A2. Use of alternative performance measures

Guidelines concerning non-IFRS performance measures for companies with securities listed on a regulated market in the EU have been issued by the ESMA (The European Securities and Markets Authority). These guidelines are to be applied to alternative performance measures not supported under IFRS.

The Annual Report refers to a number of performance measures not defined in IFRS. These performance measures are used to assist investors and company management to analyze the company’s operations and objectives. These non-IFRS measures may differ from similar terms used by other companies.

A description of the various non-IFRS performance measures used as a complement to the financial information reported according to IFRS is presented below.

Calculation of performance measures not included in IFRS framework

RETURN MEASURES

Return is a financial term that describes how much the value of an asset changes from an earlier point in time

Non-IFRS performance measure

Description

Reason for use of the measure

Return on capital employed, ROCE

Accumulated return on capital employed is calculated as 12-month rolling operating profit before amortization of acquisition-related intangible assets/EBITA as a percentage of an average of capital employed during the five most recent quarters. The corresponding key figure for a single quarter is calculated as EBITA for the quarter multiplied by four as a percentage of capital employed for the two most recent quarters.

A central ratio for measuring return on capital tied up in operations.

Adjusted return on capital employed, ROCE

Accumulated return on capital employed is calculated as 12-month rolling operating profit before amortization of acquisition-related intangible assets/EBITA, excluding items affecting comparability, as a percentage of an average of capital employed during the five most recent quarters. The corresponding key figure for a single quarter is calculated as EBITA for the quarter, excluding items affecting comparability, multiplied by four as a percentage of capital employed for the two most recent quarters.

A central ratio for measuring return on capital tied up in operations, excluding items affecting comparability.

SEKm

2019

2018

2017

ADJUSTED RETURN ON CAPITAL EMPLOYED, ROCE

 

 

 

EBITA

15,127

11,560

12,550

Items affecting comparability

713

1,375

855

Adjusted EBITA

15,840

12,935

13,405

Average capital employed

114,663

107,575

90,167

Adjusted return on capital employed, ROCE

13.8%

12.0%

14.9%

CAPITAL MEASURES

Shows how capital is utilized and the company’s financial strength

Non-IFRS performance measure

Description

Reason for use of the measure

Return on equity

For the Group, return on equity is calculated as profit for the period as a percentage of average equity.

Shows, from a shareholder perspective, the return that is generated on the owners’ capital that is invested in the company.

Adjusted return on equity

For the Group, adjusted return on equity is calculated as profit for the period, excluding items affecting comparability, as a percentage of average equity.

Shows, from a shareholder perspective, the return excluding items affecting comparability that is generated on the owners’ capital that is invested in the company.

Equity

The equity reported in the consolidated balance sheet consists of taxed equity increased by the equity portion of the Group’s untaxed reserves and non-controlling interests. The deferred tax liability in untaxed reserves has been calculated on the basis of the corporate tax rate that has been approved and will take effect given that the reserves are expected to be realized.

Equity is the difference between the Group’s assets and liabilities, which corresponds to the Group’s equity contributed by owners and the Group’s accumulated profits including the share of associated non-controlling interests.

Equity per share

Equity in relation to the average number of shares outstanding that exist in Essity Aktiebolag (publ).

A measure of the amount of equity that exists per share and is used for measuring the share against the share price.

Equity/assets ratio

Equity expressed as a percentage of total assets.

A traditional measure for showing financial risk, expressing the percentage of total assets that is financed by the owners.

Capital employed

The Group’s and business areas’ capital employed is calculated as the balance sheet’s total assets, excluding interest-bearing assets and pension assets, less total liabilities, excluding interest-bearing liabilities and pension liabilities.

This measure shows the amount of total capital that is used in the operations and is thus one of the components for measuring the return from operations.

SEKm

2019

2018

2017

CAPITAL EMPLOYED

 

 

 

Total assets

162,295

154,266

147,016

Financial assets

–6,988

–5,181

–6,912

Non-current, non-interest-bearing liabilities

–7,269

–9,037

–8,650

Current, non-interest-bearing liabilities

–34,297

–30,745

–29,417

Capital employed

113,741

109,303

102,037

 

 

 

 

CAPITAL EMPLOYED

 

 

 

Personal Care

44,268

41,768

39,447

Consumer Tissue

47,345

44,915

43,569

Professional Hygiene

22,996

22,153

20,034

Other

–868

467

–1,013

Capital employed

113,741

109,303

102,037

Non-IFRS performance measure

Description

Reason for use of the measure

Capital turnover

Net sales for the year divided by average capital employed.

Shows in a clear manner how effectively capital is employed. Together with sales growth and the operating margin, the capital turnover ratio is a key measure for monitoring value creation.

Working capital

The Group’s and business areas’ working capital is calculated as current operating receivables less current operating liabilities.

This measure shows how much working capital is tied up in the operations and can be put in relation to sales to understand how effectively tied-up working capital is used.

SEKm

2019

2018

2017

WORKING CAPITAL

 

 

 

Inventories

15,764

15,234

13,739

Trade receivables

19,864

18,687

17,607

Other current receivables

2,113

2,599

2,549

Trade payables

–15,802

–15,911

–14,748

Other current liabilities

–14,998

–12,792

–12,569

Other

–159

–249

–677

Working capital

6,782

7,568

5,901

Non-IFRS performance measure

Description

Reason for use of the measure

Net debt

The sum of consolidated interest-bearing liabilities, including pension liabilities and accrued interest less pension assets, cash and cash equivalents and interest-bearing current and non-current receivables.

Net debt is the most relevant measure for showing the company’s total debt financing.

SEKm

2019

2018

2017

NET DEBT

 

 

 

Surplus in funded pension plans

2,841

1,117

1,148

Non-current financial assets

694

634

552

Current financial assets

525

422

1,105

Cash and cash equivalents

2,928

3,008

4,107

Financial assets

6,988

5,181

6,912

Non-current financial liabilities

43,079

43,500

47,637

Provisions for pensions

5,866

5,258

4,541

Current financial liabilities

8,983

10,827

7,201

Financial liabilities

57,928

59,585

59,379

Net debt

50,940

54,404

52,467

Non-IFRS performance measure

Description

Reason for use of the measure

Debt/equity ratio

Expressed as net debt in relation to equity.

Shows financial risk and is the most useful measure for management to monitor the level of the company’s indebtedness.

Debt payment capacity, %

Expressed as 12 months rolling cash surplus (see Cash flow performance measures) in relation to closing net debt.

A financial measure that shows the company’s capacity to repay its debt.

Adjusted debt payment capacity, %

Adjusted debt payment capacity expressed as rolling 12 months cash surplus (see Cash flow performance measures) in relation to closing net debt.

A financial measure that shows the company’s capacity to repay its debt, adjusted for the impact of items affecting comparability.

Net debt/EBITDA

Calculated as the closing balance of net debt in relation to 12 months rolling EBITDA.

A financial measure that shows the company’s capacity to repay its debt.

Net debt/Adjusted EBITDA

Calculated as the closing balance of net debt in relation to 12 months rolling EBITDA, excluding items affecting comparability.

A financial measure that shows the company’s capacity to repay its debt, adjusted for the impact of items affecting comparability.

SEKm

2019

2018

2017

Debt/equity ratio, multiple

0.81

0.99

1.06

Debt payment capacity, %

38

25

26

Adjusted debt payment capacity, %

40

27

27

Net debt/EBITDA

2.33

3.11

2.91

Net debt/Adjusted EBITDA

2.25

2.96

2.83

PERFORMANCE MEASURES

Various types of performance measures and margin measures expressed as a percentage of sales

Non-IFRS performance measure

Description

Reason for use of the measure

Organic net sales

Underlying change in net sales compared with the preceding period attributable to changed volume, price or mix excluding changes attributable to exchange rate effects, acquisitions and divestments.

This measure is of major importance for management in its monitoring of underlying net sales driven by changes in volume, price and product mix for comparable units between different periods.

SEKm

2019

2018

2017

ORGANIC NET SALES

 

 

 

Personal Care

 

 

 

Organic net sales

1,549

1,213

586

Exchange rate effects

1,623

1,173

48

Acquisitions/Divestments

–175

2,371

6,301

Recognized change

2,997

4,757

6,935

 

 

 

 

Consumer Tissue

 

 

 

Organic net sales

2,754

1,089

231

Exchange rate effects

1,972

1,832

223

Acquisitions/Divestments

53

190

0

Recognized change

4,779

3,111

454

 

 

 

 

Professional Hygiene

 

 

 

Organic net sales

1,010

516

411

Exchange rate effects

1,703

780

137

Acquisitions/Divestments

1

22

150

Recognized change

2,714

1,318

698

 

 

 

 

Group

 

 

 

Organic net sales

5,297

2,868

1,169

Exchange rate effects

5,299

3,785

406

Acquisitions/Divestments

–121

2,582

6,452

Recognized change

10,475

9,235

8,027

 

 

 

 

ORGANIC NET SALES, %

2019

2018

2017

Previous period sales

118,500

109,265

101,238

Organic net sales

5,297

2,868

1,169

Total organic sales for the period

123,797

112,133

102,407

Organic net sales, %

4.5%

2.6%

1%

Non-IFRS performance measure

Description

Reason for use of the measure

Adjusted gross profit

Net sales minus cost of goods sold excluding items affecting comparability.

Gross profit shows the company’s earnings before the effects of sales, general and administration. Adjusted gross profit excludes items affecting comparability.

Operating profit before depreciation, amortization and impairment of property, plant and equipment and intangible assets (EBITDA)

Calculated as operating profit before depreciation, amortization and impairment of property, plant and equipment and intangible assets.

This measure is a complement to operating profit, as it shows the cash surplus from operations.

Adjusted operating profit before depreciation, amortization and impairment of property, plant and equipment and intangible assets (EBITDA)

Calculated as operating profit before depreciation, amortization and impairment of property, plant and equipment and intangible assets excluding items affecting comparability.

This measure is a complement to operating profit, as it shows the cash surplus from operations adjusted for the impact of items affecting comparability.

Operating profit before amortization of acquisition-related intangible assets (EBITA)

Calculated as operating profit after depreciation/amortization of property, plant and equipment and intangible assets but before amortization of acquisition-related intangible assets.

The measure is a good complement to enable earnings comparisons with other companies, regardless of whether business activities are based on acquisitions or organic growth.

Adjusted operating profit before amortization of acquisition-related intangible assets (EBITA)

Calculated as operating profit after depreciation/amortization of property, plant and equipment and intangible assets but before amortization of acquisition-related intangible assets, excluding items affecting comparability.

The measure is a good complement to enable earnings comparisons with other companies, regardless of whether business activities were based on acquisitions or organic growth, and is even adjusted for the impact of items affecting comparability.

SEKm

2019

2018

2017

Operating profit before depreciation, amortization and impairment of property, plant and equipment and intangible assets (EBITDA)

 

 

 

Operating profit

14,349

10,759

11,905

Amortization of acquisition-related intangible assets

778

732

560

Depreciation/amortization

5,815

5,443

5,162

Depreciation right-of-use assets

884

Items affecting comparability, depreciation/amortization

0

0

2

Impairment

79

19

0

Items affecting comparability, impairment

–27

445

301

Items affecting comparability, impairment of acquisition-related intangible assets

69

85

EBITDA

21,878

17,467

18,015

Items affecting comparability excluding depreciation/amortization and impairment

740

930

554

Adjusted operating profit before depreciation, amortization and impairment of property, plant and equipment and intangible assets (EBITDA)

22,618

18,397

18,569

SEKm

2019

2018

2017

Adjusted operating profit before amortization of acquisition-related intangible assets (EBITA)

 

 

 

Operating profit

14,349

10,759

11,905

Amortization of acquisition-related intangible assets

778

732

560

Items affecting comparability, amortization of acquisition-related intangible assets

69

85

Operating profit before amortization of acquisition-related intangible assets (EBITA)

15,127

11,560

12,550

EBITA margin

11.7%

9.8%

11.5%

Items affecting comparability, cost of goods sold

243

1,437

509

Items affecting comparability, sales, general and administration

470

–62

346

Adjusted operating profit before amortization of acquisition-related intangible assets (EBITA)

15,840

12,935

13,405

Adjusted EBITA margin

12.3%

10.9%

12.3%

Non-IFRS performance measure

Description

Reason for use of the measure

Items affecting comparability

Under items affecting comparability, Essity includes costs in connection with acquisitions, restructuring, impairment and other specific events. The latter item includes items not covered by acquisitions, restructuring and impairment but which are relevant when comparing earnings for one period with those of another. The item other specific events is specified in Note B3 Operating expenses.

Separate reporting of items affecting comparability between periods provides a better understanding of the company’s underlying operating activities.

Restructuring costs

Costs for impairment together with headcount reductions in connection with restructuring.

This measure shows the specific costs that have arisen in connection with restructuring of a specific operation, which contributes to a better understanding of the underlying cost level in the continuing operations.

Adjusted gross margin

Relates to adjusted gross profit as a percentage of net sales for the period.

Adjusted gross margin is cleared of items affecting comparability and is thus a better measure than gross margin for showing the company’s margins before the effect of costs such as sales, general and administration.

EBITA margin

Operating profit before amortization of acquisition-related intangible assets as a percentage of net sales for the period.

EBITA margin is a good complement to enable margin comparisons with other companies, regardless of whether business activities are based on acquisitions or organic growth.

Adjusted EBITA margin

Operating profit before amortization of acquisition-related intangible assets, excluding items affecting comparability, as a percentage of net sales for the period.

Adjusted EBITA margin is a good complement to enable margin comparisons with other companies, regardless of whether business activities are based on acquisitions or organic growth, excluding items affecting comparability.

Operating margin

Operating profit as a percentage of net sales for the period.

The operating margin is a key measure together with sales growth and capital turnover ratio for monitoring value creation.

Adjusted operating margin

Operating profit, excluding items affecting comparability, as a percentage of net sales for the period.

Adjusted operating margin is key measure together with sales growth and capital turnover ratio for monitoring value creation.

Adjusted operating profit

Calculated as operating profit before financial items and tax, excluding items affecting comparability.

Adjusted operating profit is a key ratio for control of the units and provides a better understanding of earnings performance of the operations than the non-adjusted operating profit.

SEKm

2019

2018

2017

ADJUSTED OPERATING PROFIT

 

 

 

Operating profit

14,349

10,759

11,905

Items affecting comparability

713

1,444

940

Adjusted operating profit

15,062

12,203

12,845

Adjusted operating margin

11.7%

10.3%

11.8%

Non-IFRS performance measure

Description

Reason for use of the measure

Financial net margin

Net financial items divided by net sales.

This measure shows the relationship between net financial items and net sales.

Adjusted profit before tax

Calculated as profit before tax, excluding items affecting comparability.

This is a useful measure for showing total profit for the company including financing costs, but not affected by taxes and items that affect comparability with previous periods.

Adjusted tax

Tax expenses for the period adjusted for tax expenses relating to items affecting comparability.

A useful measure to show the total tax expense for the period, adjusted for taxes related to items affecting comparability.

SEKm

2019

2018

2017

ADJUSTED TAX

 

 

 

Tax

–2,828

–1,050

–1,938

Tax relating to items affecting comparability

–159

–440

–253

Adjusted tax

–2,987

–1,490

–2,191

Non-IFRS performance measure

Description

Reason for use of the measure

Adjusted profit for the period

Profit for the period after deducting items affecting comparability.

Shows the period’s total underlying earnings capacity excluding items affecting comparability.

Net margin

Profit for the period as a percentage of net sales for the year.

The net margin shows the remaining share of net sales after all of the company’s costs, including income tax, have been deducted.

Earnings per share

Profit for the period attributable to owners of the Parent company divided by the number of shares outstanding.

Earnings per share is a good measure of the company’s profitability and is used to determine the value of a company’s outstanding shares.

Adjusted earnings per share

Adjusted earnings for the period attributable to owners of the Parent company, excluding amortization of acquisition-related intangible assets after tax divided by number of shares.

Adjusted earnings per share is a good measure of the company’s profitability and is used to determine the value of a company’s outstanding shares. The measure is a good complement to enable comparison of earnings per share with other companies, regardless of whether business activities are based on acquisitions or organic growth.

CASH FLOW PERFORMANCE MEASURES

Various performance measures and costs that have impacted the company’s cash flow

Non-IFRS performance measure

Description

Reason for use of the measure

Cash earnings

Cash earnings consist of the net of operating profit before depreciation, amortization and impairment of property, plant and equipment and intangible assets (EBITDA), financial income and expenses and income taxes.

A financial measure used when calculating the company’s debt payment capacity, see Capital measures.

Adjusted cash earnings

Adjusted cash earnings consist of the net of adjusted operating profit before depreciation, amortization and impairment of property, plant and equipment and intangible assets (EBITDA), financial income and expenses and income taxes.

A financial measure used when calculating the company’s debt payment capacity, see Capital measures.

Operating cash surplus

Calculated as operating profit with a reversal of depreciation, amortization and impairment of property, plant and equipment and intangible assets. Share of profits of associated companies and joint ventures, items affecting comparability and capital gains/losses are excluded.

This measure shows the cash flow generated by profit and is part of the follow-up of cash flow.

Investments in non-current assets, net

Investments in non-current assets, net, to maintain competitiveness, such as maintenance, rationalization and replacement measures or investments of an environmental nature and strategic investments in sites.

Shows the size of the capital expenditures required to maintain existing manufacturing capacity and investments in expansion and other growth measures.

Operating cash flow before investments in operating assets through leases

Consists of the sum of operating cash surplus and change in working capital, with deductions for net investments in non-current assets and restructuring costs.

This is an important control measure of operating activities that the units have control over themselves.

Investments in operating assets through leases

Additional right-of-use of assets directly attributable to operating activities. Mainly leases for distribution centers.

Investments in operating assets through leases is part of the follow-up of cash flow that the units have control over themselves.

Operating cash flow

Consists of the sum of operating cash surplus and change in working capital, with deductions for net investments in non-current assets and restructuring costs and investments in operating assets through leases.

This is an important control measure of operating activities that the units have control over themselves.

Investments in non-operating assets through leases

Additional right-of-use of assets that are not directly attributable to operating activities. Mainly leases for offices.

Investments through leases in non-operating assets that the units do not have control over themselves. These are recognized in the operating cash flow statement as a legend entry in changes to net debt.

SEKm

2019

2018

2017

OPERATING CASH FLOW

 

 

 

Personal Care

 

 

 

Operating cash surplus

8,785

7,821

7,238

Change in working capital

401

–410

–237

Investments in non-current assets, net

–1,866

–2,134

–2,073

Restructuring costs, etc.

–644

–271

–266

Operating cash flow before investments in operating assets through leases

6,676

5,006

4,662

Investments in operating assets through leases

–181

 

 

Operating cash flow

6,495

5,006

4,662

 

 

 

 

Consumer Tissue

 

 

 

Operating cash surplus

8,107

5,612

6,163

Change in working capital

–553

94

–425

Investments in non-current assets, net

–2,239

–3,073

–2,889

Restructuring costs, etc.

–251

–245

–139

Operating cash flow before investments in operating assets through leases

5,064

2,388

2,710

Investments in operating assets through leases

–194

 

 

Operating cash flow

4,870

2,388

2,710

 

 

 

 

Professional Hygiene

 

 

 

Operating cash surplus

6,589

5,630

5,649

Change in working capital

438

–565

73

Investments in non-current assets, net

–1,402

–1,337

–888

Restructuring costs, etc.

–603

–365

–592

Operating cash flow before investments in operating assets through leases

5,022

3,363

4,242

Investments in operating assets through leases

–84

 

 

Operating cash flow

4,938

3,363

4,242

Comments on operating cash flow

As of 2019, strategic capital expenditures are recognized together with current capital expenditures and are included in Investments in non-current assets, net. Previously, strategic capital expenditures were recognized under operating cash flow. The effect of the restatement of comparative periods entailed a decrease in operating cash flow for the Group of SEK 2,424m for 2018 and SEK 2,100m for 2017.

Amounts for the segments have been changed as follows: Operating cash flow for Personal Care has decreased SEK 806m for 2018 and SEK 791m for 2017. Operating cash flow for Consumer Tissue decreased SEK 1,303m for 2018 and SEK 1,140m for 2017. Operating cash flow for Professional Hygiene decreased SEK 315m for 2018 and SEK 169m for 2017.