January 22, 2020 / 10:59 AM / a month ago

Lower European tissue prices to squeeze Essity's profit

STOCKHOLM (Reuters) - Leading office tissue paper supplier Essity (ESSITYb.ST) said easing pulp prices meant it had to cut the cost of some products, hitting first-quarter earnings, after it reported a jump in fourth-quarter profit on Wednesday.

FILE PHOTO: Essity products are seen on display at an investor presentation by the hygiene product company in Stockholm, Sweden May 23, 2019. REUTERS/Anna Ringstrom/File Photo

Operating profit before amortisation and items affecting comparability rose 37% from a year earlier to 4.74 billion crowns ($498 million), roughly matching analysts’ average expectation in a Refinitiv poll.

The world’s biggest maker of hygiene products for businesses under the Tork brand, and incontinence products under the TENA brand, said easing pulp and energy costs, higher product prices and higher sales helped lift profits.

But the drop in pulp prices has also resulted in pressure from retailers to roll back recent years’ product prices hikes.

“In the Consumer Tissue business area, we have finalised some negotiations and agreed on price decreases in Europe. The agreed price decreases are on average low single-digits and will have an impact in the first quarter of 2020,” Essity said.

Chief Executive Magnus Groth told a news conference the price cuts agreed were smaller than he had feared.

The division accounts for around 40% of group sales.

Shares in the Swedish rival to Procter & Gamble (PG.N) and Kimberly-Clark (KMB.N), were down 4% at 1420 GMT.

After its 2017 listing, tough markets and a sharp rise in pulp prices put pressure on Essity, which also ranks second globally in consumer tissue such as toilet paper and handkerchiefs, under a range of brands including Edet and Vinda.

But pulp prices eased in 2019 and Essity’s shares had by Tuesday’s close climbed 41% over the last 12 months.

Groth saw unchanged raw material costs in the first quarter from the fourth. Any product price hikes in 2020 were most likely on personal care products in emerging markets, he told Reuters. The Personal Care division sells incontinence and feminine care products, and baby diapers.

Groth said that, faced with mounting distribution costs amid driver shortages and high fuel costs, Essity would this year invest in digital tools aimed at making a large logistics apparatus more efficient.

New IT systems would help better predict demand swings, adapt production and optimize delivery routes, he said in an interview. “This is an area where we see large potential but that we haven’t been prioritising much”.

As most of Essity’s products are bulky, retailers often require deliveries at least once a day.

Essity’s shares reached record last week after the group’s Chinese holding Vinda (3331.HK) issued a robust earnings forecast, pointing to the easing raw material prices.

Reporting by Anna Ringstrom; Editing by Barbara Lewis and Keith Weir

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