Essity AB (publ) (OTCPK:ESSYY) Second Quarter 2022 Earnings Conference Call July 21, 2022 3:00 a. m. m. , Eastern Time
Participating companies
Joséphine Edwall – Head of Communications
Magnus Groth – President and Chief Executive Officer
Fredrik Rystedt – Chief Financial Officer and Executive Vice President
Joanna Griffiths – Founder and CEO, Knix
Conference Call Participants
Carlos Eden – UBS
Linus Larsson – SEB Bank
Faham Baig – Credit Suisse
John Ennis-Goldman Sachs
Fulvio Cazzol – Berenberg
Martin Deboo – Jefferies
Oskar Lindström – Danske Bank
Karel Zoete – Kepler Cheuvreux
Tom Sykes-Deutsche Bank
Victoria Nice – SocGen
josefina edwall
Hello and welcome to the Essity convention on our 2022 semi-annual report. I’m Josephine Edwall, Essity’s director of communications and I’ll be its moderator today. Today’s presenters, of course, will be our CEO and Chairman, Magnus Groth; and our Chief Financial Officer and Executive Vice President, Fredrik Rystedt; and then we are pleased to have Joanna Griffiths, the founder and CEO of Knix. After the presentations, we will have a question and answer session.
So with that, I hand you magnus.
Magnus Groth
Thank you Josephine. Welcome everyone. And I’m pleased to announce the most powerful sales expansion quarter we’ve ever noticed and much of that is due to value increases as well as the highest value increases we’ve ever noticed in a quarter so far. And this has resulted in a sequential improvement in EBITA, however small, it is still an improvement. We see that the value increases we have achieved are particularly higher than we expected, but also the charge inflation that has continued to rise in the quarter.
Looking to the future, we continue to invest in our brands in our market positions. This is what allows us today to improve our profits and margins. 15% of sales. And, of course, I also welcome Joanna to this presentation. This is a very, very significant and strategically vital acquisition of Knix as well as Modibodi. And not only is it strategic, it’s also a very successful and high-growth business that puts us in the most sensible thing of intimate hygiene and I’ll communicate more about that in a moment.
Some monetary highlights. It is worth mentioning a growth of more than 20% overall and an expansion in acquisitions of more than 2%, which is above our target. And let’s get into details. But as for the biological 17. 8%, 12. 5% was awarded purely to the prize.
I would say the money was solid. And adjusted EBITA was slightly lower than in the same quarter last year, but improved sequentially. The EBITA bridge, as you can see again, a top charge inflation of 1,280 basis points, as you can see below the red box. And that’s not all, because it’s the charge inflation that we measure in global indices and that’s evident compared to market charges in the same quarter a year ago.
But on top of that, we also have inflation in several areas, it can be just pallets, it can be just shipping, it can be just other areas. Wage inflation, of course, further increases the pressure to collect. .
But as discussed with significant value increases, a greater mix, and higher volumes across more or less all of our categories and geographies, I’m very, very proud of the organization’s accomplishments this quarter and we have very strong momentum when it comes to proceeding with achieving expansion through a combination of price and volume.
owns
As always, innovation is the engine of this corporate. And that’s another company: it’s another quarter with a series of very, very strong product launches. All of those examples here are in Self-Care. Perhaps it’s appealing to note that it’s not evident from the symbol that’s on the right corner of our logo new women’s skincare platform that will update our very, very secure and successful compatibility platform that we’ve been employing for 15 years. And as you know, we’ve been expanding our market percentage and improving our market positions here for years and years and years. And this is not just a significant update, but really a new product platform with the logo that we are launching with a very positive reaction from consumers and consumers.
As you can see from the figures, our savings in the COGS, which generally range between SEK 500 million and SEK 1 billion during the year, were negative during the quarter. It’s not because we save that. In fact, we are saving more than last year and with a very high frequency. But this is offset by inflationary pressures in several spaces. As a result, we are seeing really extensive savings in all spaces, from innovations in compatibility with national efficiency. , digitization along the source chain, consistent with streamlining and saving sources. And the negative effects of inflation are inflation in spaces, as I mentioned before.
I think it’s a wonderful picture of the investments we make that are not only smart for the company and for our long-term functionality and profitability, but also for the planet. Those are the solar panels at our tissue paper factory in Kostheim, Germany. .
With that, I would like to go to the ground with Fredrik.
Fredrik Rystedt
Let me share with you some comments, regarding activity spaces and starting with fitness and medicine. As you can see on this slide, we continue to show effects in terms of biological growth, either for incontinence and for the medical part. And on the medical side, especially wound care and orthopedics continue to grow at a very, very good rate.
You can see that the expansion of emerging markets has been strong and this is specifically in Latin America, either for incontinence and medicine and, of course, also in Eastern Europe. Now, value and combination were sometimes strong in the high markets. here in the 4% value/combination component as shown here, the absolute majority is similar to value increases.
Now, if you take a look at Health
Now we have compensated a little with the value as I said. But the design of contracts within Health
So let’s move on to customer intelligence. This is a quarter with very, very large increases across categories and geographies. Therefore, on average, the price has risen almost 15% compared to a year ago, and also this quarter, very significant increases. And with a clever combination, the biological growth of sales, as you can see in the slide, has been close to 18%.
Now the volume is in the context of other sectors of activity, it decreases slightly and especially for the baby. So, there are essentially two explanations for this. First, we made the resolution to stop our diaper production in Colombia, our diaper business in Colombia. And this had a negative effect on the volume. We will see that this negative effect will also have an effect on the volume in the future, as we gradually launch. If you eliminate that effect, we could have had about twice the expansion you’re seeing here, about 4%. And the other explanation for why volume has decreased slightly is due to Russia with a much, much decrease in sales volume during the quarter.
So here you can see that the impact of raw fabrics is the highest of our commercial domains. Therefore, 14. 5% has an impact on the margin compared to a year ago. And here too we will see significant increases in charges in this domain sequentially and compared to last year as we go along. We have made many value increases and will see more benefits from the value increases already agreed as we move forward now into the third quarter and of course we will continue the adventure towards value increases as we go along.
And as Magnus also said, of course, charge control pricing is a very, very, or both very key organization at this point, however, we are proceeding to run our program over the long term, so controlling functionality with the release of layers in Colombia for example, and of course the acquisitions that hear more about Knix and Modibodi.
As for Professional Hygiene, very strong expansion. And of course, here we are still benefiting, it can be said, from the resumption of COVID restrictions that were provided last year and to a much lesser extent this year. And with a very clever combination and very significant costs of just over 13% in Professional Hygiene, then, of course, the biological expansion of just over 26%, as you can see.
Now, here’s the domain where mature markets actually grow more than emerging markets. And there are essentially two spaces where, which has an effect on that. Everyone knows that COVID restrictions in China have not been lifted. Therefore, the volume progression is quite low. And the other domain that contributes to that, to the relatively weaker expansion in emerging markets is Russia. So we have virtually nothing left to do when it comes to occupational hygiene. , of course, no other of other activity spaces. The impact of raw fabrics is very significant 10. 6% as margin — negative impact on margin compared to last year. And here too, we have to offset with securities and will continue to do so, as we move forward with additional value increases in the third quarter. Thank you.
Magnus Groth
It is ok. So let’s take a closer look at how we take the lead in clothing. And we use the term absorbent clothing and underwear that can be cleaned a little from side to side. And of course, the acquisitions of Knix and Modibodi are key to taking the lead here.
But just to give a background. Together we profile women’s care and incontinence care as intimate care and what we have noticed in recent years is that those two categories are increasingly united. And that from the point of view of the consumer, it is the same and is perceived from the point of view of the consumer. Seen as a general category of intimate hygiene and menstrual care, daily intimate care is how we delineate female care, while dividing incontinence care between women and men. And the relative duration of those two sets Intimate hygiene accounts for about 11% of our sales and incontinence care represents a higher percentage than women.
Waterproof clothing, why is it so exciting? It’s very exciting because it’s by far the fastest developing category in the intimate hygiene picture. We expect it to grow by at least 20% steadily over the next five years. It is also a category and Joanna will communicate about it. which is horny for the youngest. Today, 7% of the Intimate Hygiene market we expect to be 15% in five years. And those are the general reasons why consumers change. It is a more durable option, it is comfortable, it is discreet, it is reliable and above all thanks to direct sales to the consumer. Its availability is impressive as is its notoriety.
So, with this introduction, I’d like to introduce you to Knix Wear founder and CEO Joanna Griffiths.
Joanna Griffiths
Thank you so much. It is glorious to be here today with all of you. I’d like to tell you a little bit about Knix and we’re an attractive organization. We sat at the intersection of intimate hygiene that we just heard about active, intimate clothing. And our project is to motivate our consumers to be completely free and, in fact, their lives through original products and narratives.
When you think of Knix, there are a few things I sought to point out to you. So, the first one is that we are category creators. We helped invent the waterproof clothing category and it’s a very exciting category. This is one that, 10 years ago, did not exist. When you take a look at this category today, at least from an American perspective, more than 54% of other people are familiar with waterproof underwear and interest in testing is developing rapidly.
Secondly, we are product innovators. Therefore, in this category, we try to make the most productive product imaginable. Some of the accolades we garnered last year were the number one waterproof underwear logo through Consumer Reports, as well as Good Housekeeping and that was implemented for Knix and our son. Kt logo through Knix which I will talk about later.
Finally, we are a brand of movement. We’ve pioneered many of the trends seen most widely in today’s marketing, adding positivity, inclusion, and diversity of frameworks, and we use our logo and platform to break taboos and stereotypes, which we represent with us today.
Next, I’ll communicate a little bit about Knix as a whole. So, as I mentioned, we are a leading player in the waterproof, menstrual and incontinence clothing category. We have a wide variety and collection of functional underwear and sportswear that will be communicated in a moment. We are an ambitious innovator, we love to employ our platform to innovate: innovate and build accept as true within our existing super base. And perhaps the most attractive thing about this call is that we have the maximum productive virtual functions in its class.
We are a logo aimed directly at consumers, 98% of our sales are made online through our own websites. Lately we do not sell through third-party sites. So all the good fortune you’ve noticed to date has been exclusively through our own channels. And that led us to have a market share of about 30% in North America. These sales are distributed almost lightly between Canada and the United States.
And finally, we have superior gross margins in our small-cap business, which has allowed us to evolve very successfully so far. for worry-free protection. Therefore, the first considerations are periodic protections and periodic underwear. About 80% of other people have leaks during their period. Therefore, it is a wonderful option for backup protection. About two years ago, we launched products that absolutely update the need for disposable products. Therefore, consumers use it for any of those reasons.
The moment is underwear for incontinence, which is currently a case of great need in women in particular, especially in the postpartum era or for other very active people, where we see that one in 3 women suffers from what we call tension incontinence.
And then the third and this might surprise other people is daily use. So, other people opt for waterproof underwear for worry-free protection against sweating, discharge odors, all those other things. And more than 50% of Knix consumers wear waterproof underwear every day, which is very exciting and the trend we’re seeing in the intimate hygiene box, more broadly as well.
When we communicate more widely about underwear and waterproof clothing, what we’ve done at Knix over the past few years is that we’ve taken our water-resistant intellectual assets and implemented them. We in underwear. We then take our water-resistant intellectual assets and incorporate them into maternity clothing, launching products like water-resistant breastfeeding bras, for example.
More recently, we introduced waterproof swimming, which was very well received. It’s a great option for others who exclusively use sanitary pads and seek coverage when swimming.
And then, we see the next frontier of the existing active seal. This is when other people sweat, it is when they have the maximum difficulty with classic products and this is also where there is a higher incidence of tension incontinence. And so, we’re very, very excited about our foray into sportswear that we started last year. And finally, we will offer classic reusable towels.
Something that’s part of Essity and Knix is that we’re there for consumers every step of their lives. In 2017, we introduced our KT children’s logo through Knix and it was born with the idea of being there from the beginning to help normalize menstruation and support give young women peace of mind and confidence as they experience their time.
From there, we take that client and they can live their young adult life with us through the maternity and postpartum phase where we have quick products for them, then through menopause and more. defeated in life.
Knix, we are proud to have consumers who buy for their mother. They shop for their teenage daughter, their sisters and in fact we are a multigenerational brand. Part of how we have controlled ourselves to achieve that purpose successively where others have Not that we teach our visitor by first telling a story and then selling it.
We position our consumers at the epicenter of everything we do as a brand. These are our role models. For example, we have worked with more than 1,000 of our clients. We broadcast calls on our social media channels.
I think over 16,000 people applied to be a style for Knix if that gives you an indication of the point of interest and logo. They are our source of inspiration for new products. We have a very close direct relationship with our consumers thanks to the fact that we are a logo aimed directly at consumers. So, we get a lot of smart concepts from them and credit consumers on our packaging.
And finally, they are our ambassadors. So they speak for the logo by sharing their reports and we use our platform of over 800,000 fans on social media to share their amazing life-changing stories and motivate others around them.
I now give the floor to Fredrik, who will provide more important points about the transaction.
Fredrik Rystedt
Yes. Thank you, Joanna. The acquisition value of Knix, the agreed value of 320 million dollars, or about 3,300 million Swedish crowns, and this at 80% without debt or cash. So, of course, Joanna will still be the 20% owner.
Now, as Joanna already mentioned, Knix is a high-growth company, the company with a higher gross margin, but also with very, very gigantic investments in growth. And of course, despite this, the EBIT margin is attractive. Therefore, we expect to complete the acquisition in the current part of this year after the same previous regulatory approvals that we expect to have in the coming months.
So, let’s move on to another Modibodi acquisition as Magnus mentioned. And this agreement was signed the day before the knix agreement was signed. And Modibodi is also a leading water-resistant apparel company with strong market positions in Australia, New Zealand and the UK. And in Australia alone, the market share is around 40%.
And like Knix, Modibodi is a high-expansion company with very, very hot gross margins and, of course, also EBIT margins, but, of course, affected by significant expansion investments. And expansion is also a major issue for Modibodi. Therefore, the value of the acquisition is just under 1 billion Swedish kronor 140 million Australian dollars, in cash and without debts. And we also expect this acquisition to be completed in the latter part of this year.
Magnus Groth
To summarize, we are building the fastest developing company in the field of intimate hygiene and taking the global lead in water-resistant clothing. And just to say that with Knix, Modibodi and waterproof products we have introduced for the last two years under our own brands like TENA, Tom Organic and our FemCare brands. We are in the first position in the Intimate Hygiene chart that is experiencing the fastest, very exciting development.
And also, the very exciting Joanna will continue to lead Knix. And Knix and Modibodi will operate absolutely independently of the rest of Essity. And then, of course, we hope to be informed of the good fortune that these two corporations are experiencing right now. .
To sum up, this is the same slide as me. We saw strong sales growth, significant increases in value, peak volumes and sequential improvement in EBITA. And as discussed now, prices several times higher in all areas, materials, energy, also inflationary effects on prices.
We continue to invest for the long term. To finish the studies as much as possible for the 3rd quarter, I would say that the uncertainty is greater than ever and that it will again be a very complicated quarter and this is due to the acceleration of prices that we have already commented on several times. which will also continue in the 3rd quarter.
We continue to relentlessly increase values. We see that we will have significant value increases, especially in the fourth quarter. And that’s something that we’re going to execute very, very. If possible, similar margins in the third quarter and the current quarter and that will count: – Here there are massive uncertainties, you will count on the evolution of costs.
We know that it’s worth building momentum is very, very strong and that it’s also increasing, especially in non-public attention. And to the extent that we balance that in the third or fourth quarter, I think. We’ll have to see. So, with that, let’s open up the questions.
Q&A session
Operator
[Operator Instructions] Now we’ll take the first from our Charles Eden from UBS. Continúe. Su line is open.
Charles Eden
Hello. Hello. Thank you for answering my question. I have a pair. Firstly, on the value/mix of 10. 8% at the point of organization in the second quarter. Could you divide the percentage of list value increases relative to composition?What if you were given the value of the energy surcharge on the client structures and professional hygiene that you were talking about in the first quarter?Could you also quantify to what extent this contributed to setting the price for the quarter, please?Would that be helpful?
And then, if I can ask a momentary question. This is only German production and focuses in particular on its toilet paper and professional hygiene activities given the energy intensity there. But I have 4 locations in Germany, which is about 12. 5% of their global clothing and hygiene capacity. Can you tell us about overcapacity at some of your other sites in Europe or around the world and whether production constraints at the German site can be compensated elsewhere?Thank you.
Magnus Groth
Need to start Fredrik? And I will communicate about how we are preparing for the imaginable fuel shortage in Germany, to which I suppose you are referring. So, start with. . .
Fredrik Rystedt
Yes, I think, the first query, if Charles, you said how much of the total/mixed value was similar to the value. Was that your query?
Charles Eden
Yes, please. And then, if there is an additional contribution to energy, can you distribute it as well?
Fredrik Rystedt
I can’t split that because you can say that the energy surcharge is just another value you can build. Therefore, it is more of a tactical and faster way to increase values. Therefore, we did not divide exactly how much it was. But if you take the total cumulative value for the group, it was about 12. 5%. And the rest of the value is clearly combined, so 1. 5% was similar to the total.
And I think I talked about it before about the other areas. Therefore, the majority of 4% in fitness and medicine were worth the same. when you get to Professional Hygiene a little above 13%. So, those are necessarily the value increases that we’ve experienced. Let’s take a look at the current question.
Magnus Groth
Paper consumption expansion of 21. 6%.
Fredrik Rystedt
So if you take the total volume expansion was 1. 6%. And if you look at the aggregate of about a small percentage. And then, despite everything, the value accumulates at around 18%.
Magnus Groth
And it is Russia that has a negative impact on volumes.
Fredrik Rystedt
Yes, exactly. The volume is a little lower than in other areas. And of course, Russia is a very, very giant component. So yes, the ones are the numbers.
Magnus Groth
It is ok. So, let’s move on to Germany and our sites in Germany, where we are preparing to handle any scenario from an energy standpoint and especially with regard to herbal fuel. So what we are doing very concretely is that we are preparing our German plants. to be fed through LNG. Therefore, to supply them with fuel through trucks that replace their fuel pipe. So that’s all we do.
We can also, in some cases, run production, with electric drying. So we have some examples. Of course, we also work with our inventory grades so that we can manage a few weeks, even if some paper machines would close for a while and continue to convert and supply our customers.
And as you said, it’s about 11% or 12% of our capacity. Therefore, we have functions in other parts of Europe that can help you to some extent. Therefore, we have a very comprehensive program that considers investments, monetary policy as well as the supply of factories in other countries. And that with this, we will be able to manage the source even in very difficult conditions.
Charles Eden
Thank you.
Operator
Now we’ll take the next one from Linus Larsson of SEB Bank. Go ahead, your line is open.
josefina edwall
Lin, are you there?
Operator
Go ahead, your line is open.
linus larsson
Yes. Sorry for that. Thanks a lot. Thank you for taking my question. First of all, I just wanted to explain if I heard it that it’s heading towards a group-adjusted EBITA margin similar to Q3 in Q2. Just to explain if I understood at the beginning of the call.
Magnus Groth
First I came up with an Icelander named Lin Uslarsson, as it is written here on my screen. I think I watched too much football and the Icelandic team there.
Hello Linus. Je no guide. This is just an estimate and big uncertainties. Therefore, we expect to see very smart value increases also in the third quarter, even more so in the fourth quarter. So it is in the negotiations we are having when we are expecting to see particularly higher input prices sequentially and year after year in all areas. Therefore, it is an estimate and it is very difficult to say. And read through margins in line with the second quarter.
linus larsson
Good, good. And that’s something. . .
Magnus Groth
What is vital maximum here, I think, is what is vital maximum, what I must point out is that we have a worthwhile dynamic and nothing is skyrocketing here in terms of prices and we are also seeing continued momentum going forward. And as I discussed as well, it has been going down more and more slowly, but in non-public attention.
So we’re very, very confident that we’re doing everything we can and we’re really stepping back, leveraging and expanding the strength of our logo, our market positions while also being very focused on saving productivity charges. And finally, we will see the effect of this, of course, also on the numbers. So, in general, intelligent dynamics in the company.
linus larsson
But basically, his message is that he expects to keep up with charge inflation in the third quarter, but still not overcompensate, which may happen at a later stage.
Magnus Groth
Cost inflation continues to be very high and we expect particularly high prices in all areas, either sequentially and year over year, also in the third quarter, which is in line with the outlook we have.
Fredrik Rystedt
Maybe Linus, if I can upload anything we’ve talked about several times before, it’s that it’s incredibly complicated. I mean it’s a time-consuming process, no matter what industry we’re in to raise prices. It’s anything that takes time. So it’s not a one-day problem.
And of course, the kind of rate increase that you have is the one that negotiates over the price, and then gradually the price increases are executed. So if the rate increases keep going up all the time, then of course it’s hard to move on. because the rate increases we have now are the ones for which we’re going to negotiate the value and get some kind of additional refund a little bit later.
So I think the explanation for why you say we can’t compensate, I think we would possibly compensate more than the load increases, however, it’s the load increases that have happened before.
So, as Magnus has already said and we have said here many times, we will have to keep raising values and we will. And with this value dynamic that we have, we see all the probabilities of doing just that in all our spaces of activity. It’s just a procedure that takes time.
linus larsson
Absolutamente. No, it is very useful. Thanks a lot. I think it’s very transparent that I can compensate, however, my query was more about where to get an advantage. But maybe on a somewhat different note when it comes to fitness and medicine. are other prices that seem to accumulate through SEK 180 million from one year to the next. Could you put some color in those prices?Are they to some extent similar to Russia, Colombia or anything else?
Fredrik Rystedt
What exactly did you mean by Doctor, Linus?
linus larsson
Therefore, in the Health and Medicine business area, other prices increased up to SEK 180 million year over year.
Fredrik Rystedt
Right. Okay. So, I think Magnus said that if you look at the market movements that we track in a component way in the indices, they’re components of the market markets, but we also have inflation almost everywhere. These other prices are basically similar to inflation, and the magnus points discussed in this regard also exist in other areas. So, I don’t express there.
linus larsson
It is ok. Nothing in this issue?
Fredrik Rystedt
Not really.
Magnus Groth
Before we proceed with the Q&A consultation here, I just want to remind everyone that Joanna is also online and content to answer any questions.
linus larsson
Just one last question, if I may, about the waterproof category. Do you intend to make more acquisitions, or do you deserve this to be a predominantly biological business now?
Magnus Groth
Mainly, a organic farming company.
linus larsson
That is very clear. Thank you so much.
Operator
Now we’ll answer the following from Credit Suisse’s Faham Baig. Continúe. Su line is open.
Faham Baig
Hi, guys. Thank you for the call and for answering my questions. I have three, if I can also temporarily, I hope. Am I right to suggest that charges will increase sequentially compared to what was recorded in the current quarter?And similar to that, historically, I would possibly have advised that to offset the inflation of the entrance fee, you would want a price of around 25%. ?
Secondly, with respect to some of the moving parts in terms of load inflation, can you break down the transactional details of the construction into your uncooked materials?Because I think it was the biggest drag instead of the construction in terms of USD. That would be helpful. And the last question, can I just talk about Vinda in China?The quarter at the moment really turned out to be higher than expected in terms of revenue. But I’m sure I agree, we still want more value there. Could you highlight some of the value dynamics conveyed through how the festival reacts to this?Because I know that in the first quarter, the festival wasn’t following Vinda and that’s how it has an effect on the dynamics of market share. Sorry for the long list.
Magnus Groth
You to begin with, Fredrik. I’m going to communicate about Vinda.
Fredrik Rystedt
Ouais. Je I think that with regard to the values in the third quarter, we do not need to provide express figures. So the sequential buildup in the current quarter was very, very strong. About 6% in the remote neighborhood alone. So it was a price quarter from that point of view, of course, very necessary, but nevertheless. So I think Magnus commented earlier that we’re going to see more values in the fourth quarter, but there will also be values in the third. a quarter of what we have already agreed and, of course, new constructions of value that we will put in place in the short term.
But giving you an accurate forecast of how the costs of the 3rd quarter will turn out is not possible. I can continue with 25%, because I think it’s more like an express catepass than the organization. as a whole. I think you get a little bit ahead of the curve when you look at the margin and our monetary passes. Clearly, if you look at the margin and the much larger ROCE where we are at this point, we have an important, you can say, an adventure to go through to succeed by 17% or more than 17% in a few years.
And obviously, this has to come to a very large degree not only, but also to a huge degree because of the effect on margin and, of course, a significant component of that on prices. So I think looking at the margin is perhaps a more applicable picture. The precise amount we will want will depend, of course, on how cargo inflation evolves as we go along, because we don’t know.
I think it’s fair to say that the charge for the current quarter has become much higher than expected. Prices have also become more vital than we had estimated. So, from this point of view, everything is fine. Q3 loads particularly higher than we first thought. And it’s very, very hard to say. So it’s not that significant to give an accurate figure over 25%, I think. But we will continue to raise prices. And we will do it to achieve the monetary goal that we have set ourselves, Magnus, is there any transactional effect that you want to communicate about?
Magnus Groth
Currency I guess.
Fredrik Rystedt
Yes, smart question. This is about SEK 500 million. Therefore, absolute value is a fairly vital component, but absolute majority, of course, is linked to increases in natural value. But the strengthening of the dollar is not very favorable at the moment. Therefore, it is about 500 Swedish kroner. million. Most in the customer intelligence chart, but there are also in the others. I can give you the exact numbers if you want them, but quite that.
Magnus Groth
And despite everything Vinda, Vinda has the same strategy as the rest of the organization to build very, very strong logo market positions, a leading market access market. And once again, their online sales have increased. hard to increase the value. And how it will unfold in the current part of the year, I don’t know. But that’s Vinda’s ambition. That’s what they’re aiming for because we’re in all parts of the organization.
Faham Baig
Thank you Magnus.
Operator
Now we’ll answer the following from John Ennis of Goldman Sachs. Continúe. Su line is open.
John Ennis
Yes. Hello everyone. So, look, my first query is about the price of margin clients and clients for fitness and medicine, I guess. I think naturally it will be a domain where it will take longer to set the costs just for the duration of the contracts you discussed earlier. . But I guess on that basis, do you expect the margin weakness here to be a little longer, or do you have some other project to help recoup the margin if costs are going to be slower than in other segments?And I guess power supplements also works in this part of the business?This is my first question about fitness and medicine.
And then I had some quick explanation questions. The first involved energy surcharges more broadly. I guess they disappear when energy charges normalize or, in your opinion, is it the same as a stable accumulation of charges?And then my other explanation about the other item of charge. Are all the transaction effects here, or are some of them in the commodity line?And do they catch any kind of discounts or discounts on that cross-item?And have they evolved, which explains the negative movement from one year to the next?Thank you.
Magnus Groth
It is ok. I will leave you the other rates of Fredrik, it seems that here is your specialty. And I’ll tell you about fitness and medicine. And I mean there are essentially 4 things we can do in the fitness and medicine chart. We can make sure that about a third of the volume of contracts we renegotiate year, of course, we have not only achieved higher margins and higher prices, but also with new and staggered contract conditions, which means a shorter contract term and also with clauses and indices that give the opportunity to offset raw materials.
I mean it’s not necessary. What we have noticed as one of the great benefits of this entire category, especially Inco Healthcare. I mean Inco in Medicine, the impact is still very, very small. But at Inco Health Care, we have a significant impact. effect on all oil-based superabsorbent materials, also fluffy dough.
We are applying to replace contract structures to negotiate higher prices. But we also see increased strain on healthcare systems and we expect to see this in the long term to trap consumers and consumers as they move towards self-payment. And we have a merit here as we are one of the few assets that are in the regulated reimbursement component of the incontinence care business that we call Inco Health Care and in the retail component or self-payment component.
And then, of course, there are combinations where there’s a self-checkout component and a complementary component. So pull all the levers and then work very, very actively also with public affairs to make sure that the reimbursement systems are healthy and to get advantages from the users and the whole sector, so a lot of work is being done there. When it comes to energy in particular, it is not applicable for self-care.
Self-care consumes little energy. The energy intake is in the paper machines to dry the paper. Energy supplements, as Fredrik mentioned, are considered like any other worthwhile increase. they probably deserve to be superior with what we have noticed in recent days in Europe about the ongoing fuel talks. So with those other Fredrik fees?
Fredrik Rystedt
Yes, my specialty as you said Magnus. Thank you John for this question. So I think his query was where is it. Where do you find the effect of the transaction, the minus of about SEK 500 million that I talked about earlier? And it would place them on the market. Hence, the market price of greige fabrics, which is essentially where to put them. There is also a transactional currency that affects others, but they are much smaller and relate to, for example, finished products, and yet, as I said, it is a much smaller component. I think your query was also about discounts. This is usually a component of our productivity improvement. So if there is an accumulation of rebates for raw fabrics, we calculate that as a productivity improvement or you can say COGS savings. And your query is are they higher than I assume compared to last year? And they are truly superior. Therefore, there is a positive contribution from higher discounts. But if you look at the derivative rate or the exchange rate, this impact is actually less than last year. So getting discounts or increasing profits from that attitude is a bit more complicated in that market environment.
John Ennis
It’s useful. I only have a brief follow-up of energy supplements. So I guess if energy values were to fall next year, what would happen to these, the extra part of their value increase?Does it disappear or does it stay there?
Magnus Groth
We have other terms for other supplements. But, in general, it is not purely mathematical. This is a component of the general type of negotiations with our clients. Therefore, there is no simple answer to this.
John Ennis
It is ok. Thank you.
Operator
Now we will take the next one from Fulvio Cazzol from Berenberg. Please continue. Your line is open.
Fulvio Cazol
Yes, good morning and thank you for answering my questions. Sorry, I have another one with extra energy just to perceive the mechanics. So I guess I’m interested in seeing how much time we could see this continue to be added to visitors’ bills. Do you plan to keep coming with him until do you negotiate value increases?And how did the stores react? Because a few weeks ago I read an article that I was not afraid of, but that highlighted the case of a store that charged its supplier other fees such as distribution. So, I wonder if you’ve noticed this in your company.
And then my current query is about the personal label business, which grew faster than the overall tissue business in the quarter. has contributed to this more powerful growth, or if you see a decline in fabric sales among European consumers?Thank you.
Magnus Groth
It is ok. Starting with the down payment or the energy surcharge. We have a percentage that accumulates at the top of the value we trade. It is very, very similar for all consumers, whether in Professional Hygiene and Consumer Paper in Europe and North America. And we also get energy. surcharges from our suppliers and more and more. And that’s a component of inflation that you see that is not taken into account in the COGS headwinds of 1280 basis points. Therefore, it is something that not only we do, but also many of our suppliers. . And we will negotiate expansionary surcharges or solid or low surcharges as prices evolve. I couldn’t be faster.
When it comes to expanding the personal label business, it’s largely about costs, as you say. It’s actually a mix. There is a downward trade. There are also consumers we lost a year ago when we raised costs faster and more aggressively than many of our competitors who are coming back to us because their new suppliers couldn’t provide them with sufficient degrees of service. that is a positive point.
On a relative scale, we had a slightly negative impact, as already mentioned, on the logo business in Russia due to weaker expansion in China, this accelerated later in the quarter. So I think that explains the overall dynamics of the expansion of personal labels into the market. measure you have.
Fulvio Cazol
Super. Thank you for that.
Operator
Now we’ll take the following from Martin Deboo of Jefferies. Continue. Your line is open.
Martin Debou
Good morning, everyone. I have some s about Knix. I think one for Magnus and Fredrik, two for Joanna. Magnus and Fredrik revolve around synergies. I perceive that it is buying in expansion with this company, but it is paying 35 times the EBITDA for the privilege of doing so. So what is the case for synergy here, either in terms of profits and costs?And quantify that?
And then, for Joanna, I think Joanna has two questions for you. The first is that, obviously, right now it’s an American corporation. I think that component of the profit synergy goes to Europe. But what is the competition? What is the competitive landscape of waterproofing in Europe?And who are you going to have to beat if someone?And second, Joanna, how do you feel as an entrepreneur?Those are my questions.
Magnus Groth
Thank you Martine. These are the right questions. Who we are: we don’t expect any synergy. This is not a case of synergy, in the way we calculate value here. What we buy is a world-leading position in the waterproof clothing box. We buy as in a position where we are the fastest developing company in the field of intimate hygiene. We are acquiring a very strong market position in North America, which we didn’t have before, and in the maximum corneal segment of intimate hygiene, where we are already very, very successful. So that’s what we’re happy to pay for because it is, and we’re buying as Fredrik mentioned, a very successful business from a gross margin perspective, and also successful from a net margin perspective. This is how to see the value of acquiring. To you, Juana.
Joanna Griffiths
Of course. Yes, I think the component of the strategy here and the component of the plan is to focus on North America. As Magnus just mentioned, there is a wonderful opportunity to help grow the Knix logo in North America, as well as the Essity family, as well as in North America and the United States. When we think about competition, because we think globally and see a lot of prospects for Knix on a more global scale, we’ve actually had that interest in the past.
To be fair to you, this is an exclusive opportunity in the life of a customer product. It’s a very fast-growing category, not only in North America, but also globally. These are still basically small niche players. There is still no leading global logo. We would like to see Knix become this logo. So, the festival is quite fragmented, either in Europe and in North America. That’s how we think about those two things.
Finally, in terms of entrepreneurship. Of course, I think I’ve had the privilege of spending up to two years in conversations with Essity and the team there and I’ve spent a lot of time talking to them, how we are our business integrity, how we bring this innovation of ideas to the table as we see an exciting category that’s experiencing strong expansion. And the component of the logic, while I remain a major shareholder, is that we will continue to operate independently and have the ability to continue the expansion and momentum. that we have seen.
Martin Debou
It is ok. Thank you for that.
Joanna Griffiths
Yes ofcourse
Operator
Now we will answer one from Oskar Lindstrom of Danske Bank. Continue. Your line is open.
Oskar Lindström
Hello. Some questions from me. The first is that I’m also thinking about Joanna and Magnus. Direct-to-consumer sales seem to be becoming more important than taking the market share of classic retail sales. Are there broader implications for the consumer goods business, and I guess also for Essity’s business?For example, I mean, do you foresee some kind of more fragmented market, more niche products, more SKUs, less retail strength, of course?I mean, are there broader consequences of this development?So that’s my first question.
My query at the moment considers the divestment of the European paper business for personal label customers. What is the prestige of this? I know you, it operates as an independent company. But there were some problems with legal separation. If you will allow me, you can provide me with an update on this. And then my last and third question is about your comment on a greater combination of products that also contribute to the overall value/combination improvement during the quarter. I mean, does that mean you don’t see any real effect on customers opting for lower, easier products as a result of value increases?And what are your long-term expectations at this point?Thank you.
Magnus Groth
It is ok. I’ll start before I turn it’s Joanna’s turn. And then, Joanna, maybe you can pass the land to Fredrik, so that the consultation on the most productive combine ends there. And first of all, when it comes to the European department of personal label fabrics, it has made implications that we have never done. Therefore, we are not preparing for the transfer. We are preparing to create a separate entity to manage this independently. And it’s progressing well. And when it comes to legal entities, it’s not that we have problems, it’s that it takes time. So it’s going well. And I think the functionality is fantastic in the personal labels department and also the culture and momentum. So it’s going pretty well.
Then when it comes to this big question about the influence of D2C. We can communicate for hours, of course, about that. What we always say is that we should be overrepresented in the winning channels. And through that, we will be aware of everything that will happen. And clearly, D2C is now a winning channel. And that’s one of the reasons we’re so excited about the Acquisition of Knix. You mentioned a couple of things that I think are very, very true. The first is that it’s less difficult to ship many, many SKUs directly to the customer than, of course, in a retail store. And there’s also a greater opportunity for creating niche brands or bigger brands like Joanna did with Knix. It happened to you, Joanna.
Joanna Griffiths
Yes, I think what’s appealing that we’ve noticed in North America at least is a 10-year acceleration of e-commerce in the wake of COVID. So, I think it makes sense for you to see an excessive correction of D2C, because many consumers have now replaced the way they shop.
As Magnus mentioned, particularly for our category and for waterproof clothing, D2C plays such a vital role. When you think of waterproof underwear, it’s not just a pair of single black underwear you’d buy at a pharmacy. aisle. Really, we see that long-term waterproof underwear is ubiquitous with underwear. And for this to happen, consumers will have to have the opportunity to decide on other styles and colors and adjust them to their bras, etc.
And this is where direct-to-customer promotion becomes vital for two reasons. One is to be able to have the offer. And then the time is to be able to have that direct appointment with the end customer to be able to optimize those SKUs and collection in the future.
I think, from our point of view at Knix and actually it turns out to be online, what’s vital today is being where consumers shop. So, for example, for Knix, although we’ve been exclusively direct with consumers in the afterlife of our own channels, we see an opportunity to partner with third-party stores to have this active discovery mechanism for the brand, maybe where they see a product and then go online to see the entire collection. And I think more and more, what you see, at least in the North American landscape, is more of a multichannel technique and is presented in the right way with the right collection according to the channel. I now give the floor to Fredrik, who will communicate the consultation of the most productive mixture.
Fredrik Rystedt
Yes. Thank you, Joanna. This is a query that is quite difficult to answer, because I think we see that what you mentioned, Oskar, decreases, especially towards the last component and in some markets. But overall, I think the demand is still very strong. And, of course, the focus for the – for our company is and has been very focused on premiumization, on innovation. And we can see that we have continued to see smart demand for those products, especially in terms of hygiene and customer intelligence.
So the combination was pretty strong. In the future, it is very, very complicated to accurately estimate how the decline will play out. But so far, it’s a relatively marginal impact, even though we’re seeing those signs.
Operator
Now we will take the next one from Karel Zoete from Kepler Cheuvreux. Please continue. Your line is open.
Karel Zoete
Hello and thank you for answering the question. I have two. Early considerations on occupational hygiene, which had a solid quarter compared to last year due to COVID being in decline. I was wondering at a higher level, how has COVID replaced this market in North America and Europe in terms of competitive product landscape, et cetera?
And the other is about the flow of money. With margins under pressure, em operating capital, and net debt closer to 3 times EBITDA, how do you see capital allocation going forward?Are you still willing to do more mergers and acquisitions or less?Where do we stand on the balance sheet and the money that still comes from Knix and Modibodi? Thank you.
Magnus Groth
Yes. COVID and its effects on occupational hygiene, is the only sector of activity that has not fully recovered compared to 2019 in terms of volume in terms of the global turnover it has so far. But volume-wise, we expect to see similar volumes compared to 2019 through the end of this year. Therefore, it will take a few more quarters as it continues to grow in volume.
And what we’re still seeing is a higher intake of skin care products like hand sanitizer soap, so paper towels. Hand hygiene remains a driving force of the category even after COVID has been gradually subsidized. markets, of course. And as Fredrik mentioned, we are also seeing strong premiumization, in fact, the demand for our strategic or premium distribution alliance is increasing.
And in part, I think, because it also replaces air jet dryers, which are less prevalent even though they’re still seen long after the pandemic. With that, I will move on to the question of capital allocation.
Fredrik Rystedt
Yes, Karel, smart question, because we are very attached, as you all know, to our capital constraints. So we forge investment quality as you know, and precisely as you mentioned, we’re pretty close to the thresholds in terms of net debt as opposed to EBITDA. So from that standpoint, there’s not much room in our balance sheet right now. Now, perhaps stating the obvious, in the early part of the year, we usually consume running capital. part of the year, we generate current capital. So, of course, we still have a smart money flow, as you’ve noticed. And so we rebuild our strength on the balance sheet. So, perhaps you shouldn’t expect quick acquisitions, but of course we’ll create room for more acquisitions as we go. But we are committed to our capital policy.
Karel Zoete
Thank you.
Operator
Now we’ll answer the following from Tom Sykes of Deutsche Bank. Continúe. Su line is open.
tom sykes
Yes. Hello everyone. First, just a few questions about Knix. You said it is a lightweight model. So I was wondering if you probably outsourced all the production and logistics. And when do they renegotiate, please?So in the distribution of Knix sales alone, how much of the profit comes from water-resistant foundational underwear and how many other pieces that seem to be advertised in a wide variety of categories that — pieces knix sells?And then just for Fredrik and Magnus, right in the SG
Magnus Groth
It is ok. So thank you. Before moving on to Joanna, only in connection with the distribution of the other type of products in waterproof clothing, we do not provide this number for several reasons. First of all, it’s data about the competition. Secondly, because, from our point of view, it goes hand in hand. And Joanna has already discussed why, from the consumer’s point of view, there is a tendency to buy in pairs and bras and underwear. I turned to Joanna to add more color to this theme and also to the company’s soft capital structure.
Joanna Griffiths
Of course. It’s true. I think, as I mentioned before, what we think is water-resistant underwear in the long run is that it will be ubiquitous with ordinary underwear. And to explain why, we have a wider variety, so that consumers can buy our products exactly as they would any other underwear they would buy from a large retailer. Another kind of explanation of why behind the justification, behind the combination of assortments, especially since we participate more broadly in the garments making sure that our lopass is anything. that our consumers use with pride and confidence where we don’t necessarily know it’s a waterproof product, it may or may not be. active in the total diversity and set of products we offer. I think if you go back and take a closer look, you’ll see this issue of water resistance in almost everything we produce. hat piece there.
In terms of soft capital, this is true. We like to do what we do more productively and then combine it with other facets of the business. That’s why we outsource production. While we do all product progress in-house and use a forged technique for product progress, we outsource production and also outsource our fulfillment and storage. From a relationship length standpoint, we have been running with our 3PL spouses since 2016. They have been wonderful spouses to us as we expand and continue to build their own infrastructure to keep up with our growth point. So, it’s a long-term relationship.
The last contract renewal took place a few years ago, it was in 2019. Although we are now in active talks to see if there is room for economies of scale now that we have grown, especially after achieving a year-consistent 97% expansion during the year beyond. And then, from a production standpoint, we’ve had long-term relationships with most of our manufacturers. As our leading manufacturer whom we have been working with during 2015. We have diversified our supply chain in recent years as we proceeded to evolve. We negotiate costs on an ongoing basis and have controlled to maintain the stability of our freight costs for the past two years despite the many demanding situations that I believe have been highlighted today. And that has a lot to do with our expansion and volumes and pushes us to more than offset some of the other elements.
tom sykes
It is ok. Thank you so much.
Fredrik Rystedt
Yes. Tom, I am answering the last question. To be absolutely honest, I don’t have the exact percentage there, however, it will be around 10%. And if you want a more accurate number, I can. we will come back to you later. But that’s about 10%.
tom sykes
It is ok. That’s great. Thank you so much.
Operator
Now we’ll take the next one from Victoria Nice from SocGen. Continúe. Su line is open.
Victoria Nice
Bonjour. La first inquiry is about Vinda. Je I think, as Faham said, Vinda turns out to be much older overall and is almost unaffected by COVID disruptions, at least outside the doors of professionals. We just wanted to explain if this was the Or was it largely due to a weaker comparison and the expansion was still contained in general?And if so, can you catch up in the third trimester?It turns out that conditions are improving from here.
And then, for a moment, it’s just about savings in charges, which were negative because of inflation. Can we expect this to continue in the current part of the year with degrees of inflation where they still are?Thank you.
Magnus Groth
Yes. First question, the answer is I don’t know. What we saw in the first quarter, or the time when the quarter was at the same time, had a very negative effect at the beginning of the quarter because of the closures and then, I think there’s a lot of replenishment towards the end of the quarter, so I expect it to be spotty and uncertain. Therefore, I cannot say about Vinda’s outlook for the current part of the year. As for cost savings and the effect of inflation, Fredrik?
Fredrik Rystedt
It’s very difficult, Victoria, to give you a forecast, however, I would probably expect sales, so again, we talked about savings on charges. Just to remind everyone here what we’ve already said is that we have savings on project charges. that we adopt and there are lots of them in everything from logistics within factories to rationalization of materials, et cetera, et cetera. So, there are lots and lots of projects that we maintain on an ongoing basis. And they continue to generate, very smart and healthy savings.
So the point of activity is higher. What literally affects us and we have said many times are things that also have an effect on our productivity. Therefore, the measurement we produce is not really a load saving, it is a load productivity and we use it as an indicator. load saving. So, headline inflation also comes into play, as I said. So what we’ve noticed now in the first part of the year is very high prices in terms of inflation, in terms of maintenance prices, in terms of overall productivity in factories.
So there are many, many other things. And we’d probably expect most of those elements to remain in the middle for the time being. Therefore, it may not be a general year and will be complicated. It will be difficult to say precisely. how it will develop, but probably similar to the first half. Of course, as things become general again, we expect to see the kind of productivity and all the projects we do, all the power measures reappear in the P.
Magnus Groth
But they reach the P
Fredrik Rystedt
Yes, on a basis.
Magnus Groth
On a yes basis, but they are also. . .
Fredrik Rystedt
So they’re very much in the P.
josefina edwall
Bien. Je think the last question. So one last word of yours, Magnus?
Magnus Groth
I think we had a smart Q&A consultation here, which covered the fantastic expansion and value dynamics we’ve built on our strong brands. Pay attention to Joanna today, and I hope everyone has learned a lot about waterproof clothing and opportunities in this exciting category.
With that, I wish you all a summer and thank you for listening.