Earnings Call: Q3 2020

Oct 22, 2020

Hello, and welcome to Essity's Third Quarter Interim Report 2020. I'm Josephine Edwel, Head of Communications. And on today's call, our President and CEO, Magnus Groot, will go through the keynotes and the report, followed by a question and answer session where our CFO, Friedrich Roos, will join. So with this, I hand over to you, Magnus. Thank you, Josephine. And to summarize, I guess one of the highlights of this report is that we raised our target for adjusted return on capital employed from being above 15% to a new target to be above 17% by 2025 at the latest. And we will do this through continued execution of our strategy, an acceleration of our digital transformation and also through accelerated cost savings and efficiency improvements following a manufacturing roadmap program that we are announcing today. And of course, as previously already announced, the Board of Directors is proposing a dividend of SEK 6.25 per share. So that decision was taken during this fall. Moving over to the numbers, we have a number of segments affected differently. Some are positively impacted by the pandemic, some are negatively. Underlying, we see a strong business performance with improving market shares in most of our markets and category combinations combined with high cost efficiency and savings. Combined, this resulted in organic net sales 5.1% lower than the same quarter last year, but sequentially a big improvement as the impact of the pandemic has gradually eased in the Q3 compared to the Q2. Adjusted EBITA was down 1%, But in this, we see a big negative currency translation effect due to the strengthening of the Swedish krona. And adjusted for that, adjusted EBITDA would actually be up by 7%. Adjusted EBITDA margin improved to 14.4%, as we see one of the highest margins we have had over the last number of years. Operating cash flow was lower than Q3 last year. These are temporary impacts on working capital that we believe will gradually adjust going forward. And adjusted return on capital employed close to the old target at 14.7%. The net sales bridge, organic net sales was negative 5.1% with negative volumes in Professional Hygiene and Personal Care and positive volumes in Consumer Tissue. Price and mix equaled out to 0. We had positive mix everywhere in all our three segments and positive price also in Professional Hygiene and Personal Care, while it was negative in Consumer Tissue. Moving over then to the adjusted EBITA margin bridge, we see a significant improvement in gross profit margin of 240 basis points. Of course, this is helped by lower raw material costs, but also important COGS savings that we're very happy about since we have, as you know, lower utilization in many of our production units. And still we were able to achieve SEK 235,000,000 in the 3rd quarter, adding up to SEK 622,000,000 for the 1st 9 months of this year. And these benefits were then partly offset by lower fixed cost coverage in our supply chain. A and P, slightly higher, both in absolute terms and as percent of sales. We have a lot of good innovation that we're supporting with advertising and promotion, while SG and A was lower on an absolute level, but due to the lower sales higher as percentage of sales, but still shows that the very strict cost management that we are implementing everywhere also applies to SG and A. And we do see a positive long term development and I mentioned that sequentially we saw a big improvement in the Q3 compared to the Q2. Medical, for instance, improved by 27% in the 3rd quarter compared to the 2nd quarter, professional hygiene 18% and baby care 14%. And this shows then an improvement in sales even though it's negative, it's a move in the right direction. And we are able to retain EBITA margins on and also absolute EBITA on historically high levels. So we're seeing a gradual improvement here going forward. And this is, of course one of the important reasons why we have decided to raise our adjusted return on capital employed target, one of our most important financial targets, to above 17% by 2025. And the previous target was to be above 15%, which seemed like a big challenge when we set that target at the time of the split 3.5 years ago. But we have concluded that over the last 12 rolling months, we have been well above 15%, and that's a very strong foundation for setting a new target. And we will talk about all of this, but basically we see that we have a higher structural profitability level in Consumer Tissue. That's a good foundation for setting this higher target. Professional Hygiene will of course gradually recover as the impacts of the pandemic eases and we see also improvement potential in Personal Care going forward. And in addition, the benefits from the digital transformation program and the manufacturing roadmap. With all of this combined, we feel comfortable that we will be able to move towards the new higher target of above 17%. And the other financial targets remain unchanged, where an important other target is to grow sales above 3% per year. So accelerating a digital transformation, focus here is on enhancing customer and consumer value. What we see here is a big opportunity. We have invested significantly in our digital transformation over the last years, especially in e commerce in areas like procurement, in logistics, distribution and other areas. But we now see that we to take the next step, we need to make bigger investments here in our digital platform. And with this, we expect to achieve automation in many parts of the value chain, simplification, economies of scale, that we will have access to higher quality data in real time, which gives us greater visibility and predictability to take the right decisions and also eventually over time and we're already implementing this in many areas, advanced analytics to improve everything from forecasting to planning to as a follow-up of course or a consequence of that higher service level and better customer service. We will invest SEK 2,600,000,000 of which costs during 2020 to 2024, so over the next 5 years, but already started this year. And we will have a capital expenditure of SEK 1,200,000,000. We expect to start seeing positive impact from this investment in 2022 And in the short term, we will work to offset the costs by savings in other areas. So a very important priority for us going forward. The manufacturing roadmap program, many of you remember the tissue roadmap that we initiated 6 years ago and that has significantly improved our tissue footprint, but also the efficiency in the individual mills. And now we're taking the next step, including also our personal care plants and our medical plants and logistics and distribution with the aim to optimize and streamline all of our 60 wholly owned facilities with the aim of achieving world class cost efficiency, world class quality and world class service levels. And in many areas, we're already world class, but of course, this is a moving target and we see many areas for improvement here. And we believe that doing this will also contribute to our science based targets initiative to reduce carbon emissions. We always talk about innovations and this is a quarter with a very high amount of product launches based on innovation work done over the last couple of years. And I will dig into a few of the examples here. Also on the cover of our Q3 report is the washable absorbent underwear that we're launching and have already launched in Latin America. This is very exciting. It is a product that has the same performance as a liner, but since it is then washable and reusable, the environmental performance is great, up to 77% lower environmental footprint than a liner and of course a much lower usage of products. And we will launch this also in Europe beginning of next year in most of our key markets. Face masks, this is a new product offering as a consequence of the pandemic, something we had not contemplated 9 months ago. So it's one of the fastest product development programs that we've done. We see that there's a lot of there are many face masks around in most markets, but there's definitely a need both from consumers and from customers, retailers for high quality face masks supported by trusted brands and also to create order in this new category that is quite confused in many countries at this time. So we believe that this is an opportunity where we can build on our strong distribution, our strong retailer and customer partnerships and on our trusted brands. And an innovation that we've been working with for a long time and that I'm really excited about, TENAS SmartCare. And we have been providing sensors in incontinence care products for a number of years, but quite cumbersome and expensive products that have not really been suited for simple use. But now we are launching something that's incredibly simple to use and it creates fantastic customer and consumer value. And you can see there to the right 94% reduced time spent in an incontinence product nearing saturation and 86% reduction in unnecessary sleep interruptions. So quite fantastic improvement opportunities here. And we believe that this removable and reusable sensor is so easy to use now with the apps that of course are linked to this, that we are launching this not only in professional care but also in home care. And we believe that sometimes big innovations like this are more difficult to actually launch in a professional environment because of reimbursement systems and so on, while we do see that there will be this will be the new normal in a few years' time also in home care for for instance, caretaking relatives. So we're really excited about this and this is launching now on a broad scale both in Europe and in the U. S. Then moving over to the numbers here, starting with Personal Care. Organic net sales decreased 1.5%. And as you can see there at the right hand bottom, this was in all product segments except Feminine Care, which was more or less flat and sales were negatively impacted by COVID-nineteen and lockdowns. I want to underline again the significant sales improvement for Medical Solutions and actually behind these we see some very encouraging signs where in the quarter the wound care part of the business actually grew compared to last year. And in one of our key markets where we've been working hard to restructure and to improve in Germany, we also saw higher sales than a year ago. So we're seeing very encouraging signs here in Medical Solutions and a big improvement to the previous quarter. We had lower volumes, but we had higher prices, better mix and cost savings in most areas and also is supported by lower raw material costs. Sales and marketing costs were higher as percent of sales. We continue to invest between of course behind all these categories. And part of the explanation by the lower organic net sales is in the exit of baby care in Russia, our latest cure or kill effort and actually also in North Africa where we were working through a joint venture since many years that we left after the end of the quarter. Consumer Tissue, organic net sales increased by 2%. Volumes were significantly higher, pricemix negative. We have now been working in our Consumer Tissue business for quite a number of quarters here with quite low pulp prices and with high market prices. And gradually, we are adapting our price levels. The impact on price that you see here is a combination of lower prices that were already agreed in earlier quarters, so there's no changes there. There are no new price negotiations and higher promotional levels, partly in Europe and partly in China, while we saw higher prices in Latin America following currency depreciation. And as you can see up in the right hand corner there, adjusted EBITA margin remains on a historically very high level, 16.3%. Finally, Professional Hygiene. Organic net sales decreased 21.4%, and I want to underline that 80% of our business in Professional Hygiene is very much impacted negatively by the pandemic. And this 80% consists of hotels, restaurants and catering, 39% commercial buildings, 26% such as offices public interest such as universities and schools and then of course we have airports and other places that are also significantly impacted by lockdowns and by restrictions. So all of that said, we think that organic net sales decrease of 21.4% is of course a big setback but very much a consequence of market conditions. And actually, I think that the organization is doing a fantastic job and we'll get back to that in mitigating this and in also managing price mix that you can see is positive here and taking initiatives to gradually come out of this. And we saw that already in the Q3 compared to the Q2, an improvement with 18% in sales. And as you can see that mature markets and emerging markets were almost similarly affected with big local variations during the quarter. So a few more words about Professional Hygiene and the actions we are taking to recover. 1 is of course to shift our segment focus towards segments like healthcare and Industrial, where there is still a high consumption and to some extent an increase in consumption to drive services and solutions where we have a big competitive advantage with our sensor enabled solutions for instance compared to competition. Accelerating e commerce, there is a big shift and we are following or taking the lead in that shift. Accelerating skincare currently 3% of sales, but we see a big opportunity here going forward. And we do see that there is a higher usage of soaps and other skincare products. And of course recovering in hotel restaurants and catering and taking the opportunity to grow market shares even further there, anticipating the gradual improvement in that area. Converting air dryers, last quarter we reported that we had converted air dryers to tissue or hand towel dispensers to an annual business value of SEK 5,000,000 and we achieved another SEK 5,000,000 in this quarter, so that adds up to SEK 10,000,000 so far this year. New product launches and of course very much supporting Torque Peak Serve, which grew 66% in the quarter compared to last year and cost reductions to protect margins. And I thought this slide could be interesting to show. We're starting to get substantial data now from our sensor enabled dispensers and these are just some examples. So you can see an airport up there in the left hand corner and the consequence of lockdowns and reduced traveling underneath office buildings, more or less empty people working from home. I guess many of you listening today are working from home. You see this, you experience this also privately, while slightly more encouraging trends there in a department store and shopping in an entertainment center. And of course this is very, very useful data not only for the customer, the facility management company, but also for us. And one new service that we are launching this quarter that we're excited about is an automatic replenishment service. So the system sends a signal to the facility manager when it's time to replenish the professional hygiene tissue stocks. Here's some other outcome from that data. This is the consumption per visitor in a number of in thousands of dispensers that are in use then in buildings that are actually in use. And it's interesting to see that per person there is a significantly higher consumption of skincare products, so that's hand sanitizers and soaps and also hand towels. And I guess that the reduction in toilet tissue per person is not that the individual is using less toilet tissue when needed, but that they enter the washrooms actually just to clean their hands and then to leave again. So a lot of interesting data coming out of our products now. And of course we are working hard to continue our air dryer converting campaign. And here are some taglines: gambling with hygiene, making the safer choice, play it safe and so on, which is very much playing to the benefits of paper towels. And approximately 20% of the hand drying market today is jet air dryers and hot air dryers. So that's an opportunity of about 1,000,000,000 euros that we are gradually then eating into with these types of campaigns. So to summarize, we have today raised our target for adjusted return on capital employed to above 17% by 2025. That's up from the previous target to be above 15%. The other financial targets remain unchanged. We will accelerate our digital transformation with an investment in a new digital platform that will transform how we work in the company with higher automation data, better data quality, all leading to an improved customer and consumer experience. We are also launching a manufacturing roadmap program looking at all our approximately 60 fully owned plants. And we do see a strong underlying business performance in a challenging environment where different categories and product areas are affected in different ways. And of course, the dividend proposal that will be decided in an extra shareholders meeting next week on Wednesday. Thank you for listening. So thank you, Magnus. And operator, please open up for the Q and A session. Thank you. And your first question comes from the line of Sanath Firdasan at Morgan Stanley. Please go ahead. Your line is open. Good morning, Magnus. Good morning, Patrick. A couple of questions from me. First, more on the longer term question. You've just upgraded your ROCE target from 15% to 17%. If you could just help us understand office 15%, how much do you think is far more sustainable? You've spoken about Consumer Tissue margins also structurally being higher, but it's currently at a much elevated level than you would expect historically. So can you just tell us how the mix will improve going forward? And what are the drivers that you really highlight to get from 15% to 17%? Does that include widespread opportunities like face masks, those kind of things? Just a broader level understanding of how we expect to move on these growth targets. And then secondly, on the near term perspective, could you just give us a sense more on the pricing dynamics in terms of syndromatosis specifically in Europe and China? And also more broadly, is there any pressure given weak demand across personal care part of the portfolio? Thank you very much. Okay. Thank you, Serna. I'll start with the first question. Of course, we have looked at our long term financial plan and see that we are able to reach above 17%. But we also think it's a good initiative to raise the bar also to challenge ourselves, which we have to do now that we are stabilizing around 15%. And I think the components are very much what we've already seen. So working very hard with innovation, improving our mix has helped us to achieve the 15% as has ongoing cost and efficiency programs like the Tissue Roadmap that you also referred to that has improved our structural our structure cost position in Consumer Tissue considerably. So we will continue with that and that will definitely help. And then we will look at opportunities to accelerate efficiencies and savings through the manufacturing road map and also through the digital transformation program where we see that we will, starting from 2022, see benefits mostly on efficiency and the cost side, but also eventually we believe that this will improve our competitiveness through higher service levels and improved quality in our relations with customers. So all this taken together, we think that a 2% improvement I mean most of this will come from a margin improvement to start with that because we do think that we will continue to invest in growth. So capital employed, that's not what we're going after. We will continue to invest on the level we need to grow our business. So that's regarding the 17%. Then the second question was about price pressure in Consumer Tissue. And currently, we are not in any negotiations in Europe. That's done. And you see the impact here in the numbers we have. And in China, we did see a higher promotional pressure during the Q3, which we have typically maybe not seen historically because it's in between quarter 2 and quarter 4 that have these big annual sales events, 11.11 coming up in a few weeks' time. And we expect that which is typically the case, there will be higher promotional pressure also during this campaign in China. But of course, we do see historically, as you also said, very, very high Consumer Tissue margins across the board actually in our Consumer Tissue business globally. Can I just come back on the ROCE part just because it's interesting that you're spending a good amount of money in digital upgrading your business? But it seems much of that is the kind of capabilities to be more efficient rather than actually speed up top line. Can you just give a sense more sense on if there's any benefit we should think about from a top line perspective from this investment? We're very much focused on top line, and that's of course the quickest way also to improve efficiency with better capacity utilization. And we are retaining our target of above 3% growth, which before the pandemic was an attainable but challenging target, which meant gradually growing market share. We are sticking to that target. Of course, over time we hope that we should be able to do better than that. The target is to be above 3%. And this needs to come from a combination of volume, price and mix. And maybe I focused very much on the price and mix improvements coming from innovation, product launches, market share gains. But of course volume is an important part here and that's partly why we are also launching now in new areas like the washable underwear, like everything from face masks, which will not be maybe a big business, but maybe a very value adding business, skincare and professional hygiene and also focusing very much on emerging markets where eventually we expect to see a higher growth on average than we see in emerging in mature markets. So top line is a top priority for certain. That remains unchanged going forward. And maybe even more important now, also as seen from all these initiatives, when we have some structural challenges, especially in Professional Hygiene. Great. Thank you very much. Thank you. And your next question comes from the line of Ian Simpson at Barclays. Please go ahead. Your line is now open. Thanks very much. A couple of questions for me, please. Firstly, thinking a little bit about pricing in your Consumer Tissue business, would I be right in thinking that price negotiations usually take place sort of December to February? Because clearly in the pricing round, expectations were that pulp prices would come up in the second half of the year. It now looks like everyone's expectations are for pulp prices to remain low for the foreseeable future. Does that mean the upcoming pricing round could be more challenging? And secondly, you flagged a few quarters ago now that overall consumption of some of your personal care categories, diapers, fem care, Inco Care that fallen under lockdown due to sort of lost the precautionary change motivation. It would be great if you could just give an update as to how you see overall market growth trending in your main markets? Thank you very much. Okay. I will start, Jan, and Frederic maybe can help me out. And we have annual negotiation, especially for a branded assortment in Europe. So first of all, we just recently increased prices in and have an improved pricing component in Latin America, which is the smallest market for us. In Europe, we are entering then the annual negotiations for majority of our branded sales. We are not that concerned because we believe that we have a very, very strong assortment. We have strong brands that are benefiting from online sales, trusted brands. And we have a differentiation and a premiumized assortment that we think deserves and can support a higher margin than previously. So we feel in good shape there, while as you know, the private label part of our Consumer Tissue business in Europe is renegotiated more or less at any point in time when one of the parties see that there's a need or a reason. And currently there's not much going on in that area. And when it comes to China, I think I would refer to Vinda's announcement. But of course in China, we have also seen historically high margins, but also an incredibly fast premiumization by our subsidiary Vinda that's quite impressive with 4ply products, Tempo products becoming every quarter a bigger part of the portfolio. And of course making them also more protected to swings both in raw materials and in promotional pressure than many of the competitors. So that was regarding price negotiations. I think we feel good about our Consumer Tissue business and the ability to protect our margins there going forward, even though there will be price pressure as a consequence of the low pulp prices. And what was the second question? Personal care consumption? Yes, exactly. Yes, exactly. So in incontinence care retail, in feminine care and to some extent in Baby Care also, we see slightly lower consumption rates could be around 5% on average, so maybe using like 1 piece less per day. That's what we're seeing during lockdown. But then we're seeing that as soon as countries, geographies are coming out of lockdowns and restrictions, that consumption goes back to normal again. Those are the patterns that we are seeing. And we're currently not really seeing any stockpiling or destocking to any significant effects anywhere except in the Q3 for the continued destocking of professional hygiene, which accounted for about 5% of the decline of Professional Hygiene in the 3rd quarter. But we believe that, that is now out of the system for the Q4. That's brilliant. Thank you. And your next question comes from the line of Charles Eden at UBS. Please go ahead. Your line is now open. Hi, good morning. Just two questions for me, please. Firstly, just again on the heightened promotional activity in Consumer Tissue. I just wanted to check whether there's any notable difference in the levels between branded and private label products? And then my second question is actually on adult incontinence, which was broadly flat in the quarter. I noticed from one of your largest competitors, which reported earlier this week, they saw very strong growth in the quarter of around 20% from this category. We know this competitor has historically been very promotional in the category since it reentered the market. But have you seen a further step up in that promotional activity from that competitor in the quarter just given the variance in the performance between the two businesses? Thank you. The promotional intensity in starting in adult incontinence retail has been incredibly high over the last 5 or 6 years and we are countering that with innovation and of course increasing promotional pressure also from our side, but now supporting a much better assortment. And in the markets where we are present, which is very much in Europe, in Latin America and to some extent in North America, but that's a smaller part of it, We are actually doing rather well when it comes to market shares and growing market shares in Latin America, stabilizing market shares in Europe and slightly losing market shares in retail in our smallest incontinence care market, which for us, which is the U. S. And doing okay in Canada. So it's not Essity that's being impacted by this growth that you referred to from one of the competitors. And I think part of the explanation could be entering new markets and growing significantly in markets where we don't have such a strong position. So I don't see that we are negatively impacted by to any significant effect by those numbers that you referred to. And in general, in promotional activity, we expect higher promotional activity in Europe, but I can't say that we are really seeing anything in the Q3 of significance. And in China, 11.11 will be a very important indicator, always with the high uncertainties. What we know is that Vinda is by far the leader in the online channel in China and typically has done really, really well during these types of festivals. So that's our expectation also this year. I think, Charles, you asked also if there is any difference between branded and private label and there's no material difference. It's basically a European question because the rest of the world is largely branded. So if you take Europe, it's no material difference. In general, we have a better kind of own control of pricing when it comes to branded. So we control that slightly more, but in general no material difference at this time. Thanks, Brian. Your next question comes from the line of Karel Zoetke Kepler. Please go ahead. Your line is now open. Yes. Good morning. Thanks for taking the question. I have three questions. The first one is with regard to your overall market share position. I think at the Q2, again, you said that you're gaining share in around 60% of the markets where you play. Where do we stand in the Q3? And the second question is on the raised return on capital target. You say it's the improvements will be based mostly on profit margins that should go up structurally as your asset turnover and capital base will not change too much. If I think about the EBIT margin improvement, is it fair to assume that it's going to be mostly gross margins that should increase because also SG and A will go up given the investments you're doing in the business? And then the third question would be on the near term output for input costs. Can you help with us what you're seeing for the business in the Q4? Thank you. Input costs, we see largely flat input costs for the next quarter when it comes to pulp fluff, recycled fiber and also oil based materials. So no big changes. There could be some variations up or down, but basically quite unchanged. So any impact would then maybe be more related to swings in currencies when it comes to input costs. Overall market share, yes, this is the case. We continue to grow market share in fem care in most of our markets. We're doing extremely well in consumer tissue in Europe. In Latin America, we are number 1 with unchanged market shares in China. We are losing a little bit of market share in Inco Retail, but gaining market shares in all our B2B areas or in all our B2B areas in Inco Healthcare and in Professional Hygiene where we're doing really well. Those market shares are of course not measured by Kantar or Nielsen but something that we follow very closely. And in Medical, we expect to gradually recover. It's very difficult to follow market shares right now because of the big volatility in different markets and in our different segments there. So that adds up to over 60% of market category combinations where we're growing. And the second question about how to improve return on capital employed, I leave to Frederic who will talk about structural margin improvement. Yes, it's actually it's absolutely correct that it's a gross margin issue because you're right that, of course, as we pick up cost in the digital parts of what we do, we've already had a lot of digital cost in the last few years here, but of course this will accelerate it further. So we are, of course, at this point when volumes are fairly low, the SG and A and A and P to sales is also high. As volumes start growing again and also costs pick up, we expect, of course, levels to be largely stable and perhaps somewhat increasing, but on the longer perspective. So it is exactly, as you say, a gross margin issue. And of course, as Magnus has already alluded to, very much on professional and Personal Care and perhaps more remaining over the longer perspective at high structural rates in consumer tissue. And of course, just to emphasize what's already been said here, we have continued for many years to improve our mix on the back of innovation. And of course, this is the assumption also going forward that we will continue to do that as well as we have done in the past. Thank you. Thank you. Your next question comes from the line of Oscar Lindstrom at Please go ahead. Your line is open. Hi, good morning. Two sets of questions for me. The first one is on Medical Solutions segment where you had a less negative development in Q3 than you had in Q2. And you say that you are positive in the Wound Care segment overall. I mean, what is your target organic growth in this segment? And by when should we expect it? That's question A. And the second one here is, I mean, what are you still taking actions to improve organic growth here? Or have the sort of most of the restructuring actions already been taken and you're now waiting for the effect of them? And then finally on Medical Solutions, I mean, could you say a few words maybe about your acquisition strategy in this segment? And do you feel that you can that you're ready to make any more significant acquisitions in Medical Solutions already now? Or would you need to sort of see organic growth improve more before you make add on acquisitions here? Okay. So our target is to grow Medical Solutions above 3%. And we were very much expecting that to happen this year, that this would be the kind of breakthrough year before the pandemic. The pandemic is influencing all 3 sub segments negatively. Wound Care was very much negatively impacted by hospitals, of course, postponing scheduled surgery and treating COVID patients instead. And as that has subsided and many hospitals have come back to then managing all the pent up demand in surgery, we've seen an improvement in underlying wound care growth and we've also benefited from that. But in a few markets, including Germany, which is the most important market us in Woundco, we have actually also gained market shares in this quarter. And then I'm explaining this, how to achieve the 3%. When it comes to orthopedics, it's very important that people are able to get outdoors and be active because that's when they break their legs and sprain their ankles and need our castings and orthopedic soft goods and so on. And as you can read in the newspapers, that's moving back and forth. But we see an immediate improvement in demand as soon as countries come out of restrictions and lockdown. And thirdly then, the compression part of the industry where we are the global market leader, again very, very dependent on the shape of the health care system because these products that are medical products need to be fitted by a professional fitter that is typically then in a medical device store or in a healthcare setting in a hospital or in another ward. And typically then this has also been held back and delayed due to COVID restrictions. But again, we saw big improvements in markets where things were opening up. But of course, the demand for all these segments remain. The underlying strong positive structural growth drivers in all these three areas remain. And we will see how quickly we'll get back to about 3% growth, I think very much depending on how the pandemic develops. We're in much, much better shape than we were a few years ago when it comes to assortment, go to market, brand equity. And we've also recently been very agile in moving from feet on the street, very much meeting with customers in hospitals and other facilities to blended selling where we also now make sales calls online of course. And that's worked really, really well. And when it's finally when it comes to so we are in good shape, but of course we're continuing to strengthen our offering in all parts of Medical. But I feel that we are in good shape and at the point where we should be able to achieve in a stable environment above 3% growth. And acquisitions, based on that previous statement, if there are opportunities, I think we are ready to look at that. And of course, there's also a big uncertainty when those opportunity arises, but definitely part of our strategy going forward from now. And if I may just follow-up on that last point about acquisitions and opportunities in this segment. I mean, do you see your targets that you were interested in coming up for sale as a consequence of problems relating to COVID that maybe some competitors are willing to sell some businesses now that they were not willing to sell for or? Really get into that. I think that's we never really talk about our ongoing or not ongoing acquisition work. So I can't really comment on that. All right. Thank you. That was my question. Thank you. Your next question comes from the line of Karri Winter at SHB. Please go ahead. Your line is open. Yes. Thank you. Firstly, on the Professional Hygiene Business and the comments that you made regarding destocking, and it had a 5% negative impact on your organic growth in the 3rd quarter. Then if I take that comment and if I look at the data that you provided of the consumption rates in different categories, so that would seem to suggest that the run rate, excluding destocking, is, at least for the near term, likely to remain pretty much unchanged from the 3rd quarter levels? Am I missing something? Or is this a fair assumption? And could there be an element of restocking among some of your distributors in the near term? That's my first question. Yes, Kari, let me try and answer that. I don't we don't have, of course, all the data, but I think you're right. Most of the destocking is done or if not all, most of it. And the run rate, of course, is much depending on whether there's further lockdowns or further restrictions or anything, but the run rate is probably there. But we have also, as Magnus already alluded to, compensated by increased skin and of course, continue to sell a lot of dispensers in various parts. So we are compensating. Whether the demand situation will continue to improve as it has done Q3 versus Q2, it's hard to say at this point of time. Clearly, it's still low, but we are hoping for improvement. All right. Fair enough. And then about the working capital, I see that the inventories are up quite significantly from last year. Is there something specific that is pushing up inventories? Yes. We have a bit of more inventory in the group now of raw material actually. So that's the main reason. It's there is a little bit also finished products inventory that's slightly higher. But in general, it's relating to raw material. All right. And then finally, maybe a clarification on the Consumer tissue comments regarding pricing. So you have seen higher prices in Latin America. You have lower prices in Europe, but that's due to the price reductions that were announced already in Q1. And then there's been promotional pressure in China. Is that a fair summary? That's a very good summary, very clear. All right. Fair enough. Thank you very much. And your next question comes from the line of Farhan Baig, Credit Suisse. Please go ahead. Your line is open. Good morning, guys. A couple of questions from me, if that's okay. Could I firstly come back to Sanath's question? I just want to understand the digital investment in a bit more detail, particularly because it seems to me that the majority of the investment is sort of in the back end rather than the front end of investment. Is my understanding correct? And what I mean by front end, for example, is that are we expecting to see investments accelerating in e commerce? Are we expecting digital spend, digital media spend to increase? Are we should we expect some of the digital transformation to allow you to do greater innovation? So that's I just want to understand that more clearly because ultimately, I would think the front end has a bit more impact on your top line versus the back end investments that you do with advanced analytics and data encryption, etcetera? So that's my first question. And with regard and my second question is, is it more direct, but at the same time, a point of clarification. Over the last couple of years, you've been helped extremely by the raw material tailwind, of course, but also savings. You had the COGS savings. You also have the SG and A savings as well. That fallen through the margin. Given that the COGS savings going forward will no longer fall to the bottom line due to increased digital investment, would it be fair that the margin progression will be limited to non existent over the next couple of years as you make that investment? Or would you say that there are still various opportunities for you to drive margins higher in the next couple of years despite this investment? Thank you. The digital initiative will have a negative impact on margins. And I think you can calculate that if you spread out that additional cost over the next 5 years. I think it's a few tens of basis points. But as we also state, we expect to be able to compensate that to a higher or lesser degree with additional savings in other areas. And we're also focusing very much on investments now that bring forward both growth opportunities and to answer your first question and also savings opportunities. So growth opportunities are, for instance, investments in e commerce where we have invested significantly over the last couple of years, but we see that we need improved kind of basic systems in order to have the right data quality and the right speed. But we continue to invest very much in e commerce because that's where the growth is moving and where kind of the future competition is happening and we're very well positioned there already. Areas where we can achieve bigger savings may be faster through digitalization is, for instance, indirect purchasing, where we see some easier saving opportunities. Distribution and logistics is another area where we have an opportunity both for efficiency but very much improving our customer service, which I believe can definitely improve our top line also because we know that this is a we are immediately punished when we have issues for one reason or the other with service level being able to talk to retailers. Where are the products, is it delivery in full, is anything missing and so on. And to be able to answer at the push of a button. That's something that will be a competitive advantage that will definitely help us drive sales also going forward. So those are just some examples where we're focusing both on top line and on efficiency improvements. And maybe just to add to that, Faham, just if I may add just one thing. It's always it's slightly easier, as you know, to kind of predict the impact on the cost side when you do things like this, whilst it's a little bit more difficult to predict. We're convinced, as Magnus says, that it will be beneficial for the growth part the organic growth part with service levels are being available 20 fourseven for our customers as an example, but not least also, of course, enhancing our analytics capabilities, being much better at understanding what works, what doesn't work and, of course, with strategic and tactical pricing and all of those kind of things that should be very beneficial from the growth perspective. But they're all very difficult to quantify and that's why you perhaps hear more about the efficiency part, which is easier to envisage exactly how that will play out. Perfect. Thank you. Your next question comes from the line of Anabav Malthura at Liberum. Please go ahead. Your line is open. Hi, guys. Just a couple of questions regarding your investment into digital announced this morning. So firstly, do you have any plans to sell direct to consumer via subscription models like other players in the industry do? And then secondly, I mean, what does it imply for your M and A strategy going forward? Would you see any kind of change because typically investments into acquisitions end up hurting return on capital employed at least in the short term in the initial few years. So should we take any suggestion that large scale M and As are off the chart not on the cards anymore? Thank you. Yes, absolutely great question about subscription models where we worked extensively with direct to consumer concepts with the Tena brand for many years now, probably for 10 years. And that's growing very well for us. And we are using that knowledge and that concept now to also launch our own web shops in medical, for instance, for jobs. So that's a very important the compression brand. So that's an important effort and investment going forward. And we do see that in some markets that are less developed historically, like Latin America, that their own web shops are really creating value quite quickly. So we are starting web shops in many Latin American countries also covering our normal consumer brands, even consumer tissue and other categories. We are also investing in web shops actually for Torque, Torque Direct, which makes it very simple for small family owned often distributors to order directly from us online. So that's another example, maybe not direct to consumer, but direct to distributor webshop type of store that we're setting up. So actually in many areas now we're setting up our own webshops and we see that this contributes to market share gains. And the other question, I mean, the acquisition. Yes, of course, any large scale acquisition will most likely then include, of course, taking on intangibles and goodwill. But after any such acquisition, of course, you need to look at the kind of the operational capital employed and not the intangibles and goodwill to make it a fair comparison. So we would adjust for that. So no, this does not preclude us from doing large scale M and A. Okay. Thank you. And you have a further question from the line of Ian Simpson at Barclays. Please go ahead. Your line is open. Thank you so much for allowing me a follow-up. So firstly, when you look at your plant performance, how far above average efficiency would you say your absolute best in class factory might be now? I'm just trying to get a sense of how much scope there is to improve gross margins through further manufacturing optimization. And then sort of completely different question, but you called out U. S. Retail Inc. As having lost some share, if I heard you correctly. That business has been underperforming for a while, I think, and is probably now under 5% market share on my math. Have you considered exiting U. S. Retailing co entirely in the same way you've exited various subscale diaper businesses over the years? Thank you very much. So when it comes to manufacturing road map, we are starting that work now with identifying the opportunities. Of course, we have a lot of strong hypotheses. So it's too early to tell. If you remember, when we launched the manufacture the tissue roadmap a number of years ago, we gave the vision of having the lowest cost and the best quality and service levels. And then we provided more information over time. And we expect to be able to do this also when it comes to manufacturing roadmap, but it's too early this quarter. We are starting to do the analysis and we'll come back on that. And Inco Retail U. S, yes, you're right, we're slightly below 5% at this point in time. While I always want to emphasize we're doing well in Inco Healthcare and actually slightly growing market share overall. So we clearly believe that we have a reason to be still in incoretail in the U. S, but we will never be, of course, 1 or 2 or even 3. But we can fill an important niche, which is very much focused on caregivers who know the brand and to leverage the brand equity that we have from the healthcare part of our U. S. TENA business. So that's still our effort. And of course, Tena SmartCare is an important step in strengthening our retail position there. So we don't expect us to see us fighting with lighting continents and the big volumes, but rather in a number of smaller areas where we believe that we have a reason to be. And we do have it's also an area where we are making money. So it's not like some of the other Kurokill areas that we have announced over the years where we were clearly below the margins we wanted to achieve. So we're doing everything we can to improve market share and to come back in Retail U. S. Very clear. Thanks so much. And you have a follow-up question from the line of Carrie Rinta at SHB. Please go ahead. Your line is open. Yes. Thank you. I just wanted to maybe get a bit more detail on the timing of the announcement when it comes to digital investment and this manufacturing road map because there's some other companies that I cover that also have announced quite big ambitious long term initiatives in conjunction with the Q3 numbers. So financially, one could argue that you are sort of making these announcements from a position of strength. But I guess, more specifically, has the COVID-nineteen in some way impacted the timing or the scope of these plans or not? No, I can't say that COVID has impacted of course, digital transformation has accelerated due to COVID. So from that perspective, we are investing more and doing more in that area. But such a big platform new platform that we're talking about is years in the planning. So the reason why we're announcing this now is that we are announcing it internally to our staff where we have already hundreds of employees working on this and also because you will start to see the financial impact also going forward. So that's why we're presenting this now. And manufacturing road map, we feel that with the big success of the tissue road map that we've learned really so much on how to improve structure profitability that we want to have a similar approach also in Medical and in Personal Care. Having said that, of course, Consumer Tissue was the biggest part and maybe also where we had the biggest restructuring opportunities. So we don't expect to see as much restructuring in this manufacturing road map, but big opportunities to, in general, improve our performance here. And as with this road map, not only from a cost perspective, but also from a quality and customer service perspective. So yes, I think that's why we are launching these things now. And the higher return on capital employed target, I think that once you are on a higher level, it's time to take the next step. It's just a natural move. All right, fair enough. Thank you. Your next question comes from the line of Virendra Chavan, AlphaValue. Please go ahead. Your line is open. Open. Just one from me. So that's on professional hygiene. So now that even we have seen that the COVID stay at home restrictions and are they going to be in place for a while longer and offices as well as the travel industry is not going to recover in the foreseeable future. What do you expect for this business? Like what part of this lost business could be permanent or longer term in nature and have your expectations for the business changed? Yes. I can try and answer that. So thanks for the question. I mean, first of all, it will, of course, as things gradually move back to normal and it will be bumps and variations, but of course, generally, demand will continue to come back as it has done here. And it's hard to tell exactly when and how fast, but of course, it will gradually come back. And then your question is, is something here structurally permanent and whether people will permanently stay more at home, for instance, or permanently travel less, it really is very, very difficult to anticipate the permanent or structural impact on the business. But of course, we will adapt in the segments where we are and make sure we have the appropriate setup. And as we have already alluded to, we are working extensively in growing in segments where the impact may even be possible positive. And generally, as was shown here in the presentation, the impact on hygiene and health is, of course, also contributing. We are expanding with face mask. We're expanding into wipers and skincare products. So we have good confidence, great confidence that the business will develop good over time. And we have been very positive to Professional Hygiene, and we remain very positive to Professional Hygiene. Thank you. There are currently no further questions. Please continue. Thank you very much. Then we conclude today's telephone conference. Thank you for calling in, and we wish you a good day.