Essity, the Swedish hygiene products giant known for brands like Lotus, Velvet, and Tempo, reported weaker-than-expected fourth-quarter results on Thursday, causing its shares to tumble more than 5%, making it one of the biggest decliners on Europe’s benchmark STOXX 600 index.
Q4 Results Miss Estimates
The company’s adjusted operating profit before amortization (EBITA) rose by 2% to 4.97 billion Swedish crowns ($451.6 million) in the quarter, but this fell short of analysts’ consensus estimate of 5.26 billion crowns, based on data from LSEG’s IBES. The miss in profit was primarily attributed to higher raw material costs in Essity’s consumer tissue business and the impact of a stronger U.S. dollar on its margins.
Essity’s quarterly adjusted EBITA margin shrank slightly to 13.1%, down from 13.3% in the same period last year. The company noted that the rapid strengthening of the USD was a significant factor behind the increased costs, which it hasn’t yet fully offset, according to CEO Magnus Groth’s statement.
Impact of Strong USD and Raw Material Costs
Essity’s CFO, Fredrik Rystedt, explained that raw material costs increased by 880 million crowns in the quarter, with 330 million crowns of that amount driven by currency fluctuations, particularly the stronger USD. The company anticipates that the impact of these higher costs could remain a concern through the first half of 2025, according to analysts at J.P. Morgan, including Celine Pannuti, who highlighted the accelerating cost of goods sold.
Despite the higher costs, Essity was able to raise selling prices by 2.2% in the quarter, compared to the same period last year. Volumes also grew by 1.7%, marking the first time since Q3 2022 that the company achieved positive growth in both price and volume simultaneously.
Consumer Demand and Cost-Cutting Measures
Consumer goods companies, like Essity, have faced increasing pressure from consumers trading down to cheaper products amid rising inflation and economic uncertainty. In response, Essity has implemented price hikes to manage cost surges that began with the pandemic, and it has also rolled out promotions to cater to budget-conscious shoppers. The company’s strategy to raise prices while still managing to achieve some volume growth highlights how it’s balancing cost pressures with consumer demand.
Dividend and CEO Transition
Essity proposed a dividend of 8.25 Swedish crowns per share for 2024, a 6.5% increase compared to the previous year. This announcement comes as a sign of confidence, despite the weaker-than-expected profit growth in Q4.
In other corporate news, Essity announced that CEO Magnus Groth will step down in 2025 after nearly a decade in the role. Groth oversaw Essity’s spin-off from parent company SCA in 2017 and guided the company through a period of significant transformation. His departure is expected to usher in new leadership, as the company navigates continued challenges from rising raw material and currency costs.
Outlook
While Essity refrained from providing specific financial guidance for 2025, investors are closely watching how the company manages ongoing cost pressures, particularly related to raw materials and currency fluctuations. As of now, the combination of higher costs and the stronger U.S. dollar presents an ongoing risk to profit margins in the near term.
Despite these challenges, Essity’s ability to raise prices and grow volumes in the quarter shows that the company still has some leeway to weather the storm, though market conditions will need to improve for a sustainable recovery in 2025.
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