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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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.