Good morning, and welcome to Essity's presentation of the fourth quarter and full year 2023. My name is Sandra Åberg. I'm Head of Investor Relations, and joining me today are our CEO, Magnus Groth, and our CFO, Fredrik Rystedt. Magnus and Fredrik will go through the results, and after that, we are very much looking forward to your questions. I would just like to kindly remind you to have one question per call, and any additional questions, please reach out to me after. We will also be road showing in Stockholm today, and in London tomorrow, and in the US next week. So if you would like to meet with us, please let us know. With that, we are ready to get started, and I'll invite Magnus on the scene. Magnus, please.
Thank you, Sandra, and good morning, everyone, to this year-end report of the best year ever for Essity, and of course, also a thorough follow-up on the fourth quarter. Just as a reminder that every day, our brands care for the hygiene and health of over 1 billion people in 150 countries. And it's done through our fantastic leading global brands, where in many cases, these brands are multi-billion dollar brands or billion dollar brands, and in good health, and of course, a fantastic starting point for us as we continue our profitable growth journey. So, what's really, really new, of course, for the first time now, we are presenting the Essity group with Vinda as a discontinued operation. And as many of you remember, Vinda accounted for approximately 17% of sales.
So this is what the full year 2023 numbers look like without Vinda. Net sales of SEK 147 billion, SEK 18.9 billion of adjusted EBITA, which is the highest ever, with or without Vinda, and 36,000 employees. Key achievements in 2023, it was a very, very busy year. We achieved the highest profit ever, and we have created now what we see as a very strong platform for growth, and I'll get back to that, and so will Fredrik, throughout this presentation. We substantially improved our structural margins for all business areas, and of course, this is from this position, we aim to continue to grow. We made good progress on all our key priorities other than the financial priorities, innovation, efficiency, and sustainability, which is so important for us in the longer term.
In the quarter, we also received a pre-conditional offer for Vinda, which enables a more attractive portfolio for Essity going forward. Starting then with a pre-conditional offer for Vinda, a very attractive offer for Essity and our shareholders. At the price of 23.5 HKD per share, the annual return during the nine or 10 years that we've been holding this stock would be approximately 14% per annum, and the EV to EBITA multiple ends up at around 18x. So, the cash proceeds amount to about SEK 19 billion, and we will remain with Vinda as a license provider for some Essity brands that will still be sold in China and in other neighboring markets.
In this way, we remain committed to China and Southeast Asia with Essity's strongest brands going forward. The transaction is expected to be completed mid-2024, and again, interesting or important to note is that we are now, in this presentation, also looking back the last three years; we will only look at numbers that has Vinda as a discontinued operation. So what does this mean, the offer for Vinda? We have looked at our sales split several times. As you can see here down in the left-hand corner, that's the net sales split in terms of sales in 2022, where the two components making up our Consumer Goods business, Personal Care and Consumer Tissue, accounts for 61% in total.
And the stated aim of the divestment of Vinda was to reduce our exposure to Consumer Tissue. And as you can see there in the middle, this is the net sales split 2023 then with Vinda discontinued, and there's a huge shift. Consumer Tissue after then Vinda only amounting to 33% of sales. And so we could almost state that we have come a long, long way to our long-term direction of having a more balanced portfolio, where the the graph to the right there just shows what could be, of course, not an exact state, but some kind of longer-term direction.
Interesting to note that with this reduction in Consumer Tissue, actually, our pulp purchases are reduced by half, so to a much more substantial amount than the actual impact on sales, because Vinda has been very pulp intense. So our pulp purchases will come down from 3.1 million tons per year to approximately 1.6 million tons per year. And this, together with other efforts we're doing in reducing our pulp, our pulp dependency. In all parts of our business by working with other sources of fiber, recycled fibers, wheat straw, and so on. We are taking a big step out of the volatility that has been impacting our earnings, due to pulp and other raw materials.
This change in the portfolio has also been enabled by a number of successful acquisitions. And just a brief overview, even though these acquisitions were now done some time ago, because the logic is very different for the different types of acquisitions, but common for all these companies and businesses is that they are all growing, they're all profitable. Starting with Familia and Asaleo, the logic was clearly synergetic. These were businesses very similar. We were already part owners, and we could achieve cost synergies and scale. When it comes to the Medical bolt-on acquisitions, Abigo, Hydrofera, AquaCast, Coach, we have a very profitable and successful Medical platform, and on that platform, we can add high-yielding, low capital intensive, leading smaller companies in a very effective way.
While Legacy, Modibodi, and Knix are all examples of how we are finding new pockets of growth in categories we're already in. Legacy, when it comes to industrial wipers, Modibodi and Knix, washable, absorbent underwears, where we are now the world's global leader, and in all these areas, with all these acquisitions, growing and profitable. Moving on over then to the numbers, a strong sales growth, record high adjusted EBITA, and as you can see, on a yearly basis, up 57%, year-over-year to SEK 18.9 billion. Adjusted EBITA margin up to 12.8%. Adjusted ROCE, 16.4%, an improvement with 550 basis points, and adjusted earnings per share at SEK 17.56.
Looking at the growth, how that builds up, volume was -3.7%, while price mix was very positive, 9.5, and acquisitions contributing 0.9. We will look further on how this has developed in the last quarter. Taking a longer-term perspective, which I think is always important, especially considering how the world has developed over the last couple of years. Looking back the 3 years where we have done the work of putting the numbers into this Vinda discontinued fashion, we have seen net sales from 2021 to 2023 of 45%, and an improvement of adjusted EBITA of 65% from 2021 to 2023. These are the only 3 years where we have all financials accounted for as discontinued.
Still, I would like to take a look at the even longer term perspective, because, of course, Essity is a young company, and we are at the final stages of really now having a fantastic platform for future growth that's efficient, efficient, well-structured, strong brand, strong market positions. And that's after a number of years of hard work from our fantastic employees in creating this company, Essity. Over these years, and here's then the trajectory from 2014, so nearly 10 years, this has been the development now comparing not apples with apples, but apples to pears, because in the lighter shaded areas you will see Essity numbers, or before that SCA numbers, including Vinda, and for the last 3 years, excluding Vinda.
Even excluding Vinda, which also, of course, contributed significantly, both to the top line and to the profit, you can see that after now, this, these turbulent years with the pandemic, we are back on track. So huge achievement by the organization. I think it really shows the underlying power that we have in Essity, and from a net sales perspective, that we're actually higher than back in 2019, even with Vinda discontinued. And of course, look at that, the Adjusted EBITA, it's our highest Adjusted EBITA year, in spite of having Vinda included in a very favorable year of 2020. So I think it's important to say that that's all behind us. We're now looking forward, and we expect, and are working to remain on this trajectory for many years to come going forward. So it's really a long-term game.
There will be swings between individual quarters, but for the long term, I think this clearly proves that we're on a very, very steady path. And based on this, there's a suggestion from the board to the annual shareholders meeting to increase the dividend by SEK 0.5, 50 öre, to SEK 7.75, an increase of 7%, and you can see that that trajectory is very much in line with the overall growth and profitability. Moving then to the shorter term, the fourth quarter of 2023, we had net sales that were nearly flat, and sales growth slightly negative, and I have a bridge soon to see how this builds up.
Adjusted EBITA continued to develop very, very strongly, +18% compared to a year ago, EBITA margin 13.3%, and ROCE at 17.1%. So very strong improvements year-over-year in all areas. Looking at these numbers, of course, sales growth is something we should dig into. It has very much to do with the planned restructurings that we've done in the different businesses in order to have a higher structural margin in remaining business to grow volume-wise and mix-wise going forward. So I think that's very important to note. When it comes to the adjusted EBITA, we're very happy about the gross margin. We look at that in a while.
We had some SG&A costs that we were not happy with in the fourth quarter, and for the first quarter of this year, we expect SG&A costs to be slightly lower than in the fourth quarter. So it's something that we're managing. Looking then at sales development in the last quarter, volume accounted for -1.4%, while price mix, as is often the case for Essity, was positive. And looking then at the -1.4%, there was actually an underlying volume growth if you exclude the restructurings that we have presented and talked about in Q1 and Q2 of last year, and the deliberate exit of contracts in healthcare and in Baby Care.
We also tried to be very, very clear about this in the third quarter reporting, that this would have a significant negative impact in the fourth quarter and in the first, and to some extent, the second quarter of this year. So that's what you're seeing. Taking this out, we actually have an underlying growth compared to a year ago, and we also have a growth in the entire business sequentially in the fourth quarter compared to the third quarter. Mix continued to be very, very strong, 0.9%, based on our innovation work, yeah, our strong brands, our investments in A&P.
Price is down very slightly compared to a year ago, something that we're very happy about, considering how raw materials, energy, and other costs have come down, that we've been able to hold pricing more or less unchanged year- over- year. Again, attribute to our strong brands. The higher, the adjusted EBITA margin bridge, the improvement here, you can see that gross margin improved significantly, better mix, cost savings, lower costs for raw materials and distribution. And we actually saw higher energy costs in the quarter, since we had some energy benefits last year. And the lower prices and volumes and salary inflation in cost of goods sold. A&P increased and had a negative impact.
Of course, this is something that we're doing in order to boost our sales, our volume sales, to grow the business going forward, so an investment for the future. While SG&A, as I already referred to, had a negative impact and a slightly higher impact than we would like, and this is an area where we are taking actions. And as I already mentioned, we expect to see slightly lower SG&A costs in Q1 than in Q4. Very positive, maybe worth mentioning here, is the cost savings, since this is something that's been difficult to achieve, and I'm now talking about cost of goods sold. That amounted to SEK 377 million in the individual quarter, so a very strong pace of savings.
We expect for 2024 that we will continue to be able to show significant savings in cost of goods sold, somewhere between SEK 500 million and SEK 1 billion on an annual basis. With that, I'd like to hand over to Fredrik to talk about the three individual business areas. Welcome, Fredrik.
Thank you, Magnus, and, as usual, I will start with, with Health & Medical. That continued to develop, really well, with good growth and, and a significant improvement in margin. In fact, if you look at, the business area, this is where we've had the, the, the highest increase of, of margin. So if we look at the growth rate, it was clearly supported by pricing and a positive mix, so pricing a bit over 5%, 5.5, and mix roughly 1.5%. Volumes were higher for, for Medical, but clearly lower for, for Incontinence, and this was partly on the back of continued aggressive price management, and also due to, the different exits that we did in Q1 and Q2 of 2023.
So that was part of the decline for the business area. And this will, of course, just to remind you all that this will actually then still impact volume growth for the business area in Q1 and Q2 of 2024. But just worth mentioning that none of these exits were done in Q4, so we haven't actually added any exits, and we're not planning to do so as we go forward. It's much more, as Magnus talked about, about growth going forward. Now, if you look at Medical and the volumes there, or the growth there, all therapy areas actually grew.
And if you look at particularly wound care, it was supported by just a great performance of the acquisition, Hydrofera, that Magnus mentioned, with Hydrofera having double-digit growth and a total organic sales growth of 19%. So really very, very strong. Now, operating margin, if I go to that, increased with 520 basis points, and this was very much due to pricing. It was about mix, and of course, also lower input costs that we have seen now in the last couple of years, so or throughout the last several quarters, I should say. So this is obvious that we are now working off a much higher structural margin in our business area as a whole, and this is particularly the case for Inco. Magnus talked about SG&A being a bit higher.
And one of the areas where we actually see this is Health & Medical, and this is marketing, selling and the personnel costs that we actually have added during the quarter. If we look at going forward, as I already mentioned, we expect growth, but we will be impacted in terms of volume in Q1 and Q2 through the restructuring measures. That will not be in the second half of 2024, but it will be in the first half. So just worth remembering. And I'll comment a bit on the raw material side or input cost. Just generally, when it comes to raw material, we expect slightly higher during the first quarter, sequentially versus Q4, and this is basically some increases on the fluff pulp side and also oil-based material. So slight increase sequentially.
Now, turning to Consumer Goods, there you can see the growth has slowed down a bit. So if you take the organic growth, then minus a bit over a bit over 2.5--roughly about 2.5% down, and this is mainly, you can say, driven by Consumer Tissue or all of it, actually. But let me walk you through all of the categories, one by one. So I'll start with Inco there, having a growth of 9.8%, so really very, very strong, and that's based on pricing up by roughly about five, and then volumes also positive with about five and a, and a slight positive mix. So really very, very strong performance for, for Incontinence R etail. Feminine is where we had the strongest growth of, of all our categories, a bit over 16%.
Volumes up, also there by 6.5%, and we had a strong price impact there of approximately 10%. Also there, we had a positive mix, and we're very proud of that because, of course, as you know, there has been a bit of downtrading throughout last year, through 2023, especially in Latin America. Despite that fact, based on our innovations, we achieved a positive mix. Coming to Baby then, price and mix were positive, but volumes were quarter on last year's quarter or 2023 versus 2022, still negative. But this is basically just a result of the exits that we did in one of the big private label contracts, simply for profitability reasons.
So the underlying growth is actually positive, and if you look at the volume development sequentially for Baby, it was quite positive, actually nearly 7%. So it's really going in the right direction for Baby in many ways, both volume-wise and profitability-wise. And then finally, Consumer Tissue, minus 10%. So this is what is driving basically the overall development. And here we see lower prices and volume. And so you will recall from Q3 and Q2 that we saw a fairly significant volume decline. This was based on our aggressive pricing. And we also talked about then making sure that we start again having a reasonable growth in Consumer Tissue. And as was the case with Baby, it's also so with Consumer Tissue, that sequentially we had a very good growth, so roughly about 7% there as well.
So all in all, quite a good development from a volume perspective for all our areas. And this has actually resulted in good market share development, and this is particularly the case for Feminine, for Consumer Tissue, and actually for Baby. And we are continuing to invest in A&P to make sure that our market share is also Incontinence Retail will elevate or start to increase. So just a couple of words on the operating margin. As you can see, it's up 180 basis points to 13%, and this is very much due to price management, so of course, price lowering less than the advantages we've had from the input cost. It's also the efficiency gains that we have in COGS.
So generally, a very good performance in terms of margin development. I'll just make a few comments on when it comes to raw material. We expect higher raw material here when it comes to particularly pulp and to a degree, also recycled. So in this business area, we'll see higher cost, and once again, this is also sequentially. I haven't commented on the energy cost, but again, that's a much smaller number. But generally speaking, when we talk about Q4 and Q1, we expect those costs to be stable. So if I then finally talk about Professional Hygiene, here you can see that the growth is largely flat, but there is actually a lot of movements in the different components.
So as we said in Q3, we have now, actually during Q4, exited the volumes that were subject to the restructuring that we announced in Europe and North America. And the combined impact of those exits in terms of volume in Q4 was roughly about 8.5%. And as you can see, if you look at the volume here, it's 1.7%, so you can basically conclude from those two numbers that the underlying volume was exceptionally strong. So it's, it was a great quarter for Professional Hygiene. And actually, also, as a result of that, we were growing in much higher-end products than previously, so mix was positive with close to about 3%. So really good in that sense.
Prices were down as expected and as we also communicated, and this is partly based on all the energy surcharges now kind of out of the system that we've had before. Now, PH is the category where we've had most launches of new products or innovations during the quarter, five actually. And of course, this has supported this good volume development. Operating margin basically, if you compare to Q4 of 2022, the margin in Q4 2023 increased by 1.1%. It declined sequentially, as we also talked about in connection with the Q3. And as you will remember, the way we execute these restructuring measures, we didn't just cut the volume from one day to another, but we rather did it in another way.
We raised prices a lot, and then as volumes actually then have gone out of the system, margins have then gone back to more normalized levels. So this is part of the sequential margin decline. Another one was that we had higher SG&A cost in the business area, higher than what we would have wanted. And as Magnus already alluded to, this was partly of more temporary nature. And then going forward, just to highlight the obvious, we will have this impact from the volume also in the first half, as we will have with Incontinence. Also in this area, we will have that negative volume impact. So just bear in mind that is something we've done. We are not planning any other measures like this, so this is basically history.
As is the case also with Consumer Goods, we expect higher raw material cost, and this is, of course, pulp and recycled. With those words, I'll leave back to you, Magnus.
Thanks. So, that was an overview of the fourth quarter and all the numbers now excluding Vinda. It's worthwhile to look at also how the actual businesses are progressing or our different priorities are progressing, and now also then excluding Vinda. These are the key priorities we set up for 2023. To summarize now, looking back, very strong progress in all these areas. Price management, we had 8.9% in price year-over-year, 0.6% in mix improvement on the back of product launches and innovations for the group as a whole. As I mentioned before, cost efficiency, very much towards the second half of the year and with good momentum going into 2024, SEK 433 million.
You have some examples there of the really hands-on bottom line improvements that we're working with now: operational efficiency, digitalization, raw material rationalization, fiber mix improvements, sourcing negotiations, energy savings, and so on. So hundreds and hundreds of initiatives. And again, just, to come back to our strategy and our strategic intent to grow faster in the highest margin, less capital-intensive parts of our business. And here are some great examples from Inco Retail, Feminine Care that Fredrik mentioned, but also some of the acquisitions, how they have grown over the last year. E-commerce is now a smaller, or a part of sales after discontinuing Vinda, so this is a new number. It grew by 10% to 9% of overall sales in 2023.
And also in the sustainability area, we remain committed, and this is a good example of how we are getting close to our 2030 science-based targets on greenhouse gas emissions. We were also, again, for the third time, voted one of the world's 100 most sustainable companies by Corporate Knights now at Davos, the World Economic Forum, something we're very, very proud of, of course, and so are our employees and our customers. Innovations, it was a very innovation-intense quarter. I will not dwell on these just to say that we saw important innovations in many different categories: Medical Solutions, Feminine Care, Consumer Tissue adapting to the local needs and market conditions.
As Fredrik stated, especially in Professional Hygiene with Tork, a lot of new important innovations with high margins that we are looking now to grow over the next years and years and decades here. Also, several of them with a strong sustainability profile. Why are we doing this? Of course, just to get back to that, with product superiority, we can achieve higher margins, grow our market shares, get high capacity utilization in our factories. You end up in a virtuous circle, and this is what we're aiming to do going forward.
And especially now, after a year of a lot of restructuring and changes, when we expect to have very little of that in 2024, and instead build on these strong market positions, strong brands, innovations, that we have in a more steady state mode. And I'm talking a little bit extra on this picture, on this slide because there's a nice picture of this little Baby here, so I thought, oh, that was nice. This slide that you've seen many times before, is now also without Vinda, and happily, we are still number one or number two in our branded positions to over 90%. And when it comes to number one positions, about 60% of our sales, also without Vinda.
And our market shares were higher in 60% of our brand category or category country combinations over the last years. So, summary: record profits, a strong platform for growth, the preconditional attractive offer for Vinda. A lot of work in the different business areas, just to mention it again. Health & M edical: decisive pricing, leading to huge improvement in margins, but to some extent with a lower starting base on volumes. But we will work very much to grow this year. Consumer Goods: very positive momentum in Feminine Care and Inco Retail. The turnaround of Baby Care: that's continuing and looking very positive, and successful price management in Consumer Tissue with high and stable margins.
And Professional Hygiene, where we did major restructuring in the first and the second quarter, that adds structurally 200 basis points of operating margin to the Professional Hygiene business area. So a lot of effort, and looking forward then, as I stated several times, we see that we will be doing less restructuring, less you know, big changes to the business. And now we're set to grow from the fantastic platform that we have, and that sums up our strategic priorities for 2024. Strong platform for growth, volume growth in high-yielding segments, innovation, brands, and market shares gains. Price management, of course, continues. Operational efficiency and digitalization, which is where operational efficiency is very much back on the agenda again, and continued progress then on sustainability and ESG. So with that, thank you for listening.
Yes.
What happens now, Sandra Åberg?
Yes, thank you very much for taking us through the presentation. Fredrik, please join on stage as well. We will open up for your questions, and I kindly remind you, one question per call. Please, operator, give us the questions.
Thank you. As a reminder, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. To withdraw your question, please press star two. We'll take now our first question from Celine Pannuti from JP Morgan. Your line is open now.
Yes, good morning. Thank you for taking my question. So my one question, I'm gonna start probably with pricing outlook. Can you talk about Consumer Tissue? I mean, we've seen that there was negative pricing, how negotiations are happening at the moment, and what kind of pricing pressure you are asked to maybe roll back? And then the second one on personal hygiene. I think you mentioned that price mix was quite positive, but I wonder whether there is as well going to be more questions on pricing in that category. Thank you.
Okay, starting with Consumer Tissue, it's business as usual. There is no drama. We are close to finalizing the last negotiations for this year, which are typically in France. So I think that's very much under control, and we feel in good shape when it comes to Consumer Tissue margins for 2024. And your second question was regarding?
Personal Care.
Personal Care. Thanks. And here, we-
No, it was Professional Hygiene.
Oh, Professional Hygiene.
Professional Hygiene.
Okay. Yes, because in Personal Care, we've actually been increasing some prices even recently, supporting our, our margins very much. In Professional Hygiene, I think we will see some more kind of promotional pressure in order to grow the high-margin areas that we've spoken about several times. But since we are now focusing on... We're talking about PeakServe, Xpressnap, the SmartOne systems, and so on, these inherently have very high gross margins. So here we can add some more promotional pressure in order to balance growth versus margin. And typically, of course, this is a category where we are very, very strong and have good relations with our distributors. So I feel that we are very much in control here as well when it comes to margin development.
All right. Just to say, you said, the first point, that you're feeling good about the margin in Consumer Tissue.
Mm-hmm.
Are you referring that you're feeling good about the level you have reached, or you think that there will be further progress?
I mean, we don't give any forecasts on margins and profitability of different categories.
Mm.
But, it's not that there's any. I mean, what I referred to was that there's not any drama, that we see any massive price pressure and so on. Actually, the market is quite balanced, the supply and demand, and we have very, very strong brands and strong relations to our retailers. So I think it feels quite good here.
Excellent. Thank you.
We'll take now our next question from Charles Eden from UBS. Your line is open now.
Hi, good morning. Thanks for taking my question. It's on the ROCE. And specifically, is the greater than 17% ROCE target the primary factor you're considering when determining which business entity should exit? I ask because, obviously, these volume exits are positive for the ROCE, but I assume not positive for absolute profits and/or cash, unless you're gonna tell me these contracts you're exiting are actually loss-making. So I guess my question is, what gives you confidence that this strategy is the correct approach if you're not able to offset the volume losses or volume exits, I should call them, with additional volumes at higher margin elsewhere? And then just a very sort of quick sort of housekeeping one.
On the SG&A cost in Professional Hygiene, when you sort of talk about some of them being temporary in nature, could you just explain what exactly they are and what gives you confidence they are indeed temporary? Thanks.
... Yeah, it's Charles, thanks. The first question is very, very important because we have been very focused on ROCE, of course, and to get the structural underlying margin of the business up, because that has the biggest impact on ROCE. And that means that, no, we have not really discontinued any loss-making contracts, but we have discontinued contracts and also some businesses then in Professional Hygiene with very low margins. Because these contracts and businesses they still require resources, investments, and so on. And we've done that to achieve a basis, a structure, a footprint that we can build on for the future. And why it's so important you ask that question is that we're pretty much done with that now.
If you compare to seven years ago, when Essity was created, we've done a lot of these changes, and now we believe we have a very, very efficient plant structure, supply chain structure, organizations go to market, R&D, innovation, pipeline, and so on. So, actually going into 2024, and this is something we have spoken about very much internally also, we are now going to leverage these efficient modern assets, brands, products, processes that we have in order to... With a focus on profitable growth. So, there is a switch here, and don't expect any major restructurings here in the next couple of years. We're, we're done with that. Essity is in better shape than it ever has been before, I would say today.
That sounded nice, but-
It did
... but it's true. So with that, over to housekeeping, Fredrik.
Yeah, and maybe just to add, Charles, I think just to emphasize what Magnus said, you it's a great question. So what we do actually, when we look at specific, could be units or a country presence, or it could be contracts, we look at actually the net present value. And if we think the net present value in continuing with the business is negative, then we actually exit, and this has been the method for us in a long period of time. And none of the business we actually have at this point of time have those characteristics anymore, and therefore, we are not planning any further exits. So when it comes to SG&A, I mentioned that some of them were a more temporary nature.
Just before commenting on that, just generally, 2023, for most companies, and, and us included, has been really inflationary from many aspects. So if you take, personnel costs, has increased quite a lot. We haven't actually added a lot of personnel. We've added some, but, but in reality, it's been driven by fairly high inflation in, in many areas, and we expect that to be lower in 2024, just from, from a more general standpoint than we have seen in 2023. And this is not just personnel. This would include things like travel costs or, or whatever, that's just from a price level increase. So this is, of course, the explanation to the overall development when it comes to, to, SG&A and to- and other investments that we have done, and of course, obviously, A&P, but also IT structure and things.
So if I talk to specifically on PH, and it was quite, quite visible in Q4, there we had a bit of specific items. We had, as an example, inflationary compensation to employees in Germany, as an example. We had a similar thing in the United States. We had various small corrections and many, many different smaller items. And as Magnus alluded to, we will see a lower number for the group, but also for PH in Q1. So part of the increase is, was temporary.
Thank you very much.
Yeah, and actually, as Charles, you got me going a little bit there, and we have time for more questions, of course. But seven-eight years ago, we spoke about sometimes the margin gap to the obvious kind of comparable, Kimberly-Clark that reported yesterday, and we typically don't talk about competitors, but at that time, the margin gap was, I think, around 7-8%. And maybe some of you noted that now in the fourth quarter, the margin gap was much, much smaller. It was maybe 1 or 2%, or even less than that, depending on which numbers you look at, and the same when it comes to gross margin.
At the time, seven or eight years ago, we stated that approximately half of the gap could be fixed by continuous improvements, just working very hard, improving every day, and half would need structural changes. That's very much what we did last year, both in PH, as mentioned earlier, but with the divestment of Vinda, for instance. Actually, the separation of the private label division, that's much more efficient now in how they run their business. So all of this has really actually closed that gap substantially to be now maybe 1% or 2%, depending again on what you look at. Of course, this has also been at the back of our minds over this period. Okay, next question.
Yeah, we'll take now our next question from Niklas Ekman, from Carnegie. Your line is open now.
Thank you. Yes, I have a question on your margin outlook here. You talk about this, now being kind of business as usual. You talk about structural margin improvements now in the last few quarters and an ambition to grow in 2024. I'm just curious now, when pulp prices have risen more than 20% in the last six months, how feasible this is? How much of a risk do you see of actually margins trending lower in 2024? Do you think that you can offset this with resumed price hikes?
Of course, we don't provide any outlook on the margin developments for the year to come. But, I mean, what we did last year is, for instance, I mean, the risk if you have a broad portfolio of high and low margin products and offerings is that you promote the lower margin to grow your volumes. And this is now not really possible because in Incontinence Care, for instance, we're focusing on pants. In Professional Hygiene, we're focusing on the high-margin strategic systems with high gross margins I already mentioned, and so on. And we are not gonna come back to just selling standard napkins or selling standard basic, you know, open diapers, for instance, in Incontinence Care. So I think that gives a lot of discipline to the organization.
This is something that we're following in a very, very decentralized fashion now, everywhere in the business. Profitable growth now on a higher margin level is definitely what we're aiming for.
Can I add-
Mm-hmm.
Maybe one thing, Niklas, if I may here? If you look back historically a bit, you have seen that when we got kind of major raw material movements, then of course, our margins are sometimes a bit lower for a few quarters, but then we compensate through pricing. And I think we have actually, hopefully now, by now, you have seen that we have proven that we are able to fully compensate by price. There is a lag impact, and if you recall, several years ago, that lag impact was quite long, with several quarters. And over the last couple of years, of course, things have changed a lot. We've become a lot more agile, a lot faster.
So needless to say, where this all ends up, if you have major movements in input costs, yes, you may see a kind of a reduction of margin that we will then, after a couple of quarters, compensate. And then, of course, it's symmetric, so we will have a higher quarter. So when you talk about 2024, I think that's a much longer horizon. Over a couple of quarters, you can see an impact, but if you take the longer perspective, we, I think we have proven that we are able to compensate all raw material with pricing.
Super. And can I just ask, are you seeing this already now? Are you seeing that prices are starting to move upward again after having lowered them a little bit sequentially, recently?
We don't provide that level of detailed information. I don't think it's useful. What we have stated, I think in Q3 also, is that our ambition is to adjust pricing on a quarterly basis now, so that we should be able to adjust prices with one quarter lag instead of, you know, three, four, five quarters that we had historically. So to give you some indication.
Super, very clear.
Mm.
Can I also just ask, when are you aiming to come back on your new ROCE target? And also maybe what you aim to use the Vinda proceeds for, whether that's M&A or buybacks. Can you just give a timeline here on your thinking?
Yeah. I think this will be very much first half year. Because this is very much in line with the closing of the Vinda transaction that's aimed for the first half of the year. So, we will come back here during the first half.
Super. Thank you so much.
We'll take now our next question from Patrick Folan from Barclays. Your line is open now.
Hi, good morning. Yeah, I just wanted to ask question on the presentation, slide seven, where you talk about the long-term portfolio direction, and you give the current split for 2023. And then you have an arrow pointing to the long-term direction, where, you know, each segment is about 25%. How do you- how are you planning to kind of get from tissue being 33% of the group to 25%, and then having Health & Medical become a bigger part of the portfolio going forward? What's the kind of plan there? Thanks.
Yeah. To achieve this, step by step. So, kind of, the vision to the right on that slide is, of course, not cut in stone. It will never be exactly like that, but it's more a direction than saying that we'll be there by a specific date. And the way to get there is exactly the same way as we've been doing. So, we've been growing faster organically in the areas we want to grow. We've done smaller bolt-on acquisitions that are very value-creating. We are continuously looking at reducing our fiber consumption in addition to just the share of Consumer Tissue, because we have a lot of Consumer Tissue in the 33%. That's very, very strong brands, very strong market positions, and good returns. So, so...
But again, to reduce that dependence on pulp costs and on other input costs, energy and so on. So a lot of efforts going on there as well.
Maybe if I can add there, Patrick, just to say that direction that you see there is a direction and a journey that we believe is value-creating. Obviously, we're doing it to create value, not because of just percentages. So obviously, we believe that's an attractive proposition. So part of the journey is, of course, acquiring in the areas which are smaller than they should be. And of course, it's an assumption there, and something we're very much believing that we can do acquisitions like that with the value-creating results, so to speak. So just to add, it's a value-creating journey.
... Okay, so does that imply any kind of portfolio rejiggering that you currently have, moving away from certain brands or categories in terms of some of the percentage decrease? Or is it more growing the part of the pie that's underrepresented, like Health & Medical?
It's more growing, and it's more step-by-step than maybe the kind of bigger moves we've done sometimes now over the last number of years.
Okay. Thank you.
Mm-hmm.
We'll take our next question from Karel Zoete from Kepler . Your line is open now.
Yes, good morning, all. Thanks for taking the question. I'd like to come back to, to cash flow and, and use of cash, because you, you've generated, quite a lot of cash flow. Net debt is now just 2x EBITDA, so strong improvement.
Mm-hmm.
In the coming 12 months, you might get SEK 30 billion in free cash flow and disposal proceeds. So, now, how do you plan to spend all this cash? Or should leverage go down further than 2x? Thank you.
We will provide more information on this eventually, not today. Today, I can only restate. I mean, the policies that we have now for a long time, which is that we should remain solid investment grade at all times, and of course, that's clearly fulfilled. That we are using proceeds as we have done to create value in the company, growing organically and through acquisitions. And of course, also making sure that we're always capital efficient, and that that could also mean that we work with share buybacks or dividends. Something that's been part of our chart now for several years, and where we get a mandate from the annual shareholders meeting every year, we have such a mandate.
But that's been our framework now for the last 10 years, and we will come back with more details in due time.
Okay, but around 2x leverage, is that... That's fairly solid leverage ratio, right?
Yeah, it's very—I mean, typically, solid investment grade means that we should be below three net debt to EBITDA, so you're absolutely right.
Thank you.
We'll take now our next question from Oskar Lindström, from Danske Bank. Your line is open now.
Yes. Thank you. I'd like to come back to kind of thinking around margins. I mean, you're saying that you're no longer going to increase the price-cost gap, and there might even be some cost pressures from raw materials near term. And that you also say that you're pretty much done with the exits from low-margin contracts that you've been doing a bit of over the past year or two. So given those two things, what will drive mix improvements and margin expansion in 2024 that you need in order to reach your ROCE target for 2025? That's my question.
Yeah, and of course, I'm not sure that's exactly what we said, because it's very specific to different categories and markets. Because, of course, where we can raise prices, we will still do that. So that's not something... The price management, as we call it now, remains very, very important. I think we've been really able to prove our success in that area. And then, as you already mentioned, mix has really contributed year-over-year, and we expect that to continue this year. And not least, cost savings in cost of goods sold, where I mentioned the SEK 0.5 billion-SEK 1 billion of net cost savings that we expect in this area.
So we have many levers to pull here to gradually increase our margins and thus our return on capital employed. So, if you remember a kind of a waterfall or bridge that we've had previously, the key focus is now in general on commercial excellence, to reach the kind of final steps here in our ROCE journey.
All right. So you remain confident that you will reach that ROCE target for 2025? Thanks.
We'll take our next question from Mads Rosendal, from Danske Bank. Your line is open now.
Hi, thank you for taking my question. So, in connection with the sale of Vinda, you commented that it didn't constitute a cessation of business, according to the EMTN program. It seems the market doesn't really agree with you on that statement. Your bonds are trading at negative spreads to govies. So, just wanted to ask, how confident are you and why that your argument still holds? I know the license deal is a big part of it, but is there anything else that makes you confident on your statement last time?
Yeah, we are very confident, and it's basically based on the numerous legal advice that we have from experts in these areas, who clearly state that this is not a cessation of business. I don't know if you want to add there, Fredrik.
Yeah, I mean, there are many arguments, Mads, for this view from our legal counsels, and one of them, obviously, is that Vinda constitutes less than 10%. Now, it's not a given with 10%, that's not necessarily defined as that, but at least it cannot be less than that. And if you look at Vinda as part of our net sales, with our ownership structure, roughly 52% of the shares were a bit lower than that. And the total then sales as part of our sales is roughly about 8.5, so it doesn't actually qualify. That's the view of the legal counsels. And then you can add things like you just mentioned here with license agreement.
So there are many reasons for the view that has been received from multiple sources of legal advice. So these are the reasons. There are many more, but these are some.
Okay, so you're not opening up for any concessions towards these bondholders?
No.
Okay. Thank you. Thank you.
We'll take our next question from Mikheil Omanadze from BNP Paribas. Your line is open now.
Hi, Mikheil Omanadze here from BNP Paribas Exane. Thanks for taking my question. So in Consumer Goods, you commented on price and volume components in core Baby and Femcare. Can you please also break down the -10.3% organic decline in Consumer Tissue by price and volume? And also, what was the level of volume and price decline in Consumer Tissue, private label Europe? Thanks.
Maybe I can-
Mm-hmm
... I can start there. We're not gonna comment on specifically private label. We're not doing that as we have terminated the strategic review. But if I look at Consumer Tissue, just in general for the group, that's what we can comment on, then volume was -3%, a bit over -3%. If you look at price, it was basically -6.5%, roughly. So those were the components. And roughly stable mix, you can say.
Thank you.
We'll take our next question from Simen Aas from DNB Markets. Your line is open now.
Good morning, guys. So, I want to touch upon you. You mentioned Kimberly earlier in your presentation, and they are at around 35% gross margin. So could you just elaborate on how, what is the normalized gross margin in Essity post the sale of Vinda? And how should we think about, you know, you obviously now reported 32% on-
Mm-hmm
... adjusted level. Is that sort of the level that we should expect going forward? Or how, which is what you're targeting, or how should we think about that? Thank you.
It's thanks for that. Yes, we are at 32, so on, on gross margin, there's, there's a little bit of a bigger gap than actually than on, adjusted operating profit, so approximately 3%, but still a big, closure there. And to be above 30% is typically, of course, what you require from an investable brand or market position or, or product area, at least, and, and, somewhere above that. So it's a, it's a very, very good starting point, but of course, from this, our ambition is to gradually, step by step, increase this, very much, in each individual market position and, and brand, but also by, again, step by step, changing the mix of, of our, categories, and, and markets.
So a very good starting point, and what should be a normalized, gross margin target, I don't think we can, we can provide that here today. But our aim is definitely to, step by step, continue improving, our, our business and our margins, in all the ways that we already, spoke about.
Okay. Okay, that's helpful. And then just to follow up on that, so then when you say that raw mats stuff is coming up now in Q1, should we expect the margin to come down then? Or are you sort of offsetting that by better mix and those kind of improvements?
We don't give margin targets or for an individual quarter. This is, of course, referring to the very, very good long-term development that we've seen over the last number of years now, resulting this 32% gross margin.
Okay. Okay, that was my, my question. Thank you, guys.
We'll take our next question from Victoria Nice from SG. Your line is open now.
Hi there. Good morning, everyone. I just wanted to come back to some of the cost increases in Q4, and I wondered if it was possible to shed some light on the drivers of higher cost of goods sold costs in the quarter, if distribution was lower and savings were positive. You've been talking about higher salaries, but my understanding is that this sits mostly in sales and admin. So how can we think about the drivers of that specifically and this cost line in Q1, please? Thank you.
Sounds like a question for you, Fredrik.
Absolutely.
Yes.
Thank you, Magnus. Yeah, I'll, I'll try and do that, Victoria. So, so if you look at the other COGS, exactly to your point, we had efficiency gains in COGS, so there is a fairly significant negative there. And there are two, you can say, main reasons. One is actually lower volumes produced. We've talked about the very good cash flow, of course, during, you can say, the latter half of this year-
Yes
... and a lot, yeah, of course, obviously 2023. So, that has actually been accomplished through actually producing less. So a lot of this other COGS negative is through lower production volumes in the second half of 2023. So, that's also when we look forward, we are have now reached a pretty good level of our inventory. In fact, we're back to levels which we're comfortable with. So then, of course, production volumes are increasing as we go into then 2024. There is another item, and that's actually a currency impact on purchased finished goods, and that's also quite a significant significant item, and then there are some other issues, but those two are the main factors.
So generally, as we look forward, we would look for a sequentially much more stable development here, and not the significant increase that you've seen throughout this year.
Thanks very much. That's really helpful.
We'll take our next question from Tom Sykes from Deutsche Bank, London. Your line is open now.
Yeah, thanks. Morning, everybody. Just would you be able to just clarify what you're saying on, on Consumer Goods in the first half of the year? I mean, the price mix minus 2%, should we expect that to get a bit worse before it gets better? Or are you still looking to push through, you know... Or do you think you can realize any, net price improvement there? And maybe when you talk about the price mix in Consumer Tissue, I mean, can you at least talk about—Can you say anything, anything at all geographically there? And then just on the financial items, I mean, there was a step down Q4 versus Q3. Is Q4 the right run rate number? Were there any one-offs in the Q4 number, that won't be replicated, please?
I can just take the last question first, and no, not really any one-time issues, so it's fairly normalized, you can say. Of course, as we have then generated a lot of cash flow, obviously volumes are coming down. So over time, the finance net will decline, but of course, we're subject to movement of interest rates, so it's always hard to predict. But generally, it's nothing specific in Q4.
Yeah, and to your first question, it's impossible really to provide more information on that. It's very decentralized now, how we work with managing the price gap, managing the margins, balancing it with the promotions, of course, to grow volumes. So quite different from two-three years ago when you could ask me anything, and I would say, "We have to raise prices." I mean, that's not how it works anymore. So but I— As we stated several times, we know now that our organization knows and understands how to manage this in a good way to balance volume growth, margins going forward, but no specific numbers to provide.
Okay. Thank you.
Perfect. And now we are more than up to the hour, so we need to end the session. Thanks a lot for your questions, and I would like to hand over to you, Magnus, for final remarks.
Thank you. So my final remarks is that, last year was very, very busy with, fantastic, financial results. We're back on, the trajectory of top-line growth and profit and the margin growth that we've seen now over many, many years. And, we are setting ourselves up with, the most efficient platform that we've seen as it is in great shape, to have another successful year in 2024. Thank you for listening.
Thank you.