Essity : Interim Report Third Quarter 2020

JANUARY 1 - SEPTEMBER 30, 2020
(compared with the corresponding period a year ago)

• Target raised for adjusted return on capital employed to above 17% by 2025. The previous target of above 15% for adjusted return on capital employed has been achieved during the last 12 months.
• Net sales declined 4.7% to SEK 90,796m (95,289)
• Organic net sales declined 2.4%
• Sales were negatively impacted by the COVID-19 pandemic and related lockdowns
• In emerging markets, which accounted for 36% of net sales, organic net sales increased 1.2%
• Operating profit before amortization of acquisition-related intangible assets (EBITA) increased 27% to SEK 13,177m (10,387)
• Adjusted EBITA increased 19% to SEK 13,234m (11,098)
• Adjusted EBITA margin increased 3.0 percentage points to 14.6% (11.6)
• Adjusted return on capital employed increased 2.9 percentage points to 15.7% (12.8)
• Profit for the period increased 22% to SEK 8,718m (7,166)
• Earnings per share increased 17% to SEK 10.80 (9.25)
• Adjusted earnings per share increased 9% to SEK 11.50 (10.59)
• Cash flow from current operations decreased 10% to SEK 8,560m (9,529)
• The Board proposes a dividend of SEK 6.25 (5.75) per share

SUMMARY

Essity is raising its target for adjusted return on capital employed to above 17% by 2025. The previous target of above 15% for adjusted return on capital employed has been achieved during the last 12 months. The raised target will be achieved through the continued execution of Essity's existing strategy, an accelerated digital transformation and further streamlining of production, logistics and distribution. Other financial targets remain unchanged.

Essity's innovation-driven category and channel strategy with leading brands combined with comprehensive efficiency improvements have contributed during the past three years to good organic sales growth and a gradual increase in profitability. Structural profitability in Consumer Tissue has been raised for example as a consequence of a higher share of own brands, a focus on growth in segments with high margins, successful innovations and more efficient production. In Baby Care, work is continuing to improve profitability and during the year we have, for example, exited underperforming positions in North Africa and Russia. In Incontinence Products, Medical Solutions and Feminine Care the focus remains on growth. In Professional Hygiene, an increased awareness of the importance of hygiene and health is eventually expected to result in rising demand.

Essity's digital transformation will accelerate in the years ahead through a new digital platform. This will further strengthen the Group's customer and consumer offerings, generate significant cost savings and reduce the need for working capital. This digital investment is expected to amount to approximately SEK 2.6bn. Of this amount, approximately SEK 1.4bn will comprise costs that will be charged to the 2020-2024 period, and SEK 1.2bn will comprise capital expenditures. A positive sales and earnings impact is expected gradually from 2022. In the short term, costs are expected to be offset by savings in other areas.

The new Manufacturing Roadmap program will optimize and streamline all of Essity's approximately 60 wholly-owned facilities for world-class cost efficiency, quality and service levels. The program also includes logistics and distribution. Moreover, the program contributes to Essity's sustainability target relating to the reduction of carbon emissions in line with the Science Based Targets initiative.

Essity's Board of Directors is proposing a dividend of SEK 6.25 per share and that the dividend proposal will be addressed at an Extraordinary General Meeting on October 28, 2020.

During the third quarter of 2020, the Group's organic net sales declined 5.1%, of which volume accounted for -5.1% and price/mix for 0.0%. The Group's online sales increased due to strong growth in Personal Care and Consumer Tissue. Organic net sales in mature markets declined 7.7%. In emerging markets, which accounted for 36% of net sales, organic net sales decreased 0.8%

The COVID-19 pandemic has had both a positive and negative impact on Essity's business areas. Professional Hygiene's customer segments of hotel, restaurant, catering, commercial buildings as well as schools and universities were negatively affected by the lockdowns. Meanwhile, Professional Hygiene increased its sales of dispensers as a result of a greater focus on hygiene as many customers replaced air dryers to offer a more hygienic alternative. Moreover, Essity's wirelessly connected dispenser with sensor technology, Tork EasyCube^®, shows that consumption per person of paper hand towels, soap and hand sanitizer has increased during the COVID-19 pandemic. As a result of rising demand, Professional Hygiene has increased delivery capacity for hand sanitizers. As lockdowns have forced consumers to spend more time in the home, demand for Consumer Tissue has been positively impacted while this has led to temporarily lower consumption for Personal Care. Eventually, the COVID-19 pandemic may lead to increased demand for the company's leading hygiene and health products as a result of increased awareness of the importance of hygiene and health.

During the third quarter, Essity launched several innovations that has strengthened its customer and consumer offering and improve the product mix. In Feminine Care in Latin America, with the leading Nosotras and Saba brands, we launched washable, absorbent underwear. In Incontinence Products, TENA SmartCare was launched, a digital solution for continence care in the home and in healthcare, which makes life easier and better for users, relatives and caregivers. We also expanded our product offering to include face masks within retail and under our leading global brand Tork in Professional Hygiene.

The Group's adjusted gross margin for the third quarter of 2020 increased 2.4 percentage points, compared with the corresponding period a year ago, to 32.4%. The gross margin was positively impacted by a better mix, lower raw material and energy costs and costs savings. Continuous cost savings amounted to SEK 235m. Lower volumes for the Group and lower prices for the Consumer Tissue business area had a negative impact on the gross margin. Adjusted EBITA decreased 1% compared with the year-earlier period. The Group's adjusted EBITA margin rose 1.6 percentage points to 14.4%. Sales and marketing costs increased as a share of net sales. Adjusted return on capital employed rose 0.4 percentage points to 14.7%. Earnings per share amounted to SEK 3.22.

INVITATION TO PRESENTATION OF THE THIRD QUARTER REPORT FOR 2020
In conjunction with publication, a telephone and web presentation will be held where President and CEO Magnus Groth will present and answer questions.

Presentation
Date: Thursday, October 22, 2020
Time: 9:00 a.m.
Link to web presentation: https://essity.videosync.fi/2020-10-22-q3
To participate by telephone, call: [phone], [phone] or [phone]. Please call well in advance of the start of the presentation. Specify 'Essity' or conference ID no. 5359628.

Stockholm, October 22, 2020
Essity Aktiebolag (publ)

Magnus Groth
President and CEO

For further information, please contact:

Fredrik Rystedt, CFO and Executive Vice President, [phone]
Johan Karlsson, Vice President Investor Relations, Group Function Communications, [phone]
Joséphine Edwall Björklund, Senior Vice President, Group Function Communications, [phone]
Per Lorentz, Vice President Corporate Communications, Group Function Communications, [phone]

NB:
This information is such that Essity Aktiebolag (publ) is obligated to make public pursuant to the EU Market Abuse Regulation. This report has been prepared in both Swedish and English versions. In case of variations in the content between the two versions, the Swedish version shall govern. The information was submitted for publication, through the agency of the contact person set out below, at 7:00 a.m. CET on October 22, 2020. This interim report has not been reviewed by the company's auditors.

Karl Stoltz, Media Relations Manager, [phone]