STOCKHOLM (Reuters) - Swedish hygiene products group Essity (ESSITYb.ST) reported a steeper-than-expected 12 percent drop in core profit as rising pulp and energy costs outweighed higher selling prices and cost savings, sending its shares lower.
CEO Magnus Groth told analysts on a conference call on Monday he expected a significant increase year-on-year in the fourth quarter too in pulp, petrol-based raw materials and energy costs.
“Pulp prices are... actually stabilising now since a few months, but there is no real reason why they should be coming down,” Groth said. “We are not really seeing, in the short to medium term, any changes there.”
Other major consumer product companies such as Procter & Gamble (PG.N) and Kimberly-Clark (KMB.N) are also affected by all-time-high pulp prices, a major ingredient for tissues, diapers and sanitary towels.
The global pulp shortfall and price spiral over the past couple of years is partly due to a spike in Chinese demand, which has coincided with the closure of a few large mills that has capped global output.
It is exacerbated by a Chinese import ban on unsorted mixed recycled fibre that has left Chinese companies in sudden need of large amounts of fresh fibre for packaging materials.
Sweden’s Essity is the world’s biggest maker of incontinence and professional tissue products with its Tena and Tork brands. In consumer tissue such as napkins, it is Europe’s biggest, and also the biggest in China through a majority stake in Vinda (3331.HK).
Essity said profit before amortisation and one-off items shrank 12 percent from a year ago to 3.0 billion crowns ($331 million), against a Reuters poll forecast for a 3 percent drop.
The group’s profit took a 1.4 billion crown hit from higher raw material prices. Profit at the Consumer Tissue division tumbled 38 percent, more than twice as much as expected.
Essity, which is also a big producer of baby diapers and feminine care products, had warned in July that raw material costs would rise significantly in the quarter.
Shares in the company were down 2 percent at 1009 GMT, taking a year-to-date drop to 11 percent.
CEO Groth predicted consumer tissue product price increases currently being negotiated would mainly take place in 2019, with full effect in the second quarter.
“For some contracts in Europe, additional price increases have already been implemented with gradual effect in the fourth quarter of 2018. Activities to increase prices are also ongoing in Personal Care and Professional Hygiene,” it added.
Essity, which was spun off from forestry firm SCA (SCAb.ST) in 2017, said on Monday it was intensifying a savings programme announced in September.
Reporting by Anna Ringstrom, Editing by Georgina Prodhan and Emelia Sithole-Matarise