Essity AB (publ) (OTCPK:ETTYF) Q2 2024 Earnings Conference Call July 18, 2024 3:00 AM ET
Company Participants
Sandra Aberg - Vice President, Investor Relations
Magnus Groth - President, Chief Executive Officer and Director
Fredrik Rystedt - Chief Financial Officer, Executive Vice President and Head, Group Function Finance
Conference Call Participants
Charles Eden - UBS
Patrick Folan - Barclays
Victoria Nice - Bernstein & Co.
Niklas Ekman - Carnegie
Linus Larsson - SEB
Oskar Lindstrom - Danske Bank
Jeremy Fialko - HSBC
Karel Zoete - Kepler
Thomas Sykes - Deutsche Bank
Sandra Aberg
Yes, good morning and very welcome to Essity audio presentation of Second Quarter 2024 Results. My name is Sandra Aberg, Head of Investor Relations. And Joining today are CEO, Magnus Groth, and our CFO, Fredrik Rystedt. Magnus and Fredrik will take us through the results after that, you are very welcome with your questions.
Now I leave the line over to you, Magnus, please.
Magnus Groth
Thank you, Sandra, and welcome, everyone, to our Q2 interim report 2024 and assets summary, equity had a strong performance in the second quarter with high underlying volume growth, our highest EBITDA operating result to date with higher margins in all three business areas. We continued to show solid cash flow. And not to forget that during the quarter we announced a share buyback program and new ambitious financial targets.
So summing up the numbers, organic sales growth was slightly down minus 0.9%. Underlying, as I mentioned, we had the volume growth of 0.4%. But with the taking into account the restructuring that we have done in primarily Professional Hygiene and some extent in health and medical, underlying volume growth was actually 2.9%. And EBITDA, excluding IOC, as I said, is the highest so far, close to SEK3.4 billion, an increase was 17% and our EBITDA margin ended at 14.7%.
I'd like to bring your attention to our return on capital employed development, which is not anymore one of our financial targets. But if you remember, our previous financial target was to achieve a return on capital employed above 17% in 2025. And this was including the inbound, excluding them that we said that should be then about 18% because I mean, there was a drag on return on capital employed.
And we actually hit that 18% number and even 18.5% already in this quarter. So the targets that we have actually have for next year. And since we're now buying back shares, it could be interesting to look at earnings per share growth, even though, of course, the impact from the share buyback program, it's very small so far. And as you can see, there's an increase year-over-year of 37%.
Looking at the development, then over the last number of quarters, it's clear to the left, the sales and organic sales growth numbers, how we've come out of a very inflationary environment and then a period of the some extent, lower costs. And now in the quarter close to zero growth again. So a big pickup from Q1 there going forward, our ambition is to continue to grow volumes, market size, the good margins, of course, we are aiming for continuing our positive growth trajectory, EBITDA and EBITDA margin.
I think that's pictured to the right there. Graph talks for itself, the 14.7%, but actually good margins overall in the last number of quarters. So and a strong development over a number of quarters. Current market situation. Just to put things in perspective here, of course, we have inflationary environment. We have the costs in them last year when costs were coming down and so on.
Currently, I would say that market conditions are quite stable. There's nothing specific we have seen a subdued consumer and consumers who are down-trading and to some extent, looking for savings, we see raw materials, energy and so on. Moving up and down a little bit. It doesn't impact us as much as it did before, and nothing really dramatic so far. It's a business environment that's quite stable currently. And if those conditions, we are delivering these results.
And just to remind us about the new financial targets since they were launched in the quarter, annual organic sales growth of above 3% and EBIT margin, excluding ADT about 15% and which we believe are valued very value-creating targets and that we're in to achieve in the mid.
Also in the quarter, we announced a share buyback program to allocate our strong operating cash flow. And we saw that also in the second quarter, just underlining that the buyback program amounted to SEK3 billion until next year's AGM in either new AGM approval every year. Having said that, our ambition is to use share buybacks as a recurring part of our capital allocation. And so that's, of course, something that we've never done before and which is now part of our capital allocation going forward. So that's overall from a Group level.
I would like to quickly talk about the three business areas and starting with health and medical that had strong development volumes, but also fantastic, I would say EBITDA and EBITDA margin. So organic sales growth was overall 4.5%. It's coming both from volumes and higher prices and mix. So across the line. And as you can see in continence products, Health Care grew 3.8% and medical solution 5.5%. So a very good momentum here and a sharp improvement of EBITDA margin compared to a year ago.
I would like to say a few words about this nice little pack there on the picture to the right because that a product where we have seen some very, very positive initial reactions from customers and consumers, it can approach into So it's the new pant launch where we have very, very strong team. It absorbs two times faster than our previous products, and it's also states dry or for the skin for longer very, very important, especially for people with fragile skin. So very strong games, a clear upgrade and new pack and something that we believe will be very competitive going forward because of course, handsets, the biggest, it's not the biggest, but it's the fastest, most attractive part of the Incontinence Healthcare business.
Moving over to consumer goods, higher volumes in all categories, higher EBITDA and margin. Organic sales growth was slightly down minus 1.3%, even though we saw higher volumes in all categories, up 3.2%, while price mix was negative 4.5%. And this is more or less on related to price concessions that we did in Consumer Tissue last year in 2023, when pulp prices came down dramatically since then they have it moved up again. But this is Dan related to historic movements in our prices and looking at where the organic sales growth comes from, we are really happy to see that the incontinence products retail is increasing 9.7%, and we have great momentum.
But we also have a great go-to-market, a good successor product launches innovation. So we're very, very competitive now in Inco retail also in Germany and Canada continuing to see growth as well as in baby care, which just to mention, it's now very value add creating also the baby category that we have there. We have a very strong position in Europe, while consumer tissue was negative 4.7% on organic sales growth, again, related to price and higher EBITDA and EBITDA margin. Nonetheless, EBITDA up 1% and EBITA margin and ending on 12.4%.
Another innovation that to the right again, and it's again, also improved performance in many ways. But here we have completely other claims that appeal and attract consumers, close body fit, comfort and the more discreet signs. So it's a very good upgrade of our silhouette pants range, which is again an important part on the out infill retail.
And before moving on to Fashion hygiene, I'd just like to say something about market shares. It was a period when we were very much focused on margin enhancement to some extent and to the detriment of market shares. But with our focus that we have now with last year on and regaining growth through volume growth and profitable growth.
And we are also starting to see a good improvement when it comes to market shares. We have been having 90% of our business now in the consumer goods category, so Inco, retail, baby, feminine and Consumer Tissue. And we have been able to retain one number one or number two position in 90% of our sales. That has been the case over many years now.
But it's really improved the increasing shares, which is now almost half of the business and actually mostly related to the feminine care, incontinence care, retail and Baby Care. And it includes also stable shares to be increasing. We are achieving 70% which is a good improvement over a year ago, two years ago, it's showing that all our efforts investments are really paying off in market share growth in the key categories where we want to grow.
Finally, Professional Hygiene, again, good underlying volume growth, higher EBITA margin. Organic sales growth was down with 3.9%. Price mix was up 3% and volumes were down actually now because of the restructuring that we did a year ago. So tough comparison, excluding the restructuring, we actually had positive volumes of 1.4%. This means that the overall volume impact from restructuring in the quarter was a bit over 8%. Going forward, we will continue to see a negative impact from fashion had been, but in the third quarter, it will be around 6% instead of at the low grades and then again, somewhat lower in the fourth quarter before that, yes, it's lapping that impact.
So higher the day, a 18% increase with a margin. That's also on a very, very attractive level of 92.2% and a good improvement over last year. Again, talking about innovations. We continue to build on our unique compression technology, which has great benefits and for everyone handling our tissue products. And this is a compressed multiple hometown. It increases the capacity in the dispensers. It reduces logistics costs, transport costs that take less space. So very straightforward value traits, an example of an innovation that we have, where we continue to launch a broader and broader assortment.
With that, I'd like to hand over to Fredrik to dig into the numbers in more detail over to you Fredrik.
Fredrik Rystedt
And thank you, Magnus, and I will perhaps sum up a bit to what you have been mentioning looking at the Group in total and as you've said, Magnus, we had a very strong growth of 2.9% under lying and of course, especially so in health and medical with 4.4% in consumer goods were 3.2%, but growth in pretty much all the categories or actually all of them and good volume growth and of course, not least in incontinence, healthcare and retail and also medical. So quite proud of that.
You mentioned if you look at the total, you can see it on the slide that restructuring and exit in Professional Hygiene and incontinence had an impact of a negative 2.5%, which is basically similar to that of the impact we also had in Q1. This is mainly Professional Hygiene. And looking at Professional Hygiene business area, as you said, minus a negative of 8.3% and for health and medical, 1.2%. If we look forward to Q3, the incontinence impact will basically be gone. So there will be no such impact looking at Q3 and onwards. But pH will remain at roughly about 6% for the business area in Q3 and even lower than in Q4.
And looking at Q3 for the group. That 6% in Professional Hygiene has a group impact in Q3 of roughly about a negative 1.6% price makes a minus 1.3%. And this is the this is relating to price. And as Magnus already alluded to, this was this is mainly related to the price concessions we did in Consumer Tissue in 2023 on the back of falling input cost at the time sequentially, we actually have an increase in prices. So and that amounted sequentially to 0.4%. So the current momentum in pricing is actually positive. And the positive mix component is primarily driven by Professional Hygiene, but we do have a positive mix development in pretty much all of our different categories.
And looking at the EBIT, a margin bridge, obviously, we saw a very strong improvement in gross profit versus the same period in 2023. And if we look at it sequentially, we remained on the same gross profit level as we had in Q1. So despite the increasing input costs to between the quarters, we remain at the same gross profit margins, the price cost gap, obviously a big part of that was favorable for all business areas.
And we had a good pricing discipline throughout all of our different areas. We had another quarter of good term efficiency gains in cost of goods sold. And this is coming from pretty much all areas. It's procurement discounts, changing suppliers or better negotiations, material rationalization is a big part. We still have, of course, obviously the restructuring gains in Professional Hygiene, and there is a general improvement in the efficiency in our manufacturing and warehouses. We've previously mentioned that we expect to and we did that in Q1.
We expect a COGS savings for the full year of pretty close to SEK1 billion. Now obviously, as you can see the performance has been very strong in the first couple of quarters. So it's quite clear that we will deliver more than SEK1 billion. However, just worth mentioning that we expect the pace to slow down here in the third and the fourth quarter of this year.
But once again, clearly very positive picture, we continue and this is very much in line with our previous statements in previous quarters, we've continued to invest more in A&P, and this is very much in line with our ambition to fuel the profitable growth and of course, as you can see, that had an impact on margin of 70 basis points, and we now have approximately about 5.5% of net sales in A&P. spending. If you look at our SG&A, excluding A&P, that increased 110 basis points, it's a lower impact than what you saw in Q1.
And but still it is a high impact on the back of the inflationary environment that we saw previously more. So this is gradually coming down a bit, but we also continue to spend quite some quite a lot primarily in digitalization of the group. It's not a matter of number of people. In fact, if you look at the number of employees compared to one year ago, we're actually slightly fewer employees.
Turning to cash flow, it's a very good development. As you can see on this slide. Normally, Q2 is quite negative, and this is due to a negative development of working capital, but this is not something unusual. This relates to the fact that we are in Q2 always pay the bonuses for the previous year. So most of the working capital development is related to that.
And the rest is a bit higher inventory value because we see higher input cost and therefore, the value of the inventory increases so if you look at it in terms of cover days, we're pretty much in very good shape. And similar to that of Q1. CapEx remains on press or similar levels as we've seen before, but we'll see a gradual increase now in Q3 and Q4. And if we look at the full year, we expect the full year CapEx number to be in the range of SEK7 billion to SEK8 billion, somewhere in that ballpark.
And finally, then we have despite you can say that working capital impact that I showed you on the previous page, we have continued to deleverage and to further lower term our net debt position. The share buyback here was, of course, launched very late in the quarter. So we have purchased shares too, or our agent has purchased shares to a value a bit over SEK100 million. So it has had a marginal impact. But despite all of that, we have continued to deleverage and of course, also reached a lower net debt to EBITDA is actually slightly below 1.3 that you see on this slide.
And with those words, I'll leave over to you, Magnus.
Magnus Groth
Thanks, Fredrik. And I would just sum up with the slide, which is second highlighting our equity story. And we have strong market positions in attractive and growing markets around the world. And we have leading brands as I've been showing, no, of course, not only consumer goods but also in professional hygiene and health and medical, both and help them in medical, and we have a strong launch funnel for new innovation.
We continue to keep sustainability and focus, and we have a winning corporate culture and maybe most important of all, we have a very motivated and engaged team and in general, among our 36 employees, high ambitions and high engagement and a very strong financial position to build from so I think for the second quarter of 2024 is a proof point for this equity story and the business case, then I would like to invite you.
I want to save the date for what the Capital Markets Day that we're planning to have on the 3rd of December later this year in our fantastic multi-category production site in bulk close to Barcelona in Spain. It's a site where we produce both personal care and tissue products. And this is a picture here just from there, inaugurating a new machine there in the background but it will be an opportunity for you to see the tight knit, our people meet our new and to a large extent, new executive management team compared to last time when we had that face-to-face at Capital Markets Day, which was actually in print in 19 so long time ago.
Another reason to do this and also, of course, to talk more about our new financial targets, the path forward and also an opportunity to visit our air in global transportation, logistics and planning hub in Barcelona where we I see a huge benefits from digitalization, both today and going forward. So welcome very much save-the-date for our Capital Markets Day on December 3.
With that, I would like to open up for questions.
Question-and-Answer Session
Operator
[Operator Instructions]. We will now take our first question from Charles Eden of UBS.
Charles Eden
Hi, good morning. Thanks for taking my question. I've got two, please. This probably one for each of you. So Fredrik, on the EBITDA bridge for Q2, which you show on page three in the press release, the tailwind from cost of goods sold of nearly SEK1.7 billion appreciate is sort of SEK400 million benefit and cost savings, which leaves around SEK1.3 billion from presumably more Max and energy.
Can you help us understand how much of a benefit energy was here because I'd have thought what materials wouldn't have been a major tailwind given Popeyes trend value in this year, but perhaps you're getting some significant rebates and pulp supplies we need to consider. So sort of any help you can kind of give us what the moving parts of that.
And then second question, probably for you, Magnus, is just looking at sort of the over 15% adjusted EBITDA margin target, which you gave us a few weeks ago for the medium term, do you see scope for overshooting that 15% level and I appreciate it's quite early after bringing the targets in because if I look at Q2, you're already at 14.7% margin and I'd expect continued cost savings, operating leverage from volumes mix to all continue to favorably contribute going forward.
Now health and medical margins might be at the upper end of the range you'd expect, but probably some scope for profitability improvement in consumer goods. So should we view that 15% margin level as a floor target rather than an ambition? Maybe you can expand on that? Thanks very much.
Fredrik Rystedt
Yes, Charles.
Magnus Groth
Fredrik, do you want to start?
Fredrik Rystedt
Yes, I'll be happy to. So I think your question was more specifically on energy was which in the number of SEK1.7 billion as you mentioned, was SEK460 million. So it was a very positive movement in compared to last year. We had actually lower raw material cost of a bit over SEK900 million, totally just market movement. And of course, obviously this year, it's gradually going to turn the other way. And sequentially, it has already happened. So we'll see, of course, higher raw material as we call. And the remaining part is exactly, as you say, the cost savings of close to SEK400 million. So that's basically the bridge.
Magnus Groth
Okay. Charles, then over to your second question, we believe that achieving over 15% adjusted EBITDA margin, including IT, it's quite and ambition ambitious. Is it a target or a floor. We haven't set a date for achieving this other than saying that we expect to be there in the medium term. But of course, just the fact that we haven't set a date means that in the medium to long term, we would like to be about 60%. And that's what we said.
I don't see it as easy or obvious. I mean, it's a good quarter. We just presented, of course, with 14% on 7% operating margin. I'm really happy about that. Most businesses in most geographies, I would say almost all businesses and all geographies are doing well. And so kind of firing on all cylinders from that perspective. In quiet, stable market conditions, there's nothing special really one way or the other until really the same kind of typically maybe there are challenges at one in one or the other places. So I think that achieving about 15%. In the medium term, we have very ambitious targets.
Charles Eden
That's great. Thank you both and congratulations.
Operator
And we'll now take our next question from Patrick Berlin of Barclays.
Patrick Folan
Good morning, Magnus and Fredrik. A few questions from me, please. First, just thinking about your new pricing contracts and ability to cover raw material inflation, Q2 would have been the first quarter. We should have seen this in action, but price mix in health and medical was lower quarter-on-quarter and looks like Professional Hygiene pricing was stable. So how should we think about your pricing dynamics in the second half, knowing as you just said, that some of your raw material costs flowing through will be higher.
And secondly, within Professional Hygiene, you gave good color on how we should think about the restructuring phasing in the second half in terms of the impact to volumes, how should we think about the underlying volume performance, excluding restructuring? What is driving that growth in Q2 and what will support that in the second half?
And then just my last one just on the Capital Markets Day in December, what should we expect to hear what kind of categories will you be focusing on what innovation we'd be talking about? Is there any geographies focus to keep in mind. Thank you very much.
Magnus Groth
Yes. So starting then with the new pricing, considering raw material. In general and in the group, we're quite happy with that. With our prices and the price cost gap in general and believe that as we will be able to manage that also going forward, as stated a few times, of course, margins are fantastic in and America and then Professional Hygiene in the quarter. But no need for major changes there really going forward as we manage the price cost gap, just as we go along where we need to raise prices specifically in consumer tissue, and that's ongoing.
And so that's been increasing COGS that we see quarter over quarter sequentially. It's all related to consumer tissue, and we are in negotiations also to compensate for that. But again, that's an impact now on the Group for two reasons. One, we buy house as much pulp as a year ago. And secondly, we are much faster and much more agile, and we will be able to compensate in one or two quarters changes in input. It costs also in consumer goods. And so when that's the dynamics.
The Professional Hygiene restructuring, we're really, really focused in general on increasing volumes, considering the nice margins that we have specifically in Britain, Professional Hygiene very much with a focus on our strategic systems where we have the proprietary dispensing technologies where we know we create a lot of value for our customers and where we have high gross margins and in mix or improvement that you see in the margin jump that you see in Professional segment.
Is it to a large extent related to shedding the restructuring that you did a year ago, but also now focusing all our resources in Professional Hygiene on the remaining higher-margin business. And I think we'll just see how that plays out going forward, but that's what we're striving for a growth and both organic sales growth and moderate growth in Professional Hygiene Capital Markets Day that will be back, of course, with a more detailed agenda.
But I think our plan right now is to cover the entire company since we have. It's since we'll have time at the face-to-face meeting on our site and also give time for you to meet them, talk to too many athletes in the company and the MT and other experts. But we'll get back, you need more detail on the program and of course, appreciate and in particular.
Patrick Folan
Super. Thank you, Magnus.
Operator
And we'll now take our next question from Victoria Nice of Bernstein.
Victoria Nice
Hi there. Good morning, everyone. I just wondered if you could come back to better help us understand the impact in the EBIT, a deviation from raw materials specifically just how can we reconcile that reconcile that with the higher pulp prices year on year, which typically hit the P&L with a 45 day lag?
I think based on what you said previously, the remainder of your inputs seemingly quite stable or perhaps was there some benefit when it comes to oil-based inputs? Or is actually that the lag on pulp has increased and some when it hits the P&L? Or are you actually just working through some lower priced inventory? So just trying to reconcile the delivery in the quarter for the prices that we see.
And then just wanted to clarify, did you say that raw materials will turn into the drain on the EBAM. division year on year from Q3? And if you could just help us with that. And then just how we should be thinking about that pricing in Consumer Tissue? Is that something that we will start to see building from Q3. Appreciate obviously, it's a lot quicker than it was previously, but basically could it be something that we might have to wait until Q4 to see? Thanks very much.
Magnus Groth
I'll take your last question and then leave the first kind of three to Fredrik So and we should start seeing some benefits from price increases in the third quarter, but most of it in Q4, that's when they'll be finished switches very, very fast considering that raw materials in this case relating to Consumer Tissue have kind of gradually increase now for a few quarters. And so that's our plan to be fully back in Q4.
I hand over to Frederik to answer about the EBITDA bridge again.
Fredrik Rystedt
Yes, thanks. Thanks Magnus. Hi, Victoria, and I'll be happy to drive these. But it's generally, of course, a it's always a bit trickier to explain the differences because we last year we had a falling trend of pulp, which can kind of are going to continue throughout the year and this year, it's just the vice versa. When we compare quarter to quarter, of course, you got to kind of think of what actually happened last year. So to give you a better perspective, we had to we had more or less, you can say, in comparison then to Q2 2023, not that much impact from pulp.
Actually, it was it was rather the same level. Now, obviously, as I already mentioned, if you compare Q1 to Q2 or Q2 to Q1 this year than pulp prices, obviously up a lot. So in comparison to last year, pulp is really not the major factor. We also had a positive impact from as an example, the recycled fiber oil-based material was very positive. There is there was a lot of positive impact, as I already mentioned from and from energy and on top of that, the cost saving. So there is no there is no magic to it. And obviously, as you already mentioned here, we see now pulp cost, of course, coming through very much sequentially. And that will further there are an impact in Q3. So if you look at Q3, generally, COGS will be higher. It's as simple as that.
Victoria Nice
Thank you just if that will turn into a drain on the EBITDA bridge?
Fredrik Rystedt
Yes, yes, that's exactly right.
Victoria Nice
Thanks very much. It's very helpful.
Operator
And we'll now take our next question from Niklas Ekman of Carnegie.
Niklas Ekman
I'm still I'm sorry to follow up on. There's been a lot of questions here on raw material prices and adding to the bridge to I'm just wondering because you sound very confident on margins here. But given the quite massive increase, I mean, when I look at the power prices are up some 50% compared to the trough one year ago. We're close to peak levels as far as I can see. So you talk about the quite stable environment.
Isn't there a clear risk that you could see temporary margin pressure in H2? Or can you please just elaborate a little bit more on that and are these price hikes that you're talking about? Are they sufficient to kind of mitigate this given that you're coming from a fairly high starting point here in Q2 with 14.7% margin?
Magnus Groth
Yes. I mean that's I think you're describing the challenge in a good way and we'll do our best to manage the price cost gap. That's all I can say. And I also mentioned, I think to Victoria here that if we didn't have a bad job, not only in our input costs actually affects us, but also in our ability to bring that forward to customers, especially when this a gradual increase that we've seen over a couple of quarters or so. So yes, that's the challenge and that's what we'll do our best to mitigate. And I feel confident that we are much better in doing that. And we have been historically and that the overall exposure from a group perspective it's less interesting.
Niklas Ekman
Okay, very, very good. Thank you. And secondly, any news on the bond disputes, any claims that have come through or anything else that we need to know?
Fredrik Rystedt
And there is nothing more than what we have previously communicated there.
Niklas Ekman
Very good. Thank you. Thanks for taking my questions.
Operator
And we'll now take our next question from Linus Larsson of SEB GliaSite.
Linus Larsson
Thank you very much and good morning to everyone. And if I may just have one more follow-up on consumer goods. If we look on a sequential basis, if I understand you right, that you are indeed expecting input costs to increase that in Q3 and Q2. Is that a price compensation you are rather seeing the impact in the fourth quarter? That's my first question.
And then secondly, on volumes, I was positively surprised actually both in health and medical and consumer goods both grew by 3.2% year-on-year. And I just wanted to understand and the drivers behind that and where we are in terms of advertising and promotion, anything suggesting that we're above some kind of short-term trend or below, I suppose some kind of short term trend in terms of volume growth. If you could just put some color on that would be very helpful. Thank you.
Magnus Groth
Fredrik, do you want to talk about costs in Q3 and prices and kind of?
Fredrik Rystedt
I think I'll be happy to miners. And then as I think you actually Magnus said it before we have firm and we've said it many times now we're talking about a lot of raw material here. There is not so much of the other thing to talk about, but we've said it many times, we always compensate cost increases and to and we will do that this time as well. There is a time lag in the historically, that's been three to five quarters now with one to two. So it's so obviously there is always a bit of time lag, but we always compensate the cost increases. So I think you've already said we've already said it basically.
Magnus Groth
Okay. Your second question, if I understood it correctly, I see growth whether volumes, price and mix there in the other business areas. And thanks for talking about fantastic development in Professional Hygiene and not least health and medical. Maybe I could even mention health medical as a golden egg since I've seen that term being used there. It's sometimes about med tech and other Medtech companies and of course, great developments that I think it's I mean, I can only reiterate that our ambition is to grow volumes, market share with the healthy margins that we have and that will be a balance going forward.
And the and we will have elevated not elevated. We'll have A&P levels, which are we see today because we see that it really drives growth and also invest in our brands, sales and marketing performance in digitalization and so on. And that's on. We think we can do that with the margin levels that we have. So it's very difficult to be more specific.
Linus Larsson
Great. Thank you.
Operator
And we'll now take our next question from Oskar Lindstrom of Danske Bank.
Oskar Lindstrom
Yes, good morning. Two questions from me. The first one is on pricing. And now you've said that you're currently raising prices for consumer tissue to compensate for higher costs, which are coming from pulp during H2. But earlier on, you talked about sort of a positive price momentum and I understood that to be generally. So could you perhaps say something a little bit more about sort of what's happening with pricing in your business outside of consumer tissue? You know, is it? Is it price mix? No other factors? So that's my first question.
And the second question is on Professional Hygiene, which has seen quite a bit of volatility with the restructuring that you had last year? And should we view the current margin level as the sort of new normal or base level after the with the restructuring completed? Those are my two questions.
Magnus Groth
Yes, I can start and hand over to you about PHF that again, pricing outside consumer goods in general, we're quite happy with the is the current price levels because of maybe the bottom at some point, I wasn't talking about strong price momentum, maybe specifically outside of consumer goods. I was talking about a good management of the price cost gap. So really adapting pricing to it as to the circumstances in each area. And I don't see a big need for price increases actually outside of Consumer Tissue in any of our other businesses, it's pretty good.
Of course, we will continue to through innovation and new launches to achieve higher pricing and better makes us going forward for the long term. But then in the short term, it's all it's, of course, pricing impacts and more of that promotion. I think the teams are doing this in a very responsible way. So and I know it's I'm happy about how that's developing. But there's not a strong focus right now on increasing prices outside of Consumer Tissue.
Fredrik, over to you about PH and the current margin, double them, if that's sustainable and so on.
Fredrik Rystedt
Yes. Oscar, hi. You started by saying it's been a bit volatile. And of course, it's related partly to the restructuring and the impacts there. But generally speaking, I think the Professional Hygiene business has been very stable now. Obviously, the margin we have in the second quarter has historically very high and I think you used the word minus fire on all cylinders. So we it's very difficult to give forecasts on margin. We're very happy and pleased with the Professional Hygiene margin and of course, it's been further helped this quarter by very good savings in COGS as we've already talked about. But of course, it's margins are very high and time will tell as well as we go forward.
Oskar Lindstrom
Thank you. And maybe a third question, if I may. Again, just following up on pulp to clarify this. Did you say that there was no quarter on quarter impact from higher pulp prices on your costs in Q2 and that we should instead expect this to hit during Q3. Is that?
Fredrik Rystedt
Yes, no Oscar. I said when you look at core this quarter, Q2 versus last year, the same period. So compared to one year ago, the impact was pretty flat. When you look at the sequential impact, it was quite significant.
Oskar Lindstrom
Right. So it's still the 45 day delay, you know, the fixed price hitting your costs that you've had historically.
Fredrik Rystedt
Yes, pretty much. You got a bit of process time but, largely yes.
Oskar Lindstrom
Yes. And there is no inventory, you know that you're using up or having costs impacted by any such volatility?
Fredrik Rystedt
Yes, there is always that in that's? Yes, you're referring to are you referring to inventory revaluation, I guess Oscar and of course, that's just the delay in the impact. And of course, we have that as that happens every time cost goes up. You got a bit of a kind of mitigating a positive impact. And when pulp cost comes down, you got the opposite. So there is always that delay in the cost impact. So we'll of course, that's part of the movement that we see now in Q2 versus Q1. But we'll also see that in Q3 versus Q2. So obviously sequentially higher pulp costs.
Oskar Lindstrom
Right. Thank you very much, and I'm happy with my questions.
Operator
And we'll now take our next question from Jeremy Fialko of HSBC.
Jeremy Fialko
Okay, hi, morning. Couple of questions for me. First of all, just a clarification. What we look at the profit bridge, the Q3. Were you saying that the year that SEK1.6 billion would swing into a negative number? Or are you simply saying that it will be a smaller positive and year-on-year in Q3. This was not clear from the previous answer to question what you had meant. Then the second question is on me. You're getting in Professional Hygiene, not yet that does look very, very good.
And so perhaps you could go into a bit more detail on that and whether you think the basic the price mix is mostly coming from mix, that type of 3% number or whether you think that is genuinely quite sustainable given the sort of innovations that you are bringing into the market at the moment? Thanks.
Magnus Groth
Yes. Fredrik, do you want to start now take the next question?
Fredrik Rystedt
Yes, I'm not I'm not really exactly sure what was unclear there. As I said, we have sequentially and that's basically what we're guiding on. We are sequentially going to see higher cost and of course, we'll all have a year-on-year negative impact, but largely sequentially, it is it's what we typically guide on and COGS will be higher in the, say, in the third quarter versus the second. If you look at I mean, you're I think you're asking if I get your question, right, exactly. How is Q3 2024 versus Q3 of 2023? Was that your question specifically?
Jeremy Fialko
Yes, that was that was right, exactly. Yes, some color on that.
Fredrik Rystedt
Yes. exactly, and it will turn slightly to the negative or stable, but sequentially significantly, then higher on COGS, as I've said before. So just to is that clear because we've got the question a couple of times that he hopes.
Jeremy Fialko
It covers not only pulp prices.
Fredrik Rystedt
It's also and exactly we are guiding on COGS and of course, a big part of that change of COGS is relating to pulp. So let's just be super clear. If you look at sequential COGS will be higher, mainly driven by pulp. And then if you look at it year-on-year. So Q3 versus the 2024 versus Q3, slightly negative. And of course, the shift there also mainly driven by pulp.
Jeremy Fialko
Okay. But then maybe potentially energy could still be a positive in Q3 year-on-year.
Fredrik Rystedt
Yes, but.
Jeremy Fialko
Okay. That's much clearer. Thanks for that clarification.
Magnus Groth
Yes. So I appreciate all these questions. When you have big swings and short cycles, again, you mentioned the traffic that we are of course, last year, pulp prices don't come down significantly. Now that coming up again, so it doesn't make it easy with the year-over-year comparison performance. Yes, it's almost easier to talk sequentially. But of course, we need to look at it year-over-year or so but it's a bit complicated in specifically Consumer Tissue.
I think in the other categories, it's much, much more stable, as I mentioned several times. When it comes to Professional Hygiene, we had a big one-time mix improvement by the restructuring because if you remember, the capacities that we took out were all kind of low margin businesses. So some events come brand that are very basic care qualities with low gross margins and operating margins. So just the restructuring, we said that the time would have a significant contribution to margin. So Professional Hygiene and that's exactly what we're seeing.
So it's a big ones, onetime step-up of a few percentage points. Then our ambition is to continue to grow the high-margin strategic parts of the business even if it's a higher share now and that would be more of a step it kind of step-by-step process going forward.
Jeremy Fialko
Okay. Thanks. Thanks very much.
Operator
And we'll now take our next question from Karel Zoete of Caplan.
Karel Zoete
Yes, good morning. Thanks and thanks for taking the question. I asked some questions and one and one follow-up. The first one is on your retail Inco business growing at 10% in the quarter, so quite strong. Can you comment on some of the regional trends where you've been doing well. And then the other question is basically on the and on the focus on growth, we see now growth coming through. It's been a priority issue to set out at the start of the year and what changes have you made when it comes to target for the sales team, speeding up innovation, et cetera, how we see the marketing investments, but what other changes have been instrumental here? So those are the questions. Thank you.
Magnus Groth
Okay. Yes, starting with Retail Inco, we see positive development across the geographies, new Latin America and the US. And the we have a strong focus on pants. We just we have been number one in Brazil, as I mentioned before, maybe I mean, Brazil, we entered 10 years ago, we've grown organically not to be the number one, it's the world's sixth largest housing market. Just now recently, we also became the number one in Brazilian patents, which, again is a top priority, just as an example, we're also seeing some positive signs for the first time in a long time in the U.S. where we are doing really well online and at least on Amazon. And then in the EU, we are really, really recovering from a tough number of years with intense competition, both from branded and private-label competitors.
And this is really that we have continued to upgrade our assortment. Our go to market pricing strategies are all over. So it's very it's very it's a very good feeling to see that's paying off actually everywhere. But I would say the biggest improvement in this quarter comes from the zoo, and we also see positive development in that segment in the U.S. and then when it comes to growth, it has very much to do with incentives. We make sure that our sales incentives and so on then are more or more towards growth. But of course, always with the caveat that it has to be profitable growth with the retained margins.
We can see that the investments we're doing in A&P., and we've done a lot of other changes in our go to market in the medical. We've done a complete revamp of the entire organization and kind of go to market. So we are a much faster and more agile, but also actually leaner organization than before. It's also done extensive sales training and all these things combined that that's helping us currently, we have a better system support.
I mean, we do thousands of tenders in ground guarantees medical every year, and we have better system support to make sure that we are. So I think price is correct and that we are competitive also, of course, the pickup in medical. I mean, we haven't spoken about that specifically, but especially in wound care, advanced wound care and orthopedics we are doing really, really well, again, the result of the a lot of hard work over several years.
Karel Zoete
All right. Interesting. And then can I ask one follow-up question? I had because we had a lot of questions already on pricing on lag on throughput cost, et cetera, et cetera. But you also started by saying that you're in a more stable environment now a days, does that kind of suggest that your gross margins quarter-over-quarter we should see far less swings than before? And can you say much about TI and anticipation for margins in the coming one to two quarters? I know it's a bit specific, but yes, I wouldn't rule out blue gem.
Magnus Groth
We think we have tried to provide as much. Well, yes, we can for the next couple of quarters. And of course, my job is to be very much focused on the long-term trends. And we showed some longer-term developments that are quite positive, then it could always swing between individual quarters. And that's why we don't give forecast depending on it, timing of pricing and costs and so on. So I don't really have more color to give there. Our long-term focus on long-term investments and efforts are clear, and I'm sure they will continue to pay off year-over-year or year going forward. But of course, it could be variations in future quarters. Thank you.
Operator
And we'll now take our next question from Thom Sykes of Deutsche Bank.
Thomas Sykes
Yes, good morning, everybody. And just to follow up on the professional commentary you've made clear, I mean, the drop through was very high to 440 basis points of gross margin, 360 of EBITDA. I think your EBIT and so your SG&A is up maybe a couple of percent. Is there any forward is are there any costs you need to put back in to reach the growth in the Professional Hygiene business over the next six to 12 months is the SG&A level density limited increase.
And then when you have, I hope to see you expanding the categories that you seem to maybe be providing some things that we don't actually manufacture yourselves. So when you do that, do you always take inventory or are there any elements of the incremental business which is just agency sale to where the gross margin would be quite considerably higher therefore, than if you were taking inventory?
Magnus Groth
Yes. Okay. Starting with the doctors, it's a good question. I'm not I but I don't think I can answer that what I can say. But when it comes to board and finished goods, it's still a quite small part of our business. I don't think that would have any impact on the overall kind of gross margin development can be clearly healthcare margins.
Fredrik Rystedt
Tom, your question was specifically related to professional hygiene on bought-in products. Was that was all right? Or was it a general question?
Thomas Sykes
Great. Well, I mean, we can expand it to liquid fitness more directly related to professional because the expansion of the category is done that?
Fredrik Rystedt
Yes. No, it's actually a very minor impact from that perspective. In Professional Hygiene. We have a little bit more in health and medical, but from a gross profit margin perspective, it doesn't really have a big impact.
Magnus Groth
And when it comes to your first question on Professional Hygiene, yes, margins are historically very, very high currently I'm happy with that. And I'm again convinced that the team, our colleagues have managed the price cost gap and the margins in relation to growth going forward in a good way and of course, that could lead to variations over time. But the long-term trajectory we are actually very confident about.
But in terms of your SG&A in Professional Hygiene, standard base only has to modestly increase and I couldn't say will be, I think, a quick answer. okay, not polite.
Fredrik Rystedt
And maybe I can fill in their mind is just generally there is no particular shortage on spending in Professional Hygiene. So we are at good levels there. We will see higher cost for SG&A in the third quarter, more as a general, I refer to it too in during my comments there or during my presentation that we'll see the growth rate come down but we will see sequential SG&A costs come up in general, of course, but not specifically over overbalanced towards Professional Hygiene. So it's more a group comment.
Thomas Sykes
Okay, Perfect. Thank you.
Magnus Groth
Thank you. It's yes, it's 10 o'clock. So with that, we end the Q&A session of the call today and the end of Q2 presentation for Essity. And then it's a busy day from a reporting perspective unless you go. I just want to thank you for participating and wishing everyone a very good summer and hope to talk to you and see you soon. Thank you.