uncertain. Largely stable, perhaps a bit down when it comes to consumer goods. When it comes to finally, Professional Hygiene, stable raw materials. Basically for the same reason. It's difficult to give. This is our best estimate at this time. Of course, that can change. When it comes to SG&A, that's a tricky question I think, 'cause it's a very varying situation in different countries. Generally, as you of course, we just don't know that quite yet, simply because there are all sorts of salary negotiations and other indirect cost negotiations ongoing. It's a bit difficult to actually forecast.
Of course, I think it's quite clear that pretty much every company is facing significantly higher costs, as we go along, as inflation is high. Whether it's exactly single mid digits or a bit higher than that, very difficult to say
Did we cover all your questions, I'm Lai? I'm not sure.
The next question comes from Karri Rinta from Handelsbanken.
Yes. Thank you. Thanks for taking my two questions. Firstly, about the your comments as we now move from raw material cost inflation to indirect cost inflation. Can you discuss a little bit about the challenges in price management, i.e., raising prices between different divisions? I understand that it may be the easiest in health and medical because that's where the SG&A and sales force is a bigger cost item rather than input costs. Maybe more specifically, how much more difficult will it be in consumer tissue and in Professional Hygiene to raise prices on this indirect cost inflation? That's my first question.
Yeah. First of all, in general, we would like to talk about prices and price increases in relation to the value that we provide, of course, to consumers and to the retailers in building profitable shelves and also then digital shelves for them and making them competitive compared to their competitors, and not just base it on cost. Of course, that's easily what happens when you have the input cost explosion that we had last year. This year, I think it will be more about value and the value that we provide, which has been clearly visible with our relatively good service levels in most areas to competitors and our strong brands, our strong innovation and so on.
We're not always linking the need for price increases, of course, to the incoming costs. Maybe I misheard when it came to health and medical, but this is the area where it takes the longest and actually it's most difficult to raise prices because of many contracts being having a three-year duration, but also because of reimbursement schemes where countries need to change and increase the reimbursements. That takes longer. Momentum is picking up for health and medical. That's very good. It is a challenge, and it will take the coming year for them to catch up on margins. This goes then on not only for the raw materials, but also for the larger SG&A portion that they have compared to the other two business areas, as you mentioned.
This is something that they are working with very actively every day. So that's regarding pricing. Let's see going forward here. We have learned now to raise prices and work with price management every quarter instead of maybe once per year in Professional Hygiene and consumer goods. I believe there's a good basis now for continuously discussing what needs to be done on pricing so that everybody's happy with their margins and their overall profit levels. Fredrik, do you want to talk about the second question?
Was there a second? What's the second question?
No, not yet. It's still coming. Just maybe a quick follow-up on this.
Yeah.
Have you agreed on any one-year contracts outside the health and medical for 2023?
Could that be the reason for the delay?
I can't really answer that. I can't really answer that question.
Right. Fair enough. Then the second question that I had in mind was that the as Fredrik was commenting, you had negative overall savings in 2022 due to the very, very broad-based cost inflation. Now you're saying that SG&A salary inflation-
... those are still heading higher. Do you see any potential in sort of structural reduction in those items, i.e., to put it bluntly, headcount reduction?
I mean, this is-
maybe this
Yeah.
It's nothing new.
Over the last couple of quarters, we've been saying that inflation is coming, and we'll cover those costs as well through price increases and efficiency improvements. It's nothing that comes as a surprise. It's more visible in the Q4 numbers. Remember that some of those increases you saw there are kind of a little bit of one-time impacts that we now have incentive payouts that we haven't had for the last two years. We have a return of travel costs, for instance, but also, of course, more real underlying longer-term inflation. This is something we have been anticipating, and we are working very hard, not only with pricing, but also with cost efficiency, throughout the company. Sure, it's something that we're talking a bit about and working with every day.
Maybe just to complement, I, perhaps even repeating what you just said, Magnus, there, but a few factors that have been really impacting 2022 in general. The productivity and much as we kind of seen tight labor markets in the United States, especially in the early part of the year. The productivity and after post-COVID, so to speak, we also had lots of new employees in our factories, particularly in the United States, with lower productivity number as a consequence. That is not expected to be worsened. On the contrary, probably improved. If you also make another. You said it one-off. We have been facing a lot of surcharges also ourselves, energy surcharges that have come into on top.
This is also something that we as, in our way of looking at this, actually include as a negative saving. Those are more market movements 'cause all the competitors are faced with those. Of course, we don't expect them to increase, so that negative will not be increasing, so to speak. I think there is another factor also mentioned before, and that is that we have practically more or less zero bonuses in 2021. That was adding to the picture quite a lot, much more bonuses in 2022, and we don't expect that to be a kind of a drag on. We hope bonuses will be there, of course, but not increasing as we saw in 2022.
Finally, what you don't see because of the net accounting that we do or the way we show this, is that underneath the surface you see a lot of savings. All the ongoing projects are still generating sufficient or healthy savings. We will continue that high pace also in 2023. It will hopefully look better. Of course, obviously there's gonna be inflation, a lot of it also in 2023.
All right. Thank you very much.
The next question comes from Carl Voigt from Kepler Cheuvreux.
Yes, good morning. Thanks for taking the questions. I have two questions. The first one is with regards to your expected volume trends during 2023. Can you see anything with regards to when you expect things to improve a bit quarter-over-quarter? Is it already in Q1, for example? Is the China outlook is better? Related to that, the innovation agenda you have for 2023. The second question is on Latin America. Last year or 2020, you did a significant transaction, but the picture is a bit clouded. Are you exiting some baby business in Colombia? What has been the momentum in the LatAm business in the second half of the year?
What's the outlook for 23 for that part of the world? Thank you.
Okay. Starting with the volume development, very difficult to say. Of course, as I mentioned, our categories are typically very stable. These are products and categories that consumers need every day of the year. Compared to all other FMCGs, including our competitors, we had a much better volume development during last year than all others, and we only had a dip in the Q4. I think that was a quite strong performance. Having said that, I would expect volumes to kind of normalize and to see some volume growth in the year ahead, of course, because it's. Even if we enter into recession in some markets, that shouldn't have, and historically, that hasn't had a big impact on volumes in our categories.
China, I think there will be some instability in the first or Q2 as China comes out of COVID, and what that means, I don't know. We'll just have to see, I think. Latin America has been a huge success story over the year, they just continue to raise prices, grow volumes, strong market share performance, really firing on all cylinders. Really happy about Latin America and the performance there. We knew that the baby business that we had in Colombia through Ecuador was underperforming, what we decided was to step out of the diaper part of the business. We still have a substantial wipers, baby wipers business that's growing in a very healthy way.
Overall, strong performance in Latin America in an area where we will focus and really invest going forward.
Thank you.
We will take the next question from Linus Larsson from SEB.
Thanks a lot for taking my questions. May I just follow up on what we talked about previously on the call on other costs which have continued to increase across all 3 divisions, but especially in consumer goods. Could you just maybe talk a bit about what to expect in the 1st quarter? Are we seeing any easing, or are we expecting the same kind of cost or even higher costs on that other line for the group as a whole and maybe in particular on the consumer goods side?
Fredrik?
Yeah. I can give that a shot, Linus. It's a tough question to answer. If you look at just starting with the math a bit or the numbers we had in Q4, roughly about SEK 2 billion higher cost in comparison to Q1 of 2021. It's quite significant. As already mentioned, or more than SEK 400 million was related to distribution. About SEK 900 million or so was, or a bit more was related to SG&A. Finally, the rest was what we discussed earlier when you come to kind of production cost productivity, and I mentioned there as an example, maintenance and energy surcharges.
If I try and speculate a bit, and of course, part of that A&P, as I mentioned, the bonus increase that we saw here that was quite significant actually in Q4. Generally, we don't expect a lowering of the other cost line because of the kind of ongoing inflationary tendencies. We hope that we'll be able to have less impact from the COGS part, as I mentioned, as we continue to improve productivity and savings. When it comes to SG&A, I don't think it will continue to remain high, actually. Overall, we don't expect any kind of big decrease, Linus. The surrounding world doesn't seem to be behaving in that fashion for the time being.
Of course, we remain very, very eager to maintain a good cost structure, and we're doing just about everything to safeguard that happens.
That's clear. Many thanks for that clarification. Then on the other line, the one kind of the fourth division of yours, and you've had a big IT project ongoing. What's the update on that, and what's the other cost expected for full year 2023, please?
I can start with the IT project, which is our upgrade to SAP S/4HANA, where we launched successfully the pilot in May of this year in the Nordics and the Baltic countries. A good testing ground, 7 countries with all our different businesses and also plants in several countries. After expected teething problems, we are now designing the global rollout template, and this is incurring some costs according to plans. By the end of this year, beginning of next year, we expect to start the rollout in waves.
Of course, our expectation is, and what we're seeing now from the new ways of working in the Nordics and in the Baltics, is that there's a huge opportunity for efficiency improvements and automation, once we have this in a bigger part of the group. In the short term, there are some additional costs by running the old and the new systems in parallel, we can see from the performance in the Nordics and Baltics that this will really help us, once we start rolling out on the bigger markets that we're expecting to do next year.
I guess maybe I can answer the other question you had there, Linus, that was other sounds a bit odd, but it's group common cost you can say. Among other, there we include this project, the WOW project as we call it. In 2022, we have SEK 1.1. We expect SEK 1.2, roughly. You can deduct from that. That's typically salaries and a bit more spending on IT, et cetera. Roughly about SEK 1.2 billion cost for 2023.
Great. Just one final comment. You talked about the downtrading. What was the mix impact in the Q4? Do you have any guidance for the Q1, please?
I believe if I remember now correctly, we had positive mix throughout the year in all three business areas. Really happy about that continued development. We have that now for several years and in more or less all our categories. So we're still having a positive mix component. As we have stated, we don't believe that downtrading should have such a big negative impact, and that it will also be temporary because our categories are not such a big part of the disposable income in general. But again, we are well set to manage any downtrading with broad offerings also catering to those customers or consumers.
That's also part of our innovation efforts for this year to launch more attractive assortments also in the good and better parts of the business. Fredrik, anything else there?
No. I think, just to emphasize exactly what you said, mix is of course impacted by downtrading. Overall positive. Very good performance.
May I squeeze in one last question? It would be on the net interest cost. It was SEK 570 million in the quarter. Is that a good proxy for the coming quarters?
Yeah, it should actually be there and then perhaps increase slightly, but thereabout.
Thank you very much.
We will now take the next question from Victoria Nice from Societe Generale.
Hi there. Thanks for the follow-ups. just wanted to clarify when you say raw material levels, sequentially similar in the Q1, do you still mean an impact of 100% on profit and not lower? raw material deflation should start in the second half of the year as it stands right now, is that how you see it? just on energy costs, should we think about it bouncing back to over 30% impact on profit in the Q1 as subsidies and other one-offs disappear? Thanks so much.
Thanks for your questions, Victoria. I'm not 100% sure I understand, but let me just try and see, try to answer, and please help me if I'm not answering. What I was referring to before was the sequential, so stable in comparison to what we experienced in Q4 when it comes to price levels. That was what I was referring to. If you take Q1 of 2023 versus Q1 of 2022, it will be significantly higher for all three business areas. That's what I meant. When it comes to energy, we haven't given a forecast there, but as I mentioned previously, you saw that quite significant decline between Q3 and Q4 of 2022.
Of the roughly about SEK 500 million, and they were mainly, you can say, related to one-offs, not only, there's also better spot prices, but a big part was actually related to one-offs and the subsidies, and they are not expected to be there in Q1. Hence, we'll see much higher energy costs.
We will take the next question from Othman Bercha from Bank of America.
Thanks for taking my questions. I have three. First on price, pricing in consumer tissue. You mentioned competitors needing to catch up on pricing, which would be favorable for your ability to raise prices. Also you have some competitors which have had to stop production because of energy costs. They are coming back, which will put additional pressure on volumes and pricing. Can you give more color on the supply of consumer tissue in Q4? How do these two factors balance out in your ability to further raise prices?
That's correct that especially in the Q3, we saw some competitors who were actually stopping production because of the high energy costs, and they are back producing. Supply-demand balance in Europe is quite good, actually. We don't expect that to have a big negative impact on our pricing opportunities in going forward. From a balance point of view, we've had fantastic momentum throughout last year, and we aim. Of course, it's always very challenging, but there's no real change in the market environment looking forward.
Okay. Thank you. On your cost savings, as looking to the next two quarters, if you can give some, should we expect your cost savings initiatives to be offset by inflation, meaning that you will continue to have negative savings?
Fredrik, you wanna take that one?
Yeah, I can. We don't give actually a forecast. I can't give you that overview. As I previously mentioned there, we have a high activity when it comes to cost savings underneath, but whether that will be kind of on a net basis, positive or not, I can't really say. We don't give that forecast.
If I could step in here, it's, We're running over quite a lot, and I know I have some interviews coming up. Maybe we can take one last question, and then unfortunately, it's great to have this discussion, but then unfortunately, I think we have to close the conference.
Okay. maybe just a quick one. Do you intend to further exit any businesses in 2023?
Like with all both acquisitions and divestments or exits, it's nothing that we really can give any indications on beforehand, and there's nothing substantial that we're planning for in that area.
Okay. Thank you.
Operator, maybe we could have one last question.
We will now take the last question from Simon Öst from DNB Markets. Please go ahead.
Yes. Hello. Good morning. Just one quick one on gross margin. A competitor of yours reported figures yesterday and said that current, at current input costs, they expect a year-on-year improvement in gross margin in every quarter in 2023. How do you reflect on this, and if this is the case for you as well? Thank you.
We don't give those types of forecasts, so I can't really say anything more about that. We don't give full year guidance, and not on that detailed level.
Okay. Just some comments on kind of how you think about the margin then, and the kind of the gross margin component.
Gross margin is, of course, one of our key metrics and something that's also very visible in our incentive schemes. It's something we're working with very actively, and it's the improved gross margins that gives us the ability to continue to invest in the brands and in growing market share and improving net margins. It's a key component for us and a high priority always to work on improving gross margins in every way we can.
Okay. Thank you.
Okay. That was the final question, you know where to find, Johan Karlsson and Sandra Åberg for follow-up question from the IR team. With this, we conclude today's conference. We wish you all a good day.