Swedish Match AB (publ) (SWMAF) Q3 2022 Earnings Call Transcript

Swedish Match AB (publ) (OTC:SWMAF) Q3 2022 Earnings Conference Call October 28, 2022 8:00 AM ET

Company Participants

Johan Levén - Vice President Investor Relations

Lars Dahlgren - President, Chief Executive Officer

Anders Larsson - Chief Financial Officer

Conference Call Participants

Rashad Kawan - Morgan Stanley

Gaurav Jain - Barclays

Andreas Lundberg - SEB

Andrey Gandria - UBS

Fredrik Ivarsson - ABG

Operator

Good day, and thank you for standing by. Welcome to the Q3 Report 2022 Swedish Match Earnings Conference Call and Webcast. At this time, all participants are in a listen-only-mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today's conference is being recorded.

I would now like to hand over to your first speaker, Mr. Johan Levén, Vice President, Investor Relations. Please go ahead, sir.

Johan Levén

Hello. This is the Swedish Match third quarter 2022 telephone conference. And with me today are Lars Dahlgren, our President and CEO; and Anders Larsson, our CFO. In the Investors section on the swedishmatch.com website, you will find our Q3 investor presentation. You are encouraged to have the investor presentation at hand as we listen to the prepared commentary for this call. Some of the slides in investor presentation, repeat key messages from the interim report that was published this morning. We will, therefore, focus our commentary on a smaller number of slides that we have selected and while doing so, we will refer to the relevant page number in the presentation.

Unless otherwise stated, all comparison are versus the prior year's corresponding period. For U.S. book fingers, comments on financial developments are made based on results issues in local currency measured in U.S. dollars and we refer to market shares Unless stated otherwise, we refer to MSA data that measures shipment volumes from distributors to the trade. After our prepared commentary, we will be taking questions.

During today's call, there may be certain comments that constitute forward-looking statements and are subject to risks and uncertainties. Management believes that these statements are based on reasonable assumptions but can give no assurance that expectations will be achieved. Risk factors are outlined in today's interim report, as well as in the annual report, which are available on our website.

Swedish Match undertakes no obligation to update information concerning its expectations. A recording of this call will be made available on the Swedish Match website.

And with that, I'd like to hand over the call to Lars.

Lars Dahlgren

Thank you, Johan, and good afternoon, everybody. With group sales from product segments of close to MSEK 5.7 billion and operating profit from product segments of just above MSEK 2.4 billion, the third quarter financials of Swedish Match again reached a record.

Currency tailwinds, in particular, the stronger U.S. dollar played a role, but again, the smoke-free segment, and particularly the U.S. Smokefree business drove the financial performance. Within U.S. Smokefree, the continued momentum for ZYN and excellent performance for moist snuff, far outweighed challenges in chewing tobacco, where we experienced deeper than historical trend volume declines and accelerated consumer down trading.\

For most of our other businesses, the third quarter was unusually challenging with common denominator such as strong comps, timing effects on shipments and inflationary effects on costs. For Lights, the third quarter was particularly challenging with the suspension of deliveries to Russia and some costs of onetime nature.

Naturally, we do not expect negative timing effects over time, and we work diligently to mitigate challenges like inflation and the reduced lighter footprint. At the most successful strategy, as evidenced by Q3 financials is to continue to pursue our focused growth agenda in attractive and profitable segments like nicotine pouches and natural leaf cigars.

We expect continued significant growth in consumer demand for safe alternative cigarettes, and we expect the nicotine pouches as a category will continue to evolve as the number one choice among even more consumers seeking satisfactory experiences in the reduced risk product landscape.

In the third quarter, the nicotine pouch markets continued to grow at strong double-digit levels in U.S. and Scandinavia, as well as in several of the smaller markets outside those geographies. For the year-to-date period, nicotine pouches comprised almost a third of group sales from product segments and close to 50% of the sales of the Smokefree segment.

Then In the U.S. had another impressive quarter. The strong category demand and market share gains drove the volume increase of 38% and profitability was excellent with improved pricing and benefits of economies of scale in marketing investments and production.

In Scandinavia, the overall Smokefree market continued to exceed with good growth, and we are pleased to note that the slight – and we are please note the slight market share gains and strong growth for our own nicotine pouch business, driven by continued traction for the VOLT brand family in Sweden.

Our total Scandinavian Smokefree shipment volumes were weak, however, as we saw inventory adjustments in the Norwegian domestic retail trade, as consumer purchases at border and travel retail classes of trade approach pre-COVID levels. These shifts, which also implied negative mix shift, together with inflationary pressure on production and other costs contributed to a notable decline in our Scandinavian Smokefree business operating profit.

For cigars, while we knew that we faced particularly tough comps for natural leaf varieties, the third quarter was a disappointment in terms of overall shipments. For natural leaf varieties, we continue to grow volume sequentially versus the second quarter, driven by good performance for all leaf varieties.

As for HTL, we did not see anticipated increases in orders as production constraints eased and we removed allocations. With the supply chain issues that we have experienced, it's been a challenge to consistently match shipments with demand, which in turn has caused less predictable ordering patterns and inventory fluctuations at both distributor and retail levels.

For the quarter, as well as for the year-to-date period, our year-on-year shipment declines are steeper than what MSA is reporting as shipment declines from distributors to the trade and what IRI is reporting as consumer offtake of Swedish Match products.

We're now in a good inventory position ourselves. Our production capacity has come up and the limited raw material availability that we have been referring to is no longer a production constraint. Well, it may still take some time to restore balance and for these issues to work through the value chain, we should now be in a good position to fulfill future demand.

And while the category is down compared to the prior year, it is notably stronger in volume terms compared to the level before COVID, driven by growth in the natural leaf segment. And we continue to expect that growth in the cigar category will be driven by natural leaf varieties. And during the third quarter, close to 70% of our cigar shipments were comprised of natural leaf cigars.

Following these introductory remarks, we will now turn to some comments to the selected slides from the investor presentation. And we start on Page 9. Page 9 illustrates the continued impressive trajectory for ZYN shipment volumes in the U.S. on a 12-month rolling basis.

During the third quarter, we delivered record volumes of 63.6 million cans, which brought the 12-month rolling shipment volume to about 220 million cans. Similar to previous quarters, while increased distribution for SIM has been a supporting factor for the volume growth, higher velocities have been the primary driver.

At the end of the third quarter, distribution in exceeded 138,000 stores. It's very encouraging to note the fact that the solid trends of growing velocity origin [ph] have continued both in the Western region, where the brand was initially launched in 2016, as well as in the expansion markets where the brand was marketed on a broader scale from April 2019.

The relatively high purchases by distributors towards the end of the second quarter that we referred to in the Q2 report are not estimated to have had any meaningful adverse effect on shipment volumes in the third quarter.

Our consumer research demonstrates that nicotine pouches are becoming increasingly relevant as an alternative for cigarette smokers. Looking at Slide 10 and making a volume comparison to cigarettes. We continue to be excited by both the commercial and the tobacco harm reduction trajectory both in the West and in the rest of the U.S.

When equalizing one can on nicotine patches to one pack of cigarettes, our estimate based on IRI data is that the nicotine pouch category volume approached the 13% benchmark in the West and exceeded 4% of the cigarette volume on a national level.

Another source of growth for the nicotine pouch category in the U.S. are consumers of vaping [ph] products, as well as more traditional Smokefree products such as moist snuff. And on Slide 11, we compare nicotine pouches with cigarettes and moist snuff and vaping products on a quarterly basis and in retail dollar terms based on IRI data.

In the Western region, nicotine pouches in the quarter represented around 7% of figures, more than 50% of traditional moist snuff and may not [ph] close to three quarters of the wave category in dollar terms. On a national level, nicotine pouches represented 3% of figures in the quarter and around 25% of both moist snuff and vaping products in dollar terms.\

Turning to quarterly market shares for ZYN and category volumes based on MSA data and Slide 12. And as usual, we urge people to take a longer-term perspective rather than looking at isolated quarters, which can be susceptible to fluctuations based on timing of shipments and promotional schedules.

While the category for nicotine pouches in the U.S. continues to be characterized by frequent deep price promotions from a large competitor, the overall competitive promotional intensity is subsided somewhat in the third quarter compared to the first half of the year.

As the graph depicts, ZYNs market share has been extremely resilient for several periods. And lately, our market share has been growing sequentially both in the West and in expansion markets. On a year-on-year basis, the market share for ZYN increased by more than 2 percentage points, driven by particularly strong performance in regions outside of the West. In dollar terms and based on IRI data, since market share increased in the third quarter relative to the second quarter and exceeded 76% on a national level.

With that, I will hand over to Anders Larsson.

Anders Larsson

Thank you, Lars. Turning to Slide 13 and the traditional moist snuff in the U.S. based on MSA distributor data, the category for moist snuff continued to decline in the third quarter. And for the year-to-date period, MSA has the category down by 5%.

Swedish Match volumes, however, have grown both in the quarter and year-to-date, both as reported by MSA and in terms of factory shipments. In the third quarter, both factory shipments and Swedish Match MSA volumes were up by 5%.

Our average price per can is up versus prior year, but Swedish Match remains very well positioned with its value-priced long-haul brand in the current inflationary environment and where many consumers are seeing their purchasing power eroding.

Moving on to U.S. chewing tobacco on Page 14, the long-standing trend of category contraction continues, along with migration toward lower-priced offerings. For chewing tobacco 2022 has been a tougher year with relatively steep volume declines and migration to value price offerings. While the volume contraction of the category still reflects comparisons influenced by the COVID environment, the current erosion of consumer purchasing power has accelerated down trading.

While half of Swedish Matches portfolio is still comprised of the legacy premium brand, America's Best, we continued to make progress in the third quarter with share gains in the price value segment, both sequentially and year-on-year.

Turning to Slide 15. And the Smokefee category in Scandinavia. The trend of good category growth For Smokefee products in Scandinavia continued in the first quarter and similar to the rest of the year, the growth has been driven by the very strong growth for nicotine pouches, while the smooth market has continued to show resilience.

Towards the end of the quarter, we did note some weaker development for premium stores, however, possibly reflecting changed consumption patterns in view of the general economic development. The overall volume growth for smoker products in Scandinavia has been supported by good growth in all three countries, Sweden, Norway and Denmark, including a continued recovery of volumes to finish consumers post COVID.

For Swedish Match, shipment volumes in the quarter did not reflect the underlying consumption growth of Swedish Match products. The recovery in border and travel retail classes of trade post-COVID has implied unusual swings in ordering patterns from different classes of trade.

In the second quarter report, we highlighted that Swedish Match - Swedish Match shipments benefited from changes in trade inventory levels. And now in the third quarter, we experienced the opposite. With volumes in border and travel retail being almost at pre-COVID levels, during the third quarter, there was a significant reduction in orders from domestic Norwegian retailers, which we attribute to inventory adjustments.

Before we move on to Slide 16 and the snuc market in Scandinavia, we want to inform you that market share figures for snus and nicotine pouches in Scandinavia now also include sales data from e-commerce channels.

In Scandinavia, smooth still makes up the lion's share of the smoke-free category and based on needs and data and available sales data from the online channel, the snus market is estimated to represent more than 70% of the total smoker category. Swedish Match share of the snus market has been holding at a fairly consistent level on a sequential basis relative to the second quarter, Swedish Match's share decline margin.

Moving on to Slide 17 and nicotine pouches in Scandinavia. On the 1st of August, most of the regulations of the previously adopted Swedish legislation for nicotine pouches came into effect. The new regulations included, among other things, 18-year age limit marketing restrictions, mandating moderation similar to the rules for alcoholic beverages.

Swedish Match's share with nicotine pouches as measured by Nielsen and available sales data from the online channel improved both compared to the prior year quarter and compared to the second quarter of this year. The share gains resulted from good progress in Sweden with a continued positive development for our VOLT brand family.

In Norway, a brand transition from G4 to rush nicotine pouches, along with product enhancements has been implemented, which for now has not met expectations and implied a lower nicotine pouch market share in that market.

On Slide 19, we have illustrated the long-term volume development for the overall mass market, cigar category in the U.S. based on MSA distributor shipments. As we have previously commented, the demand in the cigar category was elevated during COVID times in consumer demand boosted by more usage occasions and stimulus income. These effects are clear when looking at shipments from distributors and comparing average levels pre-COVID, during COVID and now in 2022.

[indiscernible] in on the third quarter, Swedish Match estimates that the category has grown by a CAGR of 4.5% from the third quarter in 2019, which is only slightly lower than the long-term trend.

Turning to Slide 20. While our cigar factory shipment volumes were down by 17% in the third quarter. MSA reported a less decline, which we attribute to inventory adjustments after distributor level.

According to MSA, Swedish Match cigar shipments from distributors to the trade declined by 7% in the third quarter broadly in line with the market development. As depicted on the slide, market volumes for both the natural leaf and HTL segments declined, but a relatively better trend for natural leaf cigars continue. With close to 70% of our portfolio in the natural leaf segment, Swedish Match is well positioned as consumer and segment dynamics play out.

On Slide 22, we have summarized relevant financial metrics from our interim report. On a trended quarterly basis, net finance costs decreased markedly in the third quarter, principally reflecting higher financial returns on surplus cash. While we remain committed to returning cash not needed in operations to shareholders, share repurchases have been suspended in view of the current public cash offer by PMI. With halted share buybacks, our cash position has grown to more than SEK 4.4 billion by the end of the third quarter. And our net debt to EBITDA for the 12-month period ending September 30, declined to 1.3%, illustrating the strength and resilience of our financial profile.

Slide 23 simply restates our full year 2022 outlook from the interim report, which remains unchanged. Our investment plans remain on track, and we continue to foresee significant growth in consumer demand for safer alternatives to cigarettes.

Finally, as always, fluctuations in currency rates will impact our future reported results. And you may want to take note of some of the more important average exchange rates versus [ph] The average exchange rate in the fourth quarter of 2021 for the U.S. dollar was 8.86 to NOK 1.02 and the Brazilian real 1.58. In other words, should current spot rates largely prevail, one should expect continued significant currency translation tailwind in the upcoming fourth quarter for sales and earnings.

And before we open up the line for questions, please note that we are not able to comment on the Philip Morris offer for Swedish Match beyond what has already been announced.

And with that, operator, please open the line for questions.

Question-and-Answer Session

Thank you. [Operator Instructions] The first questions come, please stand by. The first questions come from the line of Rashad Kawan from Morgan Stanley. Please ask your question. Your line is open.

Q - Rashad Kawan

Hey, good afternoon, Lars and Anders. Thanks for the time this afternoon. A couple of questions for me. So another strong quarter for ZYN. Congrats on that. I wanted to get a sense from you if you're seeing any benefits from downsize specifically. So whether cigarette smokers as an example, are transitioning at a faster pace given the cost benefits involved in the switch/

And then my second question is on cigars. As demand continues to slow, you talked about the category being down 6% or so, I think, in shipment volumes and if I look at a 3-year CAGR, your volumes continue to go down sequentially.

I mean what's your take on industry demand levels? I mean, is there something more structural going on? Or is it just a function of kind of a return to normal consumption habits and would you expect trends to normalize starting next year? Thank you.

Anders Larsson

Good afternoon, and thank you for your questions. And this is Lars here. I'll take the first one on Zinn. In fact, when we look at ZYN, you may recall this, through the pandemic, where we definitely saw swings in demand and shipments for several of our categories for ZYN, we couldn't detect any impact. That is not to say that there was no impact at all, but the underlying - underlying strong growth trends were so powerful that they overshadow any other kind of temporary factors.

And if you look at the current trends, I mean, we're still relatively early into what we can call the new economic environment. But the current trends through the third quarter, they continue to be very similar to historical periods with a nice growth in the velocities across the country.

And - so that's not again to say that there couldn't be any such impact with price advantages and that could prove to be a benefit going forward. But so far, it's hard to isolate any such factors.

Rashad Kawan

And then on your question for cigars, I think it's pretty clear on the slide that we have in the investor presentation that - that we have seen an elevated category during COVID times. And of course, that's a headwind when things turn, so to say.

But still, the category is healthy here if you take a longer-term perspective - and then we'll have to see where demand is heading going forward. But - but clearly, from this short period after COVID, it's still well above pre-COVID levels?

Anders Larsson

Thank you.

Operator

We are now going to proceed with the next question. And its from the line of Gaurav Jain from Barclays. Please ask your question. Your line is open.

Gaurav Jain

Hi, good morning. So few questions from my side. So one is on -- you mentioned in one of the slides, how big modern oral is as a percentage of e-cigarettes in the U.S. And we are seeing more pressure from FDA and [indiscernible] was some pressure on due at the end of last quarter. So can - like is there any metrics like what percentage of volumes you get from seen such disruption e-cigarettes any from happened?

Anders Larsson

We source consumers across the tobacco landscape. And the latest numbers that I looked at, we saw roughly half of the consumers are a little bit more than half of the consumers are coming from date and/or cigarettes. And as you know, the U.S. consumer sometimes are using multiple type of products.

So it's definitely a an important source of growth, but it is a bit challenging to say with precision exactly how much is coming from each category. It's only subject to what people define whether they define themselves as mainly a cigar smoker or mainly a vapor prior to switching over to a larger extent, SIM.

But if you look at the trend, as we have there on the slide with the IRI data, I mean you see -- as we have there on the slide with the IRI data, I mean, you see in the total U.S. market in the third quarter, nicotine pouches correspond to 26% of the sales value of the vape. And I mean, if you go back only 1 year, that number was 19%, and it's been growing every single quarter. So there's much more to it than some issues for some of the manufacturers of that.

Gaurav Jain

Sure. My second question is on the potential flavor band that could happen in California in Q4. And you can still ship using online channels in California? Is my understanding correct?

Anders Larsson

We'd have to get back and see the exact guidelines around implementation and so forth. But it is a retail ban and the online channel for nicotine pouches is very limited in - in the U.S. market. So the -- so California is an important retail market. I think the latest number is that it's 8% or 9%. What is it one of the - of our volumes>?

But then when we look at our portfolio in California, already today 23% of our volume of Fin comes from unflavored products. And the corresponding number for U.S. on a national basis is 12%. And that is also higher than for our main competitor on both those metrics.

Gaurav Jain

Sure. you very helpfully mentioned in your comments that the promotional intensity from competition has gone down by Q2, and when we look at prices in U.S. on assets, the retail level up 6%, 7% and versus 2019, it's almost 20% while jump pricing is probably flat to maybe 5%. So as promotional intensity is reducing, do you think there is an opportunity for you to close some of the price gaps versus, let's say, open in mono or versus grid?

Anders Larsson

I mean you're right in pointing out that while as soon as the premium brand in the nicotine pouch category, it's pricing is attractive for the consumer of multiple type of nicotine products. So over time, I think there is opportunity narrow in a bit on the price gap. And then we'll have to see what happens. - thanks to state taxes and potential federal taxes and so forth and how the implementation of those is split across the industry participants.

Gaurav Jain

Okay, sure. Thanks a lot.

Operator

We're now going to proceed with the next question. The questions come from the line of Andreas Lundberg from SEB. Please ask your question.

Andreas Lundberg

Yeah, good afternoon, everyone. I know you talked about usage a year ago or some quarter go. Could you remind us or update us on the usage of nicotine pouches among your consumers in the U.S. today versus, let's say, 1 year or 2 year ago?

Anders Larsson

I mean, our numbers we're getting are ranging from basically 2 to 3.5 cans per consumer and we quite frankly, it's challenging to get accurate data and we see some volatility and so forth in market research that is difficult to explain.

So we urge a little bit of caution there to say exactly what the average consumption is. What we can say definitively is that if you look in - among those consumers that are registered in this loyalty program, the average consumption is higher, around 4% or north of 4 cans per consumer weak is not surprising. If you're more engaged with the brand, if you sign up as a loyalist. But that's still the estimate.

Lars Dahlgren

Which is in line and with kind of Scandinavian levels of consents.

Anders Larsson

For the loyalty program, yes. But we still think it is lower on average and there is an opportunity in there as there is a higher degree of multi-usage of different type of products.

Andreas Lundberg

You said that there were no visible effects from these pre-purchasing took place in the later part of Q2, right? But anything specific to think when it comes to the fourth quarter when it comes to potential destocking holding effects on nicotine powers in the U.S.?

Anders Larsson

I mean, first of all, we have 60 shipment base opposed to 64 in the third quarter, so which is to my recollection, the same pattern we had last year. Then is as always a bit tricky around year-end with the holidays and how the weekdays falls and so forth.

So I wouldn't - we have had issues before in quarter four where we have seen lower sequential growth and so forth. But one needs to look through longer periods and not look at isolated quarters too much.

Andreas Lundberg

And a general question on destocking among retailers or distributors, which appear to have been the case for a few of your businesses in the quarter. Would you say this is an eye what are you think? Or do you have any sense of that resellers actually are focusing more on their own cash flows as we have seen in some other consumer categories are late?

Anders Larsson

I mean, that could be an element of that. But the two most notable cases for our business or the cigars in the U.S. and then the Norwegian situation with the border trade opening up and so forth. And there, we think there are the other factors that are far outweighing any kind of general inventory management due to cash constraints.

But it is challenging when you have those types of swings, even in the Swedish market, where we have seen a strong rebound of traveling now. It could be that there are some fluctuations also among Swedish retailers. There are a little bit of indications of that in terms of the little bit weaker development towards the very end of the third quarter and the start of the fourth quarter.

Andreas Lundberg

And speaking of Sweden, it seems that a lot of the issues in Scandinavia in the third quarter also related to Norway, but could you share some light on your performance versus the market in the Swedish market? Thank you.

Anders Larsson

DO you have the shares [indiscernible] nicotine products Sweden and more...

Lars Dahlgren

Yes. I mean, just to remind you that we now also include sales from the online channels together with Nielsen. And when we look at the Scandinavian business for nicotine pouches, we saw that we actually gained shares both on a sequential basis and year-on-year. And we reported 18.2 in the quarter, right, and was slightly up from Q2. In the Swedish market, specifically - in Sweden, we gained some shares within nicotine pouches, but lost some shares within snows.

Anders Larsson

It looks like I'm looking at the different brands area, we gained 0.6 or so sequentially in Sweden with both being up by a share point and being down by 0.4.

Andreas Lundberg

Does that imply that you are growing faster in Sweden than the market/

Anders Larsson

Total Scandinavia -- but not a big difference compared to the overall market.

Andreas Lundberg

The recent or newer launches on the Volt product, I think you launched them for the summer, any traction or feedback you can share with us on those products?

Anders Larsson

In Norway, we made decided to make a brand positioning from G4 to rush and along with also making certain product changes that we along with also making certain product changes that we are confident our enhancements in as consumers get to try them fully. But that switch has been disappointing so far. So we lost something like three share points or so sequentially in the Normedia-market pouch market in the third quarter.

Andreas Lundberg

Thank you so much.

Operator

We are now going to proceed with the next question. And it's from the line of Andrey Gandria from UBS. Please ask your question. Your line is open.

Andrey Gandria

Hi, Lars, Anders. Thank you for taking my question. Two - one for me actually. Can you give us some more color on the performance of your nicotine pouches outside of the U.S. and can the markets such as the U.K., for instance? Thank you very much.

Lars Dahlgren

Yes, it's been - markets are growing typically from a relatively small base. If you take the U.K., for example, the market is showing strong growth in percentage terms, but it's still a very small market relative to the size of the market.

U.K. has been a bit challenging for Swedish Match. We are doing fairly well in those chains where we are present. But the majority of the volumes are in some change where we're not present at this point. And so we have a very small share in the U.K. market.

We have taken a bit of share in the Austrian market, which obviously is not a huge country, but it's actually a large market in terms of per capita consumption , so that all looks promising, and I think we're around 8% share or something like that in the Austrian market at the moment and with a clear upward trend.

Anders Larsson

And just to remind you, from a financial standpoint, if you compare year-on-year, costs were unusually low last year. So that's just to bear in mind.

Andrey Gandria

Thank you very much.

Operator

We are now going to proceed with the next question. And it is from the line of Fredrik Ivarsson from ABG. Please ask your question.

Fredrik Ivarsson

Thanks so much I've got one question on Snus, i.e., regular nicotine in Scandinavia and maybe, in particular, in Sweden, have you seen any signs of consumers down-trading in the quarter or at the beginning of Q4?

Anders Larsson

Yes. I mean, Lars touched upon that just previously here. We have noted some signs of - along those lines towards the end of the quarter and also now in October. And then it's - it's still early to draw any conclusions from that. But likely, there are some elements of down trading from - from this inflationary environment and consumers being more cautious on spending with premium being down then versus value products.

Fredrik Ivarsson

Yes. Understood. And can you - maybe since the margin can enable was down quite a bit and on a historical low level for Q3 help us out with the bridge. So how much do you think is channel mix and how much is product mix you think?

Anders Larsson

It's quite a few moving pieces affecting the margin development. I mean, first of all, we with weaker volumes, that's a headwind from an absorption point of view on the production side. And then we see inflationary pressure generally on the cost side, plus that we were also very active ahead of the legislation implementation in Sweden, August 1 with activities carried out ahead of that.

Fredrik Ivarsson

Fair enough. Appreciate the answer.

Operator

We have no further questions at this time. I hand the conference back to you for closing remarks.

Johan Levén

Okay, We thank everybody for participating. And I'd like to inform you that our full year report is scheduled to be published on February 15 next year. Thank you very much.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect your lines.