Welcome, and thank you for standing by. I would like to inform all participants that this conference call, as well as the Q&A, is being recorded and will be available to clients of J.P. Morgan. Parts of this conference call may also be reproduced in J.P. Morgan Research. If you have any objections, you may disconnect at this time. Press participants are not permitted on this call and should disconnect now, unless otherwise permitted by internal J.P. Morgan policy. Members of J.P. Morgan Investment and Corporate Banking are not permitted on this call and should disconnect now. At this point of time, all participants are in a listen-only mode until the Q&A portion of the call. Please, I would like to turn the call over to Celine Pannuti.
Thank you. Good afternoon, good morning. I am Celine Pannuti, and I head the Consumer Staples Research here at J.P. Morgan. Thank you for all of you to dial in today with a fireside chat session with, Magnus Groth, CEO of Essity. Thank you, Magnus. I'm delighted that you joined. Magnus-
Yeah, thanks for inviting me.
You're welcome, anytime. Magnus, you reported Q1 results last week that showed a very strong cash performance, and as well, the rebuilding on your EBITA. And at the same time, you underlined the changes of the portfolio since Essity was split out of SCA. So I think it's quite an exciting time to have this conversation, and I know that we are all waiting for your midterm target to be announced, I think, imminently, let's say in the next few months. So I would like to discuss that. You know, of course, we'll talk about the higher cash return potential post the Vinda sale, but also some of the near-term challenges that you are continuing to navigate.
So if you allow me, I will start with the near term, and then we'll go into more, the strategy point later on in that discussion. So if I first start with volume, if you look at the demand environment, you excluding restructuring, last Q1, you reported volume growth of about 0.6%, and the growth was, 0%-1% across all your three divisions. So that's a positive number, I presume, nonetheless, but maybe potentially, lower versus your midterm opportunity for that portfolio. So my first question is really to understand where do you expect, the volume demand improving on the underlying basis in the next 6-9 months, like, by region or by category?
Then, I think we will be talking that as well later on, but you probably will need to return to price increases in some of your categories, especially consumer tissue and professional hygiene. I just wanted to understand how you think the underlying volume demand will develop, given those price increases.
Sure. Thanks, Celine. And, yes, thanks also for acknowledging, that we're kind of, shifting page here. After creating Essity, we spent a lot of time creating a common culture, go-to-market, way of working, supply chain, working a lot with efficiencies. And, and the reason for this is that, Essity was created through numerous acquisitions, and we worked very, very hard to also put in place different structures that makes us more, more modern, more efficient, and, and well invested. And we feel that we've come a very long way now, and now we can focus, and have the right to focus, on growth, and specifically volume growth, because we have improved our margins significantly year-over-year-over-year for a long time.
And we've done that through restructuring, premiumization, innovation, and so on, but we haven't done it through operational leverage, and that's something that we're aiming for now with the modern supply chain that we have after a lot of restructuring over the years, acquisitions, disposals, and so on and so forth. So sorry for giving a very long-term perspective over the last six, seven years before getting into the short-term volume development. And that's anyway, the background why we feel that we have the right to grow because our brands are strong, our market positions are strong, our go-to-market is strong.
Of course, the last two years has been very much focused on also pricing, taking pricing due to the raw material tsunami we had a few years ago, and the same in energy and so on. Yes, that's definitely our plan this year, to grow underlying volume, and Q1 was encouraging, 0.6%. In the longer term, if you look at the organic sales target that we have currently, which is 3%, we typically have said that, you know, 2% should come from, should come from volume and 1% from mix, because in the long term, you can disregard pricing, which more follows kind of underlying inflation, raw materials, and so on. That was, of course, when we still had Vinda in the portfolio, which contributed to volume particularly.
But, I mean, the underlying market, we believe, is about 2.5% of growth. And penetration remains high, even in times, when times are tougher, even when we see downtrading, people still consume this product. So... and we still, of course, have an aging population suffering from, living longer with chronic conditions and wanting to live an active lifestyle. So there are a lot of things kind of driving underlying growth still. So, so that's our ambition, and that's our plans for, for both the, this year and going forward. And yeah, geography categories, of course, if, if you look at the opportunities, underlying growth is faster in Latin America for us, definitely than in, in Europe. And, so that's from a geographic perspective. We are working very hard in-...
Increase our presence in the U.S., which is becoming more and more central, I think, for any FMCG company with everything going on in the world. And when it comes to our categories, there's a clear difference. We can see that the MedTech, the medical categories, incontinence care, both in health care and retail, are clearly growing faster, I mean, typically 4%-7%, something, depending a little bit on the subcategory and so on. While professional hygiene, you know, 2%-3%, and then in the consumer categories, feminine care is not growing very much, maybe a percentage point, but that's an area where we are typically growing very nicely.
Baby care, close to flat, and then consumer tissue, which accounts for a little over 30% of our sales now, it grows by, you know, 1%-2% where we are. So, we're clearly, of course, emphasizing the categories and the geographies where we see the highest growth combined with high margins. So that would be then, Inco Healthcare, medical, and Inco Retail, fem care. That's... And professional hygiene is always good for us, so that's an area where we want to outperform the market, clearly.
Right. Thanks for that. Maybe if I look at pricing, so your pricing was negative in Q1 at the group level, because of the price decline that we've seen in consumer goods, which we attributed on consumer tissue, where you had some price fallback at the end of last year. Now, given that you are going to see some price rise in costs, cost increases in pulp prices, that will impact your P&L from Q2, what is your ability to reverse those price increases or to lessen the promotion? And I presume that's consumer goods, consumer tissue and professional health. But maybe, following up on the question just earlier, given the current profitability of the portfolio, are you willing to maybe prioritize volume in the short term, versus margin?
We think we can combine in the longer term than individual quarters is very difficult specifically to view have a view on. But you're right, that pulp prices are up this year, and this impacts around 33% of our sales, because it's mostly consumer tissue. We, of course, use some pulp also in professional hygiene, but even more, we use recycled fiber in professional hygiene, and that's not been impacted as much. Of those 33% of our sales, 26% are in Europe, and that's where it typically takes a little bit longer to raise prices.
In Latin America, we are typically very, very agile, but we've become much more agile in, in Europe as well, as, as you've seen during the last pricing cycle, where we stated, and this is still the fact, we are willing to negotiate every quarter with retailers, and we have systems and relations and ways of doing that. And it's interesting right now that three of our biggest consumer tissue competitors in Europe have announced price increases through different kinds of press releases and so on. So, from that perspective, I mean, that shows a positive momentum that this is something that they are aiming for and definitely something we are also aiming for.
So, at the same time, we have lost volume in consumer tissue, specifically, to some extent, in some other categories, for pricing reasons, and that's something we aim and believe that we can take back throughout the year. So we're gonna combine pricing and volume growth. That's definitely our plan for the medium term.
Okay. And maybe, you know, just following on that same topic, so yes, you mentioned pulp prices going up. Also, I think you could have crude oil prices that at some point will also be unhelpful. Now, I think what you get into higher costs in Q2 due to this higher cost of pulp, but also you mentioned that you will have higher savings. We'll come back to that, and lower energy costs. And obviously, I think what has been good in Q1 is that you managed that COGS price gap that helped-
Yeah
... favorably, the EBITA margin. So I just want to understand how that gap continues to evolve through the year, through the quarter, because at some point it will neutralize. So can you explain a bit how we should look at that?
In the long term, or I would say that kind of the margins that we achieved in the first quarter are quite good. Of course, we had an EBITA margin including items affecting comparability of 14%. And margins were quite good in all our three business areas. Definitely, we want to improve in each area as we move forward, but that means that the price-cost gap is quite good. And even if that could, you know, become bigger and smaller, we know that we can always compensate and that we will eventually... I lost your camera now, but maybe... That's better.
I mean, this would be a nice price-cost gap to keep, and then it could vary between quarters, but long term, I mean, this is a nice level. So then in individual quarters, as you say, we can support by maybe increased rebates from suppliers, by savings, by you know, maybe temporarily reducing promotions a little bit, and so on. But our aim is to have the price-cost gap we have today in all our businesses, and you know, eventually maybe also, of course, not maybe, but work to increase it further. Now I lost the sound, Celine. Sorry. I can't hear you.
Yes, I'm back. Yeah, the other thing that you mentioned-
Perfect.
at Q1 was your A&P spend, that was up 70 basis points, and you talk about innovation, the marketing support, on your, you know, to fuel the market share gain. So I wanted to understand, where do you still see a market share opportunity, within your portfolio and your market? And then on that A&P spend that was at 70 basis points in Q1, how should we expect the step up in marketing for the full year, compared to last year, you were at 4.7% of sales?
Yeah, I think it's a good level. It's partly because we're investing significantly more, because we have good innovation, we have strong plans, and we believe that this is value generating. Of course, I mean, looking back, we have higher margins now than we've had in a long time, and with these margins, 14% for the group, it's very value creating to fuel growth. It's just, you know, pure mathematics. When we had lower margins a few years ago, it wasn't as beneficial to fuel growth with A&P, then it was more nursing the margin to higher levels. So definitely we believe this is a level that we can accept. I mean, it's a little bit artificially higher by the fact that we had somewhat lower sales in Q1 than a year ago, of course.
But this is a good level, and I mean, we're going for volume increases in all our different business areas and categories. I mentioned that priority is where we have the highest margins and the best return on our capital employed, which is, as I mentioned before, Medical, Inco Healthcare, Inco Retail, Fem Care is very good, also Professional Hygiene. But we also see that also in Consumer Tissue and in Baby Care, where we now have very, very good businesses. These businesses are, I mean, in great shape compared to a few years ago. It's a strong brand, strong market positions, a lot of good innovation that's fueling growth. We can really, you know, invest in a way that maybe wasn't value creating a few years ago.
So, and it's also in those two latter categories, so baby care and consumer tissue, where we really can also get operating leverage going forward now that we're done with restructuring and, you know, changing the production footprint and so on. So, we're aiming to grow in all these areas, and from a geographic perspective, of course, growing as fast as we can in the fastest growing markets, which is very much for us now, Latin America.
All right. And so on A&P, as a percentage of sales, like, is the 70 basis point that we see in Q1?
Yeah, if it's... I mean, between 5 and 5.5% is definitely in our plans in order to fuel this value-creating growth, which of course should be combined then with nice value-creating margins. So we aim to find that balance, and we think we have good plans for that going forward.
Yeah. And then the other last question on the short term is on savings. So you mentioned that you will be aiming for the delivering saving at the top end of the SEK 0.5 billion-SEK 1 billion this year. Can you talk about where do you see the opportunity, where the efficiencies are coming from? Yeah, give us example of maybe some of these initiatives.
Yeah, and we also actually looked at the waterfall just before here. And we had savings of over SEK 400 million in the first quarter.
Yeah.
And for this reason, we guided that we will probably end up in the higher end of this range, SEK 0.5 billion-SEK 1 billion. And important to state that this is now net savings in cost of goods sold, so it's not some kind of gross saving that could be offset in other ways. So we first have to eat all the inflation that we see in salaries and so on in COGS, and other cost increases, and this is the net of all that, so it's a very strong development. And where we have really improved, one of the areas where we worked very hard over the last couple of years, and that's really working completely differently now, is in sourcing. So we have the more qualified suppliers so that we can add competitive tension.
We're buying materials that, you know, inherently have a lower cost. And we're also, in many cases, working closer with our suppliers to really work together to reduce overall costs. So sourcing is important, and also, of course, achieving rebates here, especially when costs are going up. Material rationalization, using less material in the products, is also in the quarter contributing. Energy savings is actually quite a nice saving in this quarter. Fiber mix improvements, I know we've spoke about this for many, many years, but we're using less and less long fiber and more and more short fiber than eucalyptus, and this continues to be very positive for us. And then it's the overall efficiency improvements in our plants.
Actually, looking back, especially in the personal care part of our supply chain, our efficiency is significantly higher than a few years ago, and also improving year-over-year in the tissue part of our supply chain. So it's in all areas. We all of those are positively contributing to the savings in the first quarter.
Thank you, Magnus. Maybe let's go back to the midterm targets. So, you have committed to come back to us with the targets, and there will be several bits to that, bits to those targets. But first, I wanted to talk about the top line targets. So, the prior target included M&A, so just want to confirm that your new target will be organic, excluding M&A. And as you mentioned earlier at the beginning of this call, the previous target, which was 3%, so you said 2% volume, 1% mix, including Vinda. So ex Vinda, you know, how you feel about your growth opportunity?
I mean, if you can talk about some of the new white space markets that you think can fill the gap, now that you have sold Vinda. Then, yes, you mentioned earlier that the 2% volume, 1% mix in terms of balance, would that's something that you think should continue?
Yeah, I don't want to preempt the announcement of our new targets, of course. It's, we- I agree with you that it's-- we're not going to have a kind of acquisition-related growth target because it's kind of meaningless, even though acquisitions are definitely part of our strategy going forward. We'll talk about that maybe at some point later today, then, it's not useful to have a target in that area. When it comes down to the organic part of the growth target, Vinda contributed about 1 percentage point. We've run through all the numbers regarding our category growth in diff- where we are currently than our current footprint, in the different geographies.
We believe that the underlying market growth in our category, country combination is about 2.5%. And of course, we would like to grow a little bit faster than the underlying growth. So I mean, that's just a consideration, and we'll come back with a final number, as just stated, within this quarter. But those are just some kind of high-level considerations. So we believe that our markets are growing probably around 2.5% organically.
Yeah, and then the second part of the-
Yeah.
Yeah, go ahead.
No, I think I stopped there.
Okay, good.
Because I forgot the second half of the question. So,
Yeah
If you could reiterate that. Yeah.
Now, the next one was on the rest of the target. Obviously, there will be or so far, you have a ROCE target that's 17%, which you achieved this year, in fact, in Q1. And you mentioned earlier, Q1 was a very strong profitability level. EBITA was 14%.
Yeah.
Gross margin was 33%, which maybe might have been one of the highest level you've ever achieved, or it's ending. What's really the question is here is, what do you see a structural gross margin level? Because for quite some time, your gross margin has been below 30. Now we, we've reached 33, in Q1. And then from a EBITA margin standpoint, where do you see gap, in terms of structural gap by division or by regions?
Yeah, and without becoming too detailed, yeah, we're really happy with the 33.2%. And again, with that gross margin level and with that EBITA level of 14%, growth becomes so much more value-creating in the overall equation. So, you know, a number of years ago, when we had lower margins, growth was not as value-creating, but definitely, this creates shareholder value now. So, it's what I want to say is that growth and margins are, of course, linked together, and especially if we can also achieve better operating leverage, which we believe we can. Yeah, we achieved the 17%, and thanks for acknowledging that, both in Q4 and Q1.
Having said that, of course, Vinda used to be a drag on our ROCE of about 1%, so you could argue that, you know, we should, to reach our, the target that we have in the old structure, 17% ROCE in 2025, that would then translate to around 18%, that we still have kind of some way to go. But of course, we also have some time to go to 2025, if you look at it in the old target structure. But overall, you know, with the return levels we have, with the margins we have, growth becomes more value-creating for our shareholders. So we're looking to find that balance, and we'll get back within this quarter with those targets in those two areas.
Yeah. Okay, thank you. The next point was a bit about-
Yeah, it's a different... sorry, I forgot to answer by divisions and geographies.
Yeah.
Right now, I mean, this quarter, we were firing on almost all cylinders, so then there's always opportunities in different areas. But then eventually, you know, when they go better, some other areas might have some new challenges, so depending on, on, many different reasons. So it's not that, you know, I would point at one geography or one category today saying that this is really bad, we really need to fix this. I mean, that's what we've been doing now over the last five years. So everything is doing, you know, reasonably well now. And of course, now it's more about gradual, continuous improvements, overall than, you know, pointing out one area where we need to improve, big time.
Now that you have sold Vinda, I just wanted to understand your thought process about cash usage and the priority between returning cash versus M&A, so in the form of share buyback. Obviously, in terms as well of your portfolio, you had a lot of changes that you mentioned in the past years, M&A, disposals. Do you think... Are you happy now with the way the portfolio is set up? And is M&A more incremental going forward?
Yeah, I believe M&A is more incremental from the perspective that we don't expect to venture into completely new areas like we did with medical seven years ago, which is now really taking off with the bolt-on acquisitions that we've done, really adding value. Or, I mean, more kind of drastic acquisition was into washable absorbent underwear, which is a very exciting area for us, but also kind of moving away from maybe, you know, our core business a little bit. Of course, it's still feminine care, but moving away a little bit. I think we will do more of, you know, bolt-on acquisitions in the categories and geographies where we are already present.
And to take some examples there, both Abigo and Hydrofera, which were two advanced wound care acquisitions we did in medical, they've been very value-creating because they had good margins to start with, we could help them fuel growth, and there were clear synergies where we had, for instance, different customer basis and could then sell, you know, cross-sell products and so on. So that's been really useful. And Hydrofera in the U.S. has been growing over 20% now for since we acquired them, and really helping our position over there. Asaleo, Familia, were two acquisitions where we were already part owners or joint venture partners, that were also very value-creating when we could take full control and then work with both cost synergies, the supply chain synergies, and so on and so forth.
So, it's of course quicker to derive value from acquiring companies in categories and markets we already know, and that's clearly a learning that we have and where we see many opportunities going forward. Maybe on that note, just a reflection here, we've done some very successful divestments. You mentioned Vinda, where the sales proceeds was SEK 19 billion, and actually the capital gain was SEK 9 billion over 10 years. So the TSR per year during the holding period was 14%. And I think we're one of very, very few companies that have been able to pull out of Russia and actually be paid in hard currency, which happened last year. I think it's, I mean, that's, it's maybe a few hundred out of several thousands that have been able to do that.
So I think we've done quite successful divestments also over the last couple of years. But definitely, it's, as you said, it's part of the strategy, but more kind of bolt on. And then when it comes to cash uses, we'll get back to that when we update on the financial targets and policies. So definitely, because we have a strong balance sheet now, and net debt/EBITDA, I think, was 1.36 after the first quarter. And of course, our current policy is to stay solid investment grade, so we're managing that very easily. And we also have a very strong cash flow from our own operations now for the third quarter.
So that's kind of just part of the thinking now, going into our considerations for announcing new targets and policies.
Mm. Maybe just to finalize on this one, because I think you mentioned some of the recent acquisition. Could you update us, like, the growth rate and profitability? So in personal care, you had Modibodi and Knix, and in medical, you mentioned Abigo and Hydrofera. Could you update us on that?
Both Hydrofera and Abigo are growing very, very nicely and with very good margins, so the double digit growth. I mean, BSN Medical was an acquisition seven years ago, and we've gone through the whole cycle with the pandemic and everything. And as you can see in the numbers now in the first quarter, Health and Medical is performing quite nicely. Knix is doing really, really well. We had a very tough comparison now in the first quarter. They had quite significant negative growth, but they had some big campaigns last year. And we're working very closely there to get back to growth and expect to have good growth for this year, all by the end of the year, and the same with Modibodi.
There's been a little bit of a reset because of the consumer climate, as consumers are more concerned about, you know, paying upfront for a product that can be used—that's more expensive, but can be used multiple times, so a washable, absorbent underwear, rather than buying pads and liners. But we're just scratching the surface when it comes to absorbent washable underwear. We see that especially the young consumers are really, really into this. And we have established ourselves as the global number one in this subcategory of feminine care and incontinence care, and I believe that this will develop very strong over the next years.
All right. Maybe I would like-
And both Familia and
Yeah.
Yeah, both Familia and Asaleo are doing really, really well. Familia is a fantastic company with a really... I mean, maybe some of our strongest brands, and a consumer orientation and consumer focus that is quite amazing. And also, Asaleo in New Zealand and Australia has been gaining market share very successfully ever since we acquired the company, which we part own, but it was listed on the stock exchange in Australia.
Now I would like to maybe spend a bit more time, deep diving in each of the three division. Starting with Health and Medical that you just mentioned. You're right, it has been a robust growth and strong profitability. Now, can you remind us the split of medical and incontinence in that division? And then looking specifically, for medical, what do you think are the opportunity, from a category or geography standpoint, from this, sub-segment? I mean, this is quite a fragmented market, and there are a lot of competition, there is a lot of competition from MedTech players. So, where do you think that ACT may be, as a, an opportunity to do better, in terms of distribution or in terms of products?
So where are the gaps really, for you in that market?
... Absolutely. Yeah, so out of Health and Medical, medical is 41%, and Inco Healthcare is 59%. Looking at medical, we typically talk about three sub-segments or therapeutic areas, and that's wound care, it's orthopedics, and it's compression. The area that's really doing well, and where we did the acquisitions I just mentioned, is wound care, both acute wound care and advanced wound care. So both areas developing very, very nicely, everywhere where we are positioned today. In general, our medical business is very much a European business, but we're aiming to grow both in North and South America, so Latin America, as well as in Asia, where we have a quite nice position in medical and actually outside of China, so in Southeast Asia.
Compression with the JOBST brand, we're global number one. It's starting to take off, and we're starting to see the growth that we expect from this. It's been a long journey, and we've really rejuvenated the brand, the go-to-market, the assortment, and it's really starting to work well now. And the same with the orthopedic soft goods, where we have the Actimove brand. It's not a rapidly growing category, but we have a couple of areas there that are doing really, really well. Geographically, overall, yeah, Europe is our stronghold. We're growing nicely in the emerging areas I mentioned, and we would like to have a strong position in the U.S. I mentioned that the Hydrofera acquisition really helped us. We also made a tiny, tiny acquisition, the sports tape brand, Coach and Zonas.
All of that helps us to kind of establish ourselves with the new customers in that area and also with the new products, but we're still tiny and subscale in the U.S., so that's definitely a prioritized area for us to see how we can grow faster in medical in the U.S.
I need to continue on that division. For health and medical altogether, you reached 19% margin in Q1, which I think probably was the highest level for that division. Coming clearly from some pressure last year, do you think that such level is sustainable, and what is the structural driver for such a high margin level?
Yeah, the recovery has been quite remarkable compared to a year ago, margin-wise, considering that most of the business in health and medical is on three-year contracts.
Yeah.
So only one-third of the volume end up retendered every year. So we have been able to raise prices much quicker than what's in the contract terms, so to say. We have raised prices also in contracts that have not been up for renegotiation, so the team has done a fantastic job there. And one way now to continue to see really, really... because these margins are very, very good, it's volume growth. Because one thing that also differs this business area from the other two, and the reason why we have three business areas, is that we have just completely different customer bases and go-to-markets, is that, you know, this is where we work with healthcare providers.
Could be everything from big hospitals to the NHS to singular elderly care homes, and typically heavily reimbursed areas and tenders and so on. This means we have a huge sales force. We have feet on the street really out there showing the benefits of our products and meeting with, we negotiate thousands of contracts every year, and kind of our sales force is out there talking to the different customers. So this is an area where we have a huge benefit of scale and volume, because we have a big fixed cost in the sales force, in the SG&A. And, of course, we are aiming also to make that SG&A more efficient, but still it's important to have it in order to grow.
So volume growth is clearly a top priority, and that coincides with the fact that this is where we have the highest margins and also the highest return on capital. So, clear focus for health and medical to, you know, increase growth as much as possible, as it's very value creating.
Good. Turning to consumer goods, first, I wanted to talk about personal care. So you've done quite well in feminine care and in Inco. I would like to understand a bit, your views, on these two categories, and especially from a geographical standpoint around the U.S.A. How big are you now in this market, and what kind of growth and opportunity you see there? You mentioned the U.S. earlier. And then likewise, on Latin America, which I think has also, been helped by the acquisition of, Grupo Familia, how the performance have been, there.
Absolutely. So now we're talking, personal care.
Yeah.
Overall, North America and Latin America are about 17% each of our sales, but only in North America, only a smaller part is personal care. It's actually, you know, 4%-5% of the group sales, and this is, as you stated, basically incontinence care, healthcare, incontinence care, retail, and feminine care. If you look at it from our perspective, we have about 15% of our Inco Healthcare sales in the U.S., and a similar number for Inco Retail. So it's a small part of our sales in those categories. We're also a small player in the U.S., and when it comes to feminine care, it accounts for about 9% of SP sales, and that's just mix.
We have some sales also in the Hispanic parts of Hispanic-speaking parts of with the Mexican products also. So it's small for us, but we believe it's a huge opportunity. In Canada, we are a market leader with the TENA brand in incontinence care. And then, of course, yeah, we can get back to that later. So what we're seeing an upside from is that when we changed the organization into the three business areas and made, you know, global or semi-global business areas, we put a completely new consumer team in place in North America. And I think that's already paying off both online, very much with Amazon, but actually also increasingly, you know, in retail stores.
So from a very low level, we're seeing some positive development there, both in Inco Retail and in Inco Healthcare, where we then also have a completely new organization in place. Because, you know, when we split into three business areas, Inco Retail and Feminine Care ends up in Consumer, while Inco Healthcare ends up in Health and Medical. So we really now have the right go-to market and the right competencies, and the right people in place to grow from a small position in the U.S. And likewise in actually in Latin America, I mean, where we are really super strong everywhere, both with Feminine Care and Inco Care. But having that focus now with a completely consumer-oriented organization is really helping.
If I look at the consumer goods as a total category, at Q1, you mentioned that Inco Retail and Fem Care were the area of growth, while Tissue and Baby were there to realize the operational leverage. Can you talk about how you think about the growth of that category versus the profitability?
Of the consumer tissue, specifically, or-
No, I mean, that's-
Or-
You know, like how, for instance, it feels to me that Inco and Fem Care are really the growth driver, and then you look at the-
Yeah
... profitability, leverage from leveraging Tissue and Baby. So how you basically manage that top line versus margin opportunity? And then, yes, I have a question on consumer tissue margin after that.
Yeah. Yeah. Yeah, with all the changes we did in consumer tissue and Baby, we feel that the business we have now is very strong and has the opportunity to create value. So, what we have now is, in consumer tissue and in baby care, are some very strong branded positions in Europe and in Latin America, when consumer tissue, not in Baby, we have various left. And we also have some strong partnerships with what we call retail brand customers, where we have been working together for decades to build strong brands. And we feel now that with all the restructures that we've done, all the cost improvements, all the innovations that we have, that also consumer tissue and Baby is in a good position to create value for the company.
In fact, maybe if I look at consumer tissue Europe more precisely, I mean, are we done now with the efficiencies or there are more to be done? And then can you talk about innovation and premiumization? I think that's something that you were talking a lot in the past, I think, would be interesting to see where we are at specifically in this category.
Absolutely. Yes, we are more or less done, and that goes for restructuring in general. There could always be something somewhere. Of course, we're a big company with a lot of assets, but overall, don't expect any big program announcements or anything similar to what we did in the professional hygiene in the first half of last year. That doesn't mean that we will not work with, of course, continuous improvements in areas I already mentioned, and building the brands and so on. So what's happened here in the last year, with a little bit of a more kind of negative consumer sentiment, is that we have seen downtrading in consumer tissue, specifically in Europe and in Latin America.
It hasn't impacted the premium part of that business very much, so we're still very much focused on premiumization. But having said that, we've also worked hard to improve our... If you look at good, better, best tiering to improve our good assortment so that we catch our customers, you know, before they leave us for private label. So that's been a strong push from our side. So the better segment has moved down to good, the good segment.
The premium segment is still quite nice, but that's been a strong focus for us and also a way to now get volumes back, that we have a strong offering in lower tier for consumer tissue without giving up on the higher tiers, where all the different launches we've done over the last couple of years are growing very, very nicely, like the coreless product, like the wheat straw mixed product in Germany, and like, for instance, the four-ply Just1 product that we're launching in country after country. All of these are doing really, really well. So, we're continuing with the premiumization strategy, but adapting to the current trading environment, basically, when it comes.
And it's the same in Latin America, where we are very, very strong in Mexico and in Colombia, and Ecuador, basically, and Peru is in consumer tissue.
Maybe moving to professional hygiene. This is an area where, you know, this quarter, we've seen a big impact from the restructuring that you are doing. Can you talk about what, you know, ultimately, what you think the current, the... How, you know, this is helping the division in terms of its go-to-market, in terms of its top line opportunity, and I would say profitability, too? I think margins were in the mid-teens. In the end, is that a business that could structurally be more in the high-teens level?
Again, margins are good in also professional hygiene, but eventually I think we could work towards a higher margin through mix improvements. And, you know, again, just the fact that we changed our organization a few years ago to the three business areas and having a global setup for professional hygiene made us realize that we still had businesses and assets that were very, very low, low value, unbranded, basic napkins, basically, that we were selling at close to zero, very low margins. It would never grow. And we said, "Let's. It will always be a drag on margins, even if it's nice for top line, but it's not gonna grow top line, so let's just restructure." We closed a big plant in the U.S. and a number of paper machines and converting lines in Europe.
And what we stated at the time was that this would have a negative impact on growth, but a positive impact on margin. And we believe that it has a significant positive impact on margins on professional hygiene, actually. So I mean, if it's... I think we said 2 margin points on professional hygiene, and if that's now over 20% of sales for us, it has, you know, maybe not 50 basis points, but, you know, 30, 40 basis points impact on the margin for the group, which is a significant contribution. Looking forward, we will have the same negative impact on top line in Q2 as in Q1, and then it will diminish over the second half of the year. But, I mean, we expect to have the same positive impact on margins.
And maybe looking into next year, we have now realigned the entire sales force to focus on the very high margin, differentiated, strategic product areas, where we have, you know, patented offerings, like for PeakServe, like, Xpressnap, which is growing and growing and growing, or the SmartOne system, toilet system, that's also growing and growing and growing. That's, that's where we want to grow, and that's the way to also, improve margins over time. And again, operating leverage, same as for consumer tissue.
Can we just, to finish off on consumer tissue, talk about Western Europe and North America? I think those are the two biggest markets. You have a strong hold in both. If you could talk about the competitive performance in each region.
But you were talking professional hygiene, I guess, now?
Yes.
Or... Yes.
Yes.
Okay.
Finish off on professional hygiene, yeah.
Okay. Yeah. So we have about 40% each of our sales in Europe and North America, and about 20% in emerging markets. And we have enjoyed good margins in Europe now for a while. We have improved margins significantly in the U.S. over the last year and a half. And in Europe, we're the clear number one. In the U.S., we're the clear number two, after Georgia-Pacific. And I'm also now, as I stated during the pandemic, convinced that we are investing more in professional hygiene than any of our competitors. We really see this as a key business where we can really differentiate with these patented systems, where we don't have to talk about, you know, the price every day, but actually the cost to serve, and where we also have considerable sustainability claims.
We have recycling services, and we have, you know, not only lower cost in use, but lower sustainability impact from using our systems. So I believe this is an area that we can really continue to grow and leverage, going forward.
Excellent. So listen, we arrive at the end of this. Maybe would like to have a conclusive to conclude discussion really on the midterm target, which anyway, you're going to announce in a few quarter, a few months, so let's see. But would it be fair to wrap up to say that you expect organic growth targets, potentially a margin target, and then, you know, you were mentioning payout, DPS, and capital structure targets. So if you... I mean, are those four elements what we should be looking for when you discuss? And then, you know, maybe any conclusion you want to say regarding, you know, the positioning of Essity since all the changes that we have been discussing in this call?
Yeah. I know when it's, since we haven't announced a different target yet, but very soon, I think I wait providing more, but I think I provided some clarity already during this call. And then, yeah, overall, of course, concluding, as I started, SCA is in good shape, and we worked throughout the last couple of years, and actually over the last six, seven years to really, you know, rebuild the company bottom up in many different areas. And now we feel that we have the assets and the people and the ways of working that gives us- and the margins, of course, that gives us the right to grow, and that's what we're gonna focus on after all these years.
We're in good shape, and we feel very confident about the future. And yes, that's what we're working with now for this year. And less, as you asked, also less restructuring, less uncertainties, maybe more consistency. But actually, having said that, you know, typically we can get stuck on individual quarter and the performance this way or that. As you know, I always like to look at the 10-year trend, and if you look at that, we have consistently grown both top line and margins year-over-year. Then we had a dent in the curve during the two pandemic years, and now we're back on track again on a trajectory where I think we can continue, or we aim to continue to be on going forward.
Excellent. Thank you so much, Magnus, and, and thank you everyone for joining.
Thanks, Celine.